Alexandria Semiconductors Produces 300,000 Hi-Tech Computer Chips Per Month

Alexandria Semiconductors produces 300,000 hi-tech computer chips per month. Each chip uses a component which Alexandria makes in-house. The variable costs to make the component are $0.80 per unit, and the fixed costs run $956,000 per month. Alexandria has been approached by a foreign producer who can supply the component, ready-made and with acceptable quality standards for $0.60 each. If Alexandria chooses to outsource, it could reduce the fixed costs by 50%. Alexandria would have no other use for the facilities currently employed in making the component. If Alexandria decides to outsource, how would that affect the operating income?

A) There would be no effect on operating income.
B) Operating income would go up by $538,000.
C) Operating income would go up by $180,000.
D) Operating income would go down by $60,000.

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