Dong Fang Company Fabricates Inexpensive Automobiles for Sale to 3^rd

question 59

Multiple Choice

Dong Fang Company fabricates inexpensive automobiles for sale to 3^rd world countries. Each auto includes one wiring harness, which is currently made in-house. Details of the harness fabrication are as follows:
$$\begin{array} { | l | r | r | } \hline \text { Volume } & 900 & \text { Units per month } \\\hline \text { Variable cost per unit } & \$ 8.00 & \text { Per unit } \\\hline \text { Fixed costs } & \$ 14,000 & \text { Per month } \\\hline\end{array}$$
A factory in Indonesia has offered to supply Dong Fang with ready-made units for a price of $14.00 each.
Assume that Dong Fang's fixed costs could be reduced by $5,000 if they outsource, and that Dong Fang will not be able to use the excess capacity in any profitable manner. If Dong Fang decides to outsource, what will be the impact on Dong Fang's monthly operational income?

• A) It will go up by $2,600.
• B) It will go down by $14,000.
• C) It will go up by $8,600.
• D) It will go down by $400.

Understand the use and importance of the SML (Security Market Line) approach in estimating the cost of equity.

Acknowledge the impact of flotation costs on project financing.

Differentiate between the concept of cost of capital and opportunity cost.

Learn about the subjective approach to assigning discount rates and its implications for project selection.

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Definitions:

Opportunity Cost

The cost of forgoing the next best alternative when making a decision or choosing to invest in one option over another.

Producer Surplus

The difference between the amount that producers are willing and able to sell a good for and the actual amount received due to a higher market price.

Producer Surplus

The divergence between the desired selling price of producers and the real price at which goods are sold.

Supply Curve Shift

A change in the supply curve, indicating a change in the quantity supplied at each price.