Make-or-Buy Decision. Cool Company LLC currently manufactures skateboards. Management is interested in outsourcing production of the skateboards to a reputable manufacturing company that can supply the skateboards for $90 per unit. Cool Company LLC incurs the following annual production costs to produce 3,000 skateboards internally:

	Per Unit	Total Annual Cost at 3000 units
Variable Production Cost
Direct Materials	$30	$90,000
Direct Labour	$15	$45,000
Manufacturing Overhead	$20	$60,000
Fixed Production Costs
Factory lease		$80,000
Equipment lease		$40,000
Factory Insurance		$25,000
Production Supervisors Salary		$90,000
Total Production cost		$430,000

If production is outsourced, all variable production costs, equipment lease costs, and factory insurance costs will be eliminated. The production supervisors salary cost will remain regardless of the decision to outsource or to produce internally because the supervisor recently signed a long-term contract with the company. The factory lease has five years remaining and cannot be terminated before then.

Required:

1. Perform differential analysis. Assume making the product internally is Alternative 1, and buying the product from an outside manufacturer is Alternative 2.

2. Which alternative is best? Explain.

3. Summarize the result of outsourcing production.

4. Assume Cool Company can lease the space it currently uses to produce skateboards for $45,000 per year if production of skateboards is outsourced. Because the company subleasing this space would also pay for insurance, Cool Company would not be required to pay for factory insurance. Determine if Cool Company would be better off outsourcing production. (Hint: $45,000 will appear in the analysis as an opportunity cost)