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Sierra Semiconductors produces 100,000 high-tech computer chips per month. Each chip uses a component that Sierra makes in-house. The variable costs to make the component are $1.30 per unit, 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 $1.20 each. If the company chooses to outsource, fixed costs can be reduced by 40%. There are no other uses for the facilities currently employed in making the component. What would be the effect on operating income, if the company decides to outsource?
A) Operating income would increase by $450,000.
B) Operating income would increase by $120,000.
C) There would be no effect on operating income.
D) Operating income would decrease by $10,000.
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Horngren's Financial & Managerial Accounting, The Financial Chapters

Horngren's Financial & Managerial Accounting, The Financial Chapters


Edition: 5th
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7 years ago
This was certainly a tough question, loving the expertise
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