Seven Seas Company manufactures 10 luxury yachts per month.Included in each yacht is a compact media center.Seven Seas manufactures media center in-house,but is considering the possibility of outsourcing that function.At present,the variable cost per unit is $275,and the fixed costs are $41,000 per month.The CEO wishes to boost operational profit by $4000.He has an offer from a foreign producer to provide the media centers at a contract rate of $325 per unit.The required saving in fixed cost in order to achieve his objective would be:

Question

Quizplus · Accepted Answer

To achieve an additional $4000 in profit, the savings in fixed costs must offset the increased variable cost of $50 per unit for 10 units, which is $500. Therefore, the fixed cost savings needed is $4000 (desired profit increase) + $500 (additional variable cost), totaling $4500.

Seven Seas Company Manufactures 10 Luxury Yachts Per Month