Valuable Electronics uses a standard part in the manufacture of different types of radios
The total cost of producing 42,000 parts is $100,000, which includes fixed costs of $40,000 and variable costs of $60,000. The company can buy the part from an outside supplier for $1 per unit and avoid 20% of the fixed costs. Assume that the company can use the freed manufacturing space to make another product that can earn a profit of $16,000. If Valuable outsources, what will be the effect on operating income?
A) increase of $42,000
B) decrease of $42,000
C) decrease of $8,000
D) increase of $16,000
A .A)
In-house Outsource
Variable cost $60,000 $42,000
Avoidable fixed cost (8,000 )
Profit from another product (16,000 )
Total cost $60,000 $18,000
Increase in operating income ($60,000 - $18,000 ) = $42,000
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