A company produces 400 microwave ovens per month, each of which includes one electrical circuit. the company currently manufactures the circuit inminushouse but is considering outsourcing the circuits at a contract cost of $ 28 each. currently, the cost of producing circuits inminushouse includes variable costs of $ 26 per circuit and fixed costs of $ 5 comma 000 per month. assume the company could not reduce any 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
Solution:Savings in variable cost (400 x $26 ) $10,400 Savings in fixed costs 5,000 Less: Purchase cost (400 x $28 ) $11,200 =10,400 + 11,200 Increase in operating income on account of outsourcing $ 21,600
