Make-or-Buy Decision. Tennis Gear, Inc., currently manufactures tennis rackets. Management is interested in outsourcing production of these tennis rackets to a reputable manufacturing company that can supply the rackets for $45 per unit. Tennis Gear, Inc., incurs the following annual production costs to produce 15,000 rackets internally.

If production is outsourced, all variable production costs will be eliminated, and 70 percent of fixed production costs will be eliminated. Thirty percent of fixed production costs will remain regardless of the decision to outsource or to produce internally.

Required:

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

2. Which alternative is best? Explain.

3. Summarize the result of outsourcing production using the format presented in Figure 7.3.

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

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