Cheong Automobiles Company Fabricates Inexpensive Automobiles for Sale to Third

question 84

Multiple Choice

Cheong Automobiles Company fabricates inexpensive automobiles for sale to third world countries.Each vehicle includes one wiring harness,which is currently made in-house.Details of the harness fabrication are as follows: A factory in Indonesia has offered to supply Cheong with ready-made units for a price of $14 per wiring harness.Assume that Cheong's fixed costs could be reduced by $5,000 if they outsource,and that Cheong will not be able to use the excess capacity in any profitable manner.What will be the impact Cheong's monthly operating income,if Cheong decides to outsource?

• 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.

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Definitions:

Subchapter S

A section of the Internal Revenue Code that provides for a special tax status for qualifying small businesses, allowing income to be taxed at the shareholder level and not at the corporate level.

Net Capital Loss

This occurs when the total capital losses from investments exceed the total capital gains, which can sometimes be used to offset other types of income for tax purposes.

Ordinary Income

This refers to any income earned through work, interest, dividends, or rental income, subject to standard tax rates.

Dividend Income

Income received from owning shares in a company, paid out from the company's profits.