Wheels Inc. currently manufactures its own custom rims for automobiles. Management is interested in outsourcing production of these rims to a reputable manufacturing company that can supply the rims for $80 per unit. Wheels Inc. incurs the following annual production costs to produce 10,000 rims internally.

If production is outsourced, all variable production costs, factory building and equipment lease costs, and factory insurance costs will be eliminated. The production supervisor’s salary cost will remain regardless of the decision to outsource or to produce internally because the supervisor recently signed a long-term contract with Wheels Inc.

Required

a. Perform differential analysis using the format presented in Table 7.2. Assume making the rims internally is Alternative 1, and buying the rims 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. Compare the format used in requirement a with that of requirement c.

Table 7.2

Table 7.3

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Variable production costs: Total Annual Per Unit Cost at 10,000 Units Direct materials $20 $200,000 Direct labor 10 100,000 Manufacturing overhead 30 300,000 Fixed production costs: Factory building and equipment lease 70,000 Factory insurance 50,000 Production supervisor's salary 100,000 Total production costs $820,000