A company produces 300 microwave ovens per month,each of which includes one electrical circuit.The company currently manufactures circuit in-house but is considering outsourcing the circuits at a contract price of $28 each.Currently,the cost of producing circuits in-house includes variable costs of $24 per circuit and fixed costs of $7000 per month.
Assume the fixed costs are unavoidable,but that company could employ the vacated premises to earn rental profit of $2900 per month.How will it affect monthly operating profit if the company outsources?

Question

Quizplus · Accepted Answer

If the company outsources, it will save $24 per circuit in variable costs but will incur $28 per circuit in outsourcing costs, resulting in an additional cost of $4 per circuit. For 300 circuits, this is an additional cost of $1200. However, the company can earn $2900 in rental profit, resulting in a net increase in operating profit of $1700 ($2900 - $1200).

A Company Produces 300 Microwave Ovens Per Month,each of Which