Question

Lightning Semiconductors produces 200,000 hi-tech computer chips per month. Each chip uses a component that Lightning makes in-house. The variable costs to make the component are $1.40 per unt, and the fixed costs are $1,100,000 per month. The company has been approached by a foreign producer who can supply the component, within acceptable quality standards, for $1.10 each. The food 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 the company decides to outsource? O A Lightning Semiconductors could save $1,100,000 per month in costs. OB. There would be no effect on operating income. OG Lightning Semiconductor's costs would increase by $220,000 per month OD Lightning Semiconductors could save $60,000 per month in costs

Answer 1

Variable cost per unit = $1.40

Fixed costs = $1,100,000

Outside supplier's price = $1.10

Since fixed costs are unavoidable, hence fixed costs are irrelevant in making the decision whether to outsource or not.

Savings per unit in buying from outside supplier = Variable cost per unit - Outside supplier's price

= 1.40 - 1.10

= $0.30

Monthly savings = Monthly requirements x Savings per unit in buying from outside supplier

= 200,000 x 0.30

= $60,000

Hence, correct option is (D)

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