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

Multiple Choice

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. 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 income, if the company decides to outsource?

A) There would be no effect on operating income.
B) Operating income would go up by $520,000.
C) Operating income would go up by $440,000.
D) Operating income would go down by $80,000.