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19-03-2021
Business

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Cheong Automobile Company fabricates automobiles. Each vehicle includes one water pump, which is currently made in-house. Details of the water pump assembly are as follows: Volume 1200 units per month Variable cost per unit $11.50 per unit Fixed costs $10,000 per month An Indonesian factory has offered to supply Cheong Automobile Company with ready-made units for a cost of $16 for each water pump. Assume that Cheong's fixed costs are unavoidable and that Cheong will not be able to use the excess capacity in any profitable manner. If Cheong decides to outsource, monthly operating income will ___

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topeadeniran2 topeadeniran2

22-03-2021

Answer: Monthly operating income will decrease by $5400.

Explanation:

Volume = 1200 units per month

Variable cost per unit = $11.50 per unit

Fixed costs = $10,000 per month

Since Cheong decides to outsource, the monthly operating income will be calculated thus:

= Volume × (Cost of ready made units - Variable cost per unit)

= 1200 × (16 - 11.50)

= 1200 × 4.50

= $5400

Therefore, the monthly operating income will decrease by $5400.

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