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15 November, 22:35

Sanchez Semiconductors produces 400 comma 000 high minus tech computer chips per month. Each chip uses a component that Sanchez makes inminushouse. The variable costs to make the component are $ 1.30 per unit, and the fixed costs are $ 1 comma 200 comma 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. If the company chooses to outsource, fixed costs can be reduced by 50 %. There are no other uses for the facilities currently employed in making the component. What would be the effect on operating income, if the company decides to outsource?

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  1. 16 November, 00:03
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    Effect on income = 1,120,000 - 440,000 = 680,000 increase

    Explanation:

    Giving the following information:

    Sanchez Semiconductors produces 400,000 tech computer chips per month.

    The variable costs to make the component are $ 1.30 per unit, and the fixed costs are $ 1,200,000 per month. The company has been approached by a foreign producer who can supply the component, within acceptable quality standards, for $ 1.10 each. If the company chooses to outsource, fixed costs can be reduced by 50%.

    Make in house:

    Variable cost = 400,000*1.3 = 520,000

    Unavoidable Fixed costs = 600,000

    Total = 1,120,000

    Buy = 1.1*400,000 = 440,000
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