Valuable Electronics Uses a Standard Part in the Manufacture of Different

Valuable Electronics uses a standard part in the manufacture of different types of radios manufactured by it. The total cost of producing 25,000 parts is $95,000, which includes fixed costs of $40,000 and variable costs of $55,000. The company can buy the part from an outside supplier for $3 per unit, and avoid 20% of the fixed costs. If Valuable Electronics decides to outsource the production of the part, how will it impact its operating income?

A) increase of $12,000
B) decrease of $12,000
C) increase of $20,000
D) decrease of $20,000

Correct Answer:

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