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 Table 7.3. 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 Table 7.4.

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

30. Make-or-Buy Decision a. (Make internally) Alternative 1 (Buy from outside) Alternative 2 Differential Amount Alternative 1 Differential Amount is: Alternative 1 (5675,000) Lower Variable production costs: Cost to buy from outside Direct materials Direct labor Manufacturing overhead Fixed production costs Total production costs Correct Correct Incorrect Incorrect Incorrect Incorrect Incorrect Incorrect Incorrect Incorrect Incorrect Incorrect Incorrect b. Use the dropdown menu to select the best answer from the options below. a. Buying from the outside alterative 2) is the best alterative because costs are lower if the product is made internally. b. Making the product intemally (alternative 1) is the best altemative because the costs are higher if the product is made intemally. c. Buying from the outside (altemative 2) is the best alternative because costs are higher if the product is made internally. d. Making the product intemally (alternative 1) is the best altemative because the costs are lower if the product is made intemally. c. Amounts shown in parentheses indicate a negative impact on profit, and amounts without parentheses indicate a positive impact on profit: 120.000 Result of Outsourcing Production Cost increase to buy from outside Direct materials cost savings Direct labor cost savings Manufacturing overhead cost savings Fixed production cost savings Cost savings from outsourcing Incorrect Correct Incorrect Incorrect Incorrect Incorrect Incorrect d. Use the drop down menu to select the best answer from the options below. a. Managers often prefer to see the details of all calculations and how they impact profit. A11 other costs are irrelevant. b. Managers often prefer to see the differential costs and how they impact profit. All other costs are irrelevant. c. Managers often prefer to see costs to buy from the outside and how they impact profit. All other costs are irrelevant. d. Managers often prefer to see costs to make the product intemally and how they impact profit. All other costs are irrelevant. 30. Make-or-Buy Decision a. (Make internally) Alternative 1 (Buy from outside) Alternative 2 Differential Amount Alternative 1 Differential Amount is: Alternative 1 (5675,000) Lower Variable production costs: Cost to buy from outside Direct materials Direct labor Manufacturing overhead Fixed production costs Total production costs Correct Correct Incorrect Incorrect Incorrect Incorrect Incorrect Incorrect Incorrect Incorrect Incorrect Incorrect Incorrect b. Use the dropdown menu to select the best answer from the options below. a. Buying from the outside alterative 2) is the best alterative because costs are lower if the product is made internally. b. Making the product intemally (alternative 1) is the best altemative because the costs are higher if the product is made intemally. c. Buying from the outside (altemative 2) is the best alternative because costs are higher if the product is made internally. d. Making the product intemally (alternative 1) is the best altemative because the costs are lower if the product is made intemally. c. Amounts shown in parentheses indicate a negative impact on profit, and amounts without parentheses indicate a positive impact on profit: 120.000 Result of Outsourcing Production Cost increase to buy from outside Direct materials cost savings Direct labor cost savings Manufacturing overhead cost savings Fixed production cost savings Cost savings from outsourcing Incorrect Correct Incorrect Incorrect Incorrect Incorrect Incorrect d. Use the drop down menu to select the best answer from the options below. a. Managers often prefer to see the details of all calculations and how they impact profit. A11 other costs are irrelevant. b. Managers often prefer to see the differential costs and how they impact profit. All other costs are irrelevant. c. Managers often prefer to see costs to buy from the outside and how they impact profit. All other costs are irrelevant. d. Managers often prefer to see costs to make the product intemally and how they impact profit. All other costs are irrelevant