Quality Glass currently manufactures windshields for automobiles. Management is interested in outsourcing production of these windshields to a reputable manufacturing company that can supply the windshields for $45 per unit. Quality Glass incurs the following annual production costs to produce 15,000 windshields internally.

If production is outsourced, all variable production costs will be eliminated, and 80 percent of fixed production costs will be eliminated. Twenty percent of fixed production costs will remain regardless of the decision to outsource or to produce internally.

Required

a. Perform differential analysis using the format presented in Table 7.2. Assume making windshields internally is Alternative 1, and buying windshields from an outside manufacturer is Alternative 2.

b. Which alternative is best? Explain.

c. Summarize the result of outsourcing production using the format presented in Table 7.3.

d. Why might some managers prefer the format presented in requirement c?

Table 7.2

Table 7.3

Transcribed Image Text:

Variable production costs: Total Annual Per Unit Cost at 15,000 Units Direct materials $8 $120,000 Direct labor 10 150,000 Manufacturing overhead 11 165,000 Fixed production costs 390,000 Total production costs $825,000