A company produces 500 microwave ovens per month, each of which includes one electrical circuit. The company currently manufactures the circuits in-house but is considering outsourcing the circuits at a contract cost of $28 each. Currently, the cost of producing circuits in-house includes variable costs of $26 per circuit and fixed costs of $7,000 per month. Assume the company could eliminate all fixed costs by outsourcing and that there is no alternative use for the facilities presently being used to make circuits. If the company outsources, operating income will

company outsources, operating income will decrease by 1000

Explanation:

given data

microwave ovens = 500 per month

cost = $28 each

variable costs = $26 per circuit

fixed costs = $7,000 per month

solution

we know here Incremental savings is

Incremental savings = microwave ovens * variable costs

Incremental savings = 500 * 26 = 13000

and

Incremental cost is

Incremental cost = microwave ovens * cost

Incremental cost = 500 * 28 = 14000

so

company operation income = Incremental saving - Incremental cost

company operation income = 13000 - 14000 = - 1000

so company outsources, operating income will decrease by 1000