Worthington Sailboats Company manufactures 100 luxury yachts per month
Included in each yacht is a compact media center. Worthington Sailboats manufactures the media center in-house. The company is considering the possibility of outsourcing the production of the media centers in order to close down some of its facilities and reduce the administrative costs. At present, the variable cost per unit is $275, and fixed costs are $44,000 per month. Assume that if it outsources, fixed costs could be reduced by 60%. The production manager advised the company to contract with a foreign supplier who offered a contract cost of $410 per unit. If it outsources the media center, how would that affect operating income?
A) Operating income would improve by $12,900.
B) Operating income would improve by $26,400.
C) Operating income would decline by $12,900.
D) Operating income would remain the same.
A .A)
Savings in variable cost (100 x $275 ) $27,500
Savings in fixed cost ($44,000 x 60%) 26,400
Less: Purchase cost ($100 x $410 ) 41,000
Increase in operating income on account of outsourcing $12,900
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