Question

Lightning Semiconductors produces 200,000 hi-tech computer chips per month. Each chip uses a component that Lightning makes in-house. The variable costs to make the component are $1.20 per unit, and the fixed costs are $1,300,000 per month. The company has been approached by a foreign producer who can supply the component, within acceptable quality standards, for $1.10 each. The fixed costs are unavoidable, and Lightning would have no other use for the facilities currently employed in making the component. What would be the effect if the company decides to outsource?

a. There would be no effect on operating income.
b. Lightning Semiconductors could save $1,300,000 per month in costs.
c. Lightning Semiconductors could save $20,000 per month in costs.
d. Lightning Semiconductor's costs would increase by $220,000 per month

Answer 1

c. Lightning Semiconductors could save $20,000 per month in costs.

Step-by-step explanation:

The Differential Analysis would be presented below:

Particulars Make Buy

Variable production cost $240,000

Purchase price $220,000

Total relevant Cost $240,000 $220,000

Based on the above table, the financial advantage is

= $240,000 - $220,000

= $20,000

.