Cheong 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 1,300 units per month
Variable cost per unit $12.50 per unit
Fixed costs $15,000 per month
An Indonesian factory has offered to supply Cheong Company with ready-made units for a cost of $17 for each harness. Assume that Cheong's fixed costs are unavoidable and that Cheong will not be able to use the excess capacity in any profitable manner. If Cheong decides to outsource, monthly operating income will ________.
A) increase by $5,850
B) decrease by $15,000
C) increase by $15,000
D) decrease by $5,850
D .D)
Relevant cost
Purchase cost (1,300 x $17 ) $22,100
In-house(1,300 x $12.50 ) 16,250
Reduction in operating income $5,850
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