Question

Walsh Automobile Company fabricates automobiles. Each vehicle includes one airflow sensor, which is currently made in-house. Details of the airflow sensor fabrication are as follows: Volume Variable cost per unit Fixed costs 700 units per month $7.00 per unit $13,000 per month A Japanese factory has offered to supply Walsh with ready-made units for a cost of $14.00 per sensor. Assume that Walsh's fixed costs could be reduced by $5,000 if it outsources and that Walsh will not be able to use the excess capacity in any profitable manner. If Walsh decides to outsource, monthly operating income will A. Increase by $4,900 O B. decrease by $100 O C. increase by $13,000 O D. decrease by $13,000

Answer 1

Answer- If Walsh decides to outsource, monthly operating income will= decrease by $100.

Explanation-If units are made in-house profit will be = No. of units*Variable cost per unit

= 700 units*$7 per unit

= $4900

If units are made by outsourcing then profit will be = (No. of units*Offer price per unit)- Saving in fixed costs

= (700 units*$14 per unit)-$5000

= $9800-$5000

= $4800

If Walsh decides to outsource, monthly operating income will= decrease by $100 (ie- $4900-$4800).