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 700   units per month Variable cost per unit ​$8   per unit Fixed costs ​$13,000   per month A Japanese factory has offered to supply Walsh with​ ready-made units for a cost of​ $15 per sensor. Assume that​ Walsh's fixed costs could be reduced by​ $3,000 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. decrease by​ $1,900

B. increase by​ $13,000

C. decrease by​ $13,000

D. increase by​ $5,600

Answer 1

Cost when production is in-house
Volume	700 units
Variable cost per unit	$8
Total Variable cost(700 units*$8)	$5,600
Cost when production is outsourced
Cost of sensor per unit	$15
(700*$15)	$10,500
Less:Saving in Fixed cost	$3,000
Net cost of purchase	$7,500
Net Increase in cost of production	$1,900
($7,500-$5,600)
So if cost is increased by $1,900 then it means that operating income will decrease by the same amount
So Option A is correct