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Question
A company produces 100 microwave ovens per month, each of which includes one electrical circuit. The company currently manufactures the circuit in-house but is considering outsourcing the circuits at a contract price of $28 each. Currently, the cost of producing circuits in-house includes variable costs of $26 per circuit and fixed costs of $5,000 per month.
Assume the fixed costs are unavoidable, but that company could employ the vacated premises to earn rental income of $700 per month. If the company outsources, how will it affect monthly operating income?
A) Operating income will go up by $500.
B) Operating income will go down by $2,800.
C) Operating income will go down by $200.
D) Operating income will go up by $4,800.
Answer
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