Question

Lightning Semiconductors produces​ 400,000 hi-tech computer chips per month. Each chip uses a component that Lightning makes​ in-house. The variable costs to make the component are​ $1.30 per​ unit, and the fixed costs are​ $1,300,000 per month. The company has been approached by a foreign producer who can supply the​ component, within acceptable quality​ standards, for​ $1.20 each. The fixed costs are​ unavoidable, and Lightning would have no other use for the facilities currently employed in making the component. What would be the effect on operating income if the company decides to​ outsource?

Answer 1

Answer:

an increase in operating income of $ 40,000.

Explanation:

Consider the Savings and Costs that arise with the outsource decision.

Note : Fixed Costs are incurred whether or not outsource decision is made ( unavoidable) and are therefore irrelevant for this decision.

Savings :

Variable Costs ( 400,000 × $1.30)       520,000

Costs :

Purchase Price ( 400,000 × $1.20)     (480,000)

Effect : Net Income / (loss)                     40,000

If the Company decides to​ outsource there will be an increase in operating income of $ 40,000.