Question

A company produces 400 microwave ovens per​ month, each of which includes one electrical circuit. the company currently manufactures the circuit inminushouse but is considering outsourcing the circuits at a contract cost of $ 28 each.​ currently, the cost of producing circuits inminushouse includes variable costs of $ 26 per circuit and fixed costs of $ 5 comma 000 per month. assume the company could not reduce any fixed costs 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​

Answer 1

Outsourcing the production of circuits would reduce the company's operating costs by $4,200 per month, resulting in an increase in operating income.

Step-by-step explanation:

To determine the impact of outsourcing the production of circuits on the company's operating income, we need to compare the current in-house production costs with the outsourcing costs. Currently, the company produces 400 circuits per month, with variable costs of $26 per circuit and fixed costs of $5,000 per month. This gives a total monthly cost of (400 x $26) + $5,000 = $15,400. If the company outsources, the contract cost per circuit is $28, so the total monthly cost would be 400 x $28 = $11,200. The difference in costs is $15,400 minus $11,200, or $4,200.

Therefore, if the company decides to outsource the production of circuits, it would reduce its operating costs by $4,200 per month. This would result in an increase in operating income.

Answer 2

Solution:Savings in variable cost (400 x $26 ) $10,400
Savings in fixed costs 5,000
Less: Purchase cost (400 x $28 ) $11,200 =10,400 + 11,200
Increase in operating income on account of outsourcing $ 21,600