Mulcahey Automobiles Company fabricates automobiles
Each vehicle includes one wiring harness, which is currently made in-house. Details of the harness fabrication are as follows:
Volume 800 units per month
Variable cost per unit $7 per unit
Fixed costs $12,000 per month
An Indonesian factory has offered to supply Mulcahey with ready-made units for a cost of $15 per wiring harness. Assume that Mulcahey's fixed costs could be reduced by $4,000 if it outsources and that Mulcahey will not be able to use the excess capacity in any profitable manner. If Mulcahey decides to outsource, monthly operating income will ________.
A) increase by $12,000
B) decrease by $12,000
C) increase by $5,600
D) decrease by $2,400
D .D)
Cost incurred
Saving in variable cost (800 x $7 ) $5,600
Saving in fixed cost 4,000
Less: Purchase cost (800 x $15 ) (12,000 )
Loss on cost on account of outsourcing $(2,400 )
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