A company produces 400 microwave ovens per month, each of which includes one electrical circuit. the company currently manufactures the circuit inminushouse but is considering outsourcing the circuits at a contract cost of $ 28 each. currently, the cost of producing circuits inminushouse includes variable costs of $ 26 per circuit and fixed costs of $ 5 comma 000 per month. assume the company could not reduce any fixed costs by outsourcing and that there is no alternative use for the facilities presently being used to make circuits. if the company outsources, operating income will

Question

Alfonso Vega

Business

16 September, 04:58

A company produces 400 microwave ovens per month, each of which includes one electrical circuit. the company currently manufactures the circuit inminushouse but is considering outsourcing the circuits at a contract cost of $ 28 each. currently, the cost of producing circuits inminushouse includes variable costs of $ 26 per circuit and fixed costs of $ 5 comma 000 per month. assume the company could not reduce any fixed costs by outsourcing and that there is no alternative use for the facilities presently being used to make circuits. if the company outsources, operating income will

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Adam Reeves · Answer 1

Solution:Savings in variable cost (400 x $26) $10,400

Savings in fixed costs 5,000

Less: Purchase cost (400 x $28) $11,200 = 10,400 + 11,200

Increase in operating income on account of outsourcing $ 21,600