Question

Arthur Co., a telephone manufacturer, usually makes the chips used in its phones. Each phone uses one chip. Making the chips costs the company $100 per phone in variable costs. Additionally, $20,000 of fixed cost is directly related to making the chips. The company is considering buying the chips from an outside supplier for $110 per phone. If Arthur Co. purchased the chips, it would not incur the fixed costs. How much would Arthur save or lose by buying the chips, if it is producing 10,000 phones

Answer 1

Loss of $80,000

Step-by-step explanation:

Given;

Variable cost of making the chips = $100 per phone

Fixed cost for making the phone = $20,000

Cost of chips if bought from outside = $110

Number of phones to be produced = 10,000

Now,

The overall cost of making the chips by own

= Total variable cost + Fixed cost

on substituting the respective values, we get

= ( $100 × 10,000 ) + $20,000

= $1,000,000 + $20,000

= $1,020,000

Also,

The overall cost for buying the chips from outside = $110 × 10,000

= $1,100,000

Since, the cost of buying the chips is more than the overall cost of making the chips there will be a loss.

Loss = (overall cost for buying the chips - overall cost of making the chips)

Loss = $1,100,000 - $1,020,000 = $80,000