Lightening Semiconductors Produces 200,000 Hi-Tech Computer Chips Per Month

question 59

Multiple Choice

Lightening Semiconductors produces 200,000 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 $1,100,000 per month.The company has been approached by a foreign producer who can supply the component,ready-made and with acceptable quality standards for $1.20 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 profit if the company decides to outsource?

• A) Operating profit would go down by $0.
• B) Operating profit would go up by $440,000.
• C) There would be no effect on operating profit.
• D) Operating profit would go up by $240,000.

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