What effect on operating income if company decides

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Question 1: Sanchez Semiconductors produces 200,000 high-tech computer chips per month. Each chip uses a component that Sanchez makes in-house. The variable costs to make the component are $1.20 per unit, and the fixed costs are $1,200,000 per month. The company has been approached by a foreign producer who can supply the component, within acceptable quality standards, for $1.00 each. If the company chooses to outsource, fixed costs can be reduced by 30%. There are no other uses for the facilities currently employed in making the component. What would be the effect on operating income, if the company decides to outsource?

Option 1: There would be no effect on operating income.

Option 2: Operating income would increase by $400,000.

Option 3: Operating income would increase by $200,000.

Option 4: Operating income would decrease by $40,000.

Reference no: EM132500672

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