Priestly Automobiles Company fabricates automobiles
Each vehicle includes one wiring harness, which is currently made in-house. Details of the harness fabrication are as follows:
Volume 700 units per month
Variable cost per unit $7 per unit
Fixed costs $16,000 per month
An Indonesian factory has offered to supply Priestly with ready-made units for a price of $14 per wiring harness. Assume that Priestly's fixed costs are unavoidable, but that Priestly could use the vacated production facilities to earn an additional $9,500 of profit per month. If Priestly decides to outsource, monthly operating income will ________.
A) increase by $4,600
B) decrease by $16,000
C) increase by $9,500
D) decrease by $24,200
A .A)
Saving in variable cost (700 x $7 ) $4,900
Earnings from vacant production facilities 9,500
Less: Purchase cost (700 x $14 ) 9,800
Increase in operating income $4,600
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