Lightening Semiconductors Produces 400,000 Hi-Tech Computer Chips Per Month

question 112

Multiple Choice

Lightening Semiconductors produces 400,000 hi-tech computer chips per month. Each chip uses a component which Lightening makes in-house. The variable costs to make the component are $1.20 per unit, and the fixed costs run $1,200,000 per month. The company has been approached by a foreign producer who can supply the component, ready-made and with acceptable quality standards for $1.10 each. If the company chooses to outsource, it could reduce the fixed costs by 40%. The company does not have any other use for the facilities currently employed in making the component. What is the effect on operating income, if the company decides to outsource?

• A)There would be no effect on operating income.
• B)Operating income would go up by $520,000.
• C)Operating income would go up by $440,000.
• D)Operating income would go down by $80,000.