Question

Walsh Automobile Company fabricates automobiles. Each vehicle includes one airflow​ sensor, which is currently made inminushouse. Details of the airflow sensor fabrication are as​ follows: Volume 700 units per month Variable cost per unit $ 7 per unit Fixed costs $ 13 comma 000 per month A Japanese factory has offered to supply Walsh with readyminusmade units for a cost of $ 16 per sensor. Assume that​ Walsh's fixed costs could be reduced by $ 4 comma 000 if it outsources and that Walsh will not be able to use the excess capacity in any profitable manner. If Walsh decides to​ outsource, monthly operating income will​ ________.

Answer 1

Decrease by $2,300

Step-by-step explanation:

The computation of the monthly operating income is done by comparing the two methods:

First method:

= Volume × variable cost per unit

= 700 units × $7

= $4,900

Second method:

= Volume × unit cost - reduction in fixed cost

= 700 units × $16 - $4,000

= $11,200 - $4,000

= $7,200

The difference would be $2,300 which reflects the cost increment that decreases the net income by $2,300