Voltaic Electronics uses a standard part in the manufacture of different types of radios. The total cost of producing 36 comma 000 parts is $ 110 comma 000 , which includes fixed costs of $ 50 comma 000 and variable costs of $ 60 comma 000. The company can buy the part from an outside supplier for $ 2 per unit and avoid 20 % of the fixed costs. Assume that the company can use the freed manufacturing space to make another product that can earn a profit of $ 15 comma 000. If Voltaic outsources, what will be the effect on operating income?

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20 February, 06:49

Voltaic Electronics uses a standard part in the manufacture of different types of radios. The total cost of producing 36 comma 000 parts is $ 110 comma 000 , which includes fixed costs of $ 50 comma 000 and variable costs of $ 60 comma 000. The company can buy the part from an outside supplier for $ 2 per unit and avoid 20 % of the fixed costs. Assume that the company can use the freed manufacturing space to make another product that can earn a profit of $ 15 comma 000. If Voltaic outsources, what will be the effect on operating income?

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Cael Huang · Answer 1

The net income will increase by $13,000 is the part is out source.

Explanation:

Giving the following information:

Units = 36,000 parts

Total variable cost = $60,000

Total fixed costs = $50,000

The company can buy the part from an outside supplier for $ 2 per unit and avoid 20 % of the fixed costs.

Assume that the company can use the freed manufacturing space to make another product that can earn a profit of $15,000.

We need to calculate the effect on the income of buying the part.

First, we will calculate the current cost:

Production:

Total cost = total variable cost + avoidable fixed cost

Total cost = 60,000 + 10,000 = $70,000

Buy:

Total cost = 36,000*2 - 15,000 = $57,000

The net income will increase by $13,000 is the part is out source.