Question

A company produces 300 microwave ovens per month, each of which includes one electrical circuit. The company currently manufactures the circuit in-house but is considering outsourcing the circuits at a contract cost of $34 each. Currently, the cost of producing circuits in-house includes variable costs of $28 per circuit and fixed costs of $6,000 per month. The controller says that they should outsource production of the circuit, if it reduces fixed cost more than $1,800 per month. Is this statement true or false?

Answer 1

True

Step-by-step explanation:

Monthly production = 300

Outsource rate = 34

In house cost = 28

Fixed cost /unit = 6000/300=20

total in house cost / unit 48

Saving on outsourcing = (48-34) *300 = 4200.

On outsourcing , fixed cost on the circuit is totally removed

Answer 2

True

Step-by-step explanation:

There is 300 production per month

Contract cost = 34

Variable cost = 28

Fixed cost per month per unit = 6000/300=$20

total in house cost / unit 48

=300* (48-34) =$ 4200.

Outsourcing of production by the of the circuit by the controller if it reduces fixed cost more than $1,800 per month is true