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29 March, 12:20

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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  1. 29 March, 13:49
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    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
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