Valuable Electronics uses a standard part in the manufacture of different types of radios. The total cost of producing 29,000 parts is $105,000, which includes fixed costs of $50,000 and variable costs of $55,000. The company can buy the part from an outside supplier for $2 per unit and avoid 30% of the fixed costs. Assume that the company can use the freed manufacturing space to make another product that can earn a profit of $16,000. If Valuable outsources, what will be the effect on operating income?

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Business

Amelia Hobbs

14 June, 14:17

Valuable Electronics uses a standard part in the manufacture of different types of radios. The total cost of producing 29,000 parts is $105,000, which includes fixed costs of $50,000 and variable costs of $55,000. The company can buy the part from an outside supplier for $2 per unit and avoid 30% of the fixed costs. Assume that the company can use the freed manufacturing space to make another product that can earn a profit of $16,000. If Valuable outsources, what will be the effect on operating income?

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Amirah Wolfe · Answer 1

Increase in income = $28,000

Explanation:

Giving the following information:

In house:

The total cost of producing 29,000 parts:

Fixed costs = $50,000

Variable costs = $55,000.

Total cost = $105,000

Outsource:

$2 per unit

Avoid 30% of the fixed costs.

Make another product that can earn a profit of $16,000.

Cost of outsourcing = 2*29,000 + (0.70*50,000) - 16,000 = $77,000

Increase in income = 105,000 - 77,000 = $28,000