A company produces 200 microwave ovens per month, each of which includes one electrical circuit
The company currently manufactures the circuits in-house but is considering outsourcing the circuits at a contract cost of $30 each. Currently, the cost of producing circuits in-house includes variable costs of $24 per circuit and fixed costs of $12,000 per month. Assume the company could cut fixed costs in half 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 ________.
A) increase by $4,800
B) decrease by $4,800
C) decrease by $1,200
D) stay the same
A .A)
Cost incurred
Saving in variable cost (200 x $24 ) $4,800
Saving in fixed costs ($12,000 / 2 ) 6,000
Less: Purchase cost (200 x $30 ) (6,000 )
Increase in operating income on account of outsourcing $4,800
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