Valuable Electronics uses a standard part in the manufacture of different types of radios manufactured by it.The total cost of producing 25,000 parts is $95,000,which includes fixed costs of $40,000 and variable costs of $55,000.The company can buy the part from an outside supplier for $3 per unit and avoid 20% of the fixed costs.
If Valuable Electronics decides to outsource the production of the part,how will it impact its operating profit?

Question

Quizplus · Accepted Answer

If the company outsources, it will incur a cost of $75,000 (25,000 parts x $3). By outsourcing, it avoids 20% of the fixed costs, saving $8,000 (20% of $40,000). The total cost of producing in-house is $95,000, while outsourcing costs $75,000 - $8,000 = $67,000. The difference is $95,000 - $67,000 = $28,000, so the operating profit decreases by $12,000.

Valuable Electronics Uses a Standard Part in the Manufacture of Different