A company produces 200 microwave ovens per month,each of which includes one electrical circuit.The company currently manufactures the circuit in-house but is considering outsourcing the circuits at a contract price of $32 each.Currently,the cost of producing circuits in-house includes variable costs of $30 per circuit and fixed costs of $7 000 per month.
The management accountant says that they could outsource production of the circuit,if it reduces fixed cost greater than $400 per month.Is this statement true or false?

Question

Quizplus · Accepted Answer

To determine whether outsourcing production of the circuit is beneficial, we need to compare the costs of producing the circuits in-house to the contract price of outsourcing.

Cost of producing 200 circuits in-house = $30 x 200 + $7,000 = $13,000

Cost of outsourcing 200 circuits = $32 x 200 = $6,400

Outsourcing the production of the circuit will reduce the fixed cost by $7,000 - $6,400 = $600 per month.

Since the management accountant stated that outsourcing should only be considered if it reduces fixed cost greater than $400 per month, the statement is false. Therefore, the answer is B.

A Company Produces 200 Microwave Ovens Per Month,each of Which