Cheong Automobile Company Fabricates Automobiles An Indonesian Factory Has Offered to Supply Cheong Automobile Company

question 64

Multiple Choice

Cheong Automobile Company fabricates automobiles. Each vehicle includes one water pump, which is currently made in-house. Details of the water pump assembly are as follows: $$\begin{array} { | l | r | l | } \hline \text { Volume } & 1200 & \text { units per month } \\\hline \text { Variable cost per unit } & \$ 11.50 & \text { per unit } \\\hline \text { Fixed costs } & \$ 10,000 & \text { per month } \\\hline\end{array}$$ An Indonesian factory has offered to supply Cheong Automobile Company with ready-made units for a cost of $16 for each water pump. Assume that Cheong's fixed costs are unavoidable and that Cheong will not be able to use the excess capacity in any profitable manner. If Cheong decides to outsource, monthly operating income will ________.

• A) increase by $5400
• B) decrease by $10,000
• C) increase by $10,000
• D) decrease by $5400

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First-born Son

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