Valuable Electronics Uses a Standard Part in the Manufacture of Different

question 6

Multiple Choice

Valuable Electronics uses a standard part in the manufacture of different types of radios manufactured by it. The total cost of producing 25,000 parts is $95,000, which includes fixed costs of $40,000 and variable costs of $55,000. The company can buy the part from an outside supplier for $3 per unit, and avoid 20% of the fixed costs. If Valuable Electronics decides to outsource the production of the part, how will it impact its operating income?

• A)increase of $12,000
• B)decrease of $12,000
• C)increase of $20,000
• D)decrease of $20,000

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Definitions:

Production Function

An economic model expressing the relationship between inputs (like labor and capital) and the quantity of output produced.

Profit Maximization

The process or strategy of adjusting the production and sale of goods and services to achieve the highest possible profit levels.

Production Function

An equation that describes the relationship between the inputs used in production and the output generated from those inputs.

Marginal Product

The additional output produced as a result of using one more unit of a particular input, holding all other inputs constant.