Rajiv Motors fabricates inexpensive automobiles for sale to 3rd world countries.
ID: 2456617 • Letter: R
Question
Rajiv Motors fabricates inexpensive automobiles for sale to 3rd world countries. Each auto includes one wiring harness, which is currently made in-house. Details of the harness fabrication are as follows:
A factory in BanglaDesh has offered to supply Rajiv Motors with ready-made units for a price of $15 each. Assume that Rajiv Motors fixed costs are unavoidable, and that Rajiv will not be able to use the excess capacity in any profitable manner. What will be the impact on Rajiv’s monthly operating income, if Rajiv decides to outsource?
Volume
1,200.00
units per month
Variable cost per unit
$12.50
per unit
Fixed costs
$20,000.00
per month
A) It will go up by $3,000.
B) It will go down by $20,000.
C) It will go up by $20,000.
D) It will go down by $3,000.
Volume
1,200.00
units per month
Variable cost per unit
$12.50
per unit
Fixed costs
$20,000.00
per month
Explanation / Answer
Answer is D
Explanation:
If Rajiv decides to outsource he has to purchase product at $ 15 and variable cost can be saved to the extent of $12.5
Income to be decreased by =(15-12.5)*1200
=$3000
Note : Fixed cost is unavoidable ,therefore it is common cost in the both options i,e. In house manufacturing and outsourcing
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