Exhibit 7-3

Cap Incorporated currently manufactures hats. Management is interested in outsourcing production to a reputable manufacturing company that can supply the hats for $5 per unit. Cap produces 20,000 hats each year. Variable production costs are $2 and annual fixed costs are $75,000. If production is outsourced, all variable costs and 60 percent of annual fixed costs will be eliminated.

26. Refer to Exhibit 7-3. What are the total production costs if the hats are outsourced?

$130,000

$145,000

$100,000

$60,000

None of the answer choices is correct.

27. Refer to Exhibit 7-3. Which is the best alternative, producing internally or outsourcing?

Outsourcing the production of hats results in $15,000 in savings compared to internal

production.

Outsourcing the production of hats results in $30,000 in savings compared to internal

production.

Producing the hats internally results in $30,000 in savings compared to outsourcing

production.

Producing the hats internally results in $15,000 in savings compared to outsourcing

production. e. None of the answer choices is correct.