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

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. The fixed costs are unavoidable, and Lightening would have no 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) Lightening Semiconductors could save $1,200,000 per month in costs.
C) Lightening Semiconductors could save $40,000 per month in costs.
D) Lightening Semiconductor's costs would go up by $10,000 per month.

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