Question

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?

Answer 1

Answer:

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

Answer 2

Increase in income= $28,000