Question

A company produces 500 microwave ovens per month, each of which includes one electrical circuit. The company currently manufactures the circuits in-house but is considering outsourcing the circuits at a contract cost of $28 each. Currently, the cost of producing circuit in-house includes variable cost of $26 per circuit and fixed cost of $5,000 perr month. Assume the fixed cost are unavoidable but thhat company could employ the vacated premises to earn rental income of $2,200 per month. If the companny outsources, monthly operating income will be ________________(Show work)
A) increase by $1,200
B) decrease by $14,000
C) decrease by $1,000
D) increase by $27,000

Answer 1

Answer:

A) increase by $1,200 is the correct option

Explanation:

Incremental savings     [500 *26] =13000

Rental income=2,200

Total income=15200

Less:Incremental cost  =[500*28] =- 14000

Incremental income 1200