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?

Question

Business

Aaden Rose

24 July, 02:44

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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Answers (1)

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Kareem Boyer · Answer 1

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