Fastec Automobile Company fabricates automobiles. Each vehicle includes one tran

Question

Fastec Automobile Company fabricates automobiles. Each vehicle includes one transfer case, which is currently made in - house. Details of the transfer case fabrication are as follows: Volume Variable cost per unit Fixed costs 700 units per month $6.00 per unit $16,000 per month A Korean factory has offered to supply Fastec with ready - made units for a price of $12.00 per transfer case. Assume that Fastec's fixed costs are unavoidable, but that Fastec could use the vacated production facilities to earn an additional $8,500 of profit per month. If Fastec decides to outsource, monthly operating income will A. increase by $8,500 OB, decrease by $21,100 ° C. increase by $4,300 OD. decrease by $16,000

Explanation / Answer

Answer is C

if manufactured Qty required 700 Variable cost per unit $6 Variable cost $4,200 Fixed costs $16,000 Operating Cost $20,200 if bought Qty required 700 purchase price per unit $12 purchase cost $8,400 Fixed costs $16,000 as cannot be avoided Total costs $24,400 Less: additional inc $8,500 Operating Cost $15,900 Operating income per month increase by $4,300 ($20200-$15900)

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