Question

Comfort Cruiser Company manufactures 80 luxury yachts per month. Included in each yacht is a compact media center. Comfort Cruiser manufactures the media center​ in-house. The company is considering the possibility of outsourcing the production of the media centers in order to close down some of its facilities and reduce the administrative costs. At​ present, the variable cost per unit is​ $280, and fixed costs are​ $44,000 per month. Assume that if it​ outsources, fixed costs could be reduced by​ 60%. The production manager advised the company to contract with a foreign supplier who offered a contract cost of​ $410 per unit. If it outsources the media​ center, how would that affect operating​ income?

A. Operating income would decline by​ $16,000.

B. Operating income would increase by​ $26,400.

C. Operating income would increase by​ $16,000.

D. Operating income would remain the same.

Answer 1

Answer- If it outsources the media​ center, operating​ income would increase by $16000.

Explanation- Relevant cost of manufacturing media centre in-house = (Relevant variable cost per unit*No. of units produced) + Avoidable fixed costs

= ($280 per unit*80 units)+ ($44000*60%)

= $22400+ $26400

= $48800

Purchase cost of media centre = 80 units*$410 per unit

= $32800

Net increase in operating income if media centre is purchased from foreign supplier = $48800-$32800

= $16000

The unavoidable fixed cost have no effect on decision making, these cost are continue to occur whether product are manufactured or purchased.