Coffee Mugs Inc. currently manufactures ceramic coffee mugs. Management is interested in outsourcing production to a reputable manufacturing company that can supply the cups for \($2\) per unit. Coffee Mugs produces 100,000 mugs each year. Variable production costs are \($0.80\) and annual fixed costs are \($150,000.\) If production is outsourced, all variable costs and 40 percent of annual fixed costs will be eliminated. 

Perform differential analysis using the format presented in Table 7.2 and explain which alternative is best, Alternative 1 (producing internally) or Alternative 2 (outsourcing).

Table 7.2 

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Make-or-Buy Differential Analysis for Best Boards Inc. (Make internally) Alternative 1 (Buy from outside) Alternative 2 Differential Alternative 1 Amount is: Variable costs: Cost to buy from outside $ 0 $ 700,000* == $(700,000) Lower Direct materials 300,000 0 = 300,000 Higher Direct labor 160,000 0 = 160,000 Higher Manufacturing overhead 100,000 0 = 100,000 Higher Fixed costs: Factory equipment lease 110,000 110,000 = 0 Factory building rent 290,000 290,000 0 Production supervisors' salaries 140,000 90,000** 50,000 Higher Total production costs $1,100,000 $1,190,000 = $ (90,000) Lower *$700,000 $70 per unit x 10,000 units. ** One supervisor must be paid $90,000 per year even if the company buys the product. The other supervisor, who is paid $50,000 per year, can be let go if the company buys the product.