Quality Glass currently manufactures windshields for automobiles. Management is interested in outsourcing production of these windshields to a reputable manufacturing company that can supply the windshields for $45 per unit. Quality Glass incurs the following annual production costs to produce 15,000 windshields internally.

Per Unit

Total Annual Cost at 15,000 Units

Variable production costs

$8

Direct materials

$ 10

$ 120,000

Direct labor

$ 11

150,000

Applied (and actual) factory overhead

165,000

Fixed production costs

390,000

Total production costs

$ 825,000

If production is outsourced, all variable production costs will be eliminated, and 80 percent of fixed production costs will be eliminated. Regardless of the decision to outsource or to produce internally, 20 percent of fixed production costs will remain .

Required:

a. Perform differential analysis using the format presented in Figure 7.2. Assume making windshields internally is Alternative 1, and buying windshields 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 Figure 7.3

Figure 7.2 Make-or-Buy Differential Analysis for Best Boards, Inc. Alternative 1 Alternative 2 (Make (Buy from Differential Internally) Outside) Amount Alternative 1 Is Variable costs Cost to buy from outside S 00 $ 700,000* = $(700,000) Lower Direct materials 300,000 0 300,000 Higher Direct labor 160,000 0 160,000 Higher Manufacturing overhead 100,000 0 100,000 Higher Fixed costs Factory equipment lease 110,000 110,000 = Factory building rent 290,000 290,000 = O 0 Production supervisors' salaries 140,000 90,000 50,000 Higher Total production costs $1,100,000 $1,190,000 = $ (90,000 LowerFigure 7.3 Summary of Differential Analysis for Best Boards, Inc. Result of Outsourcing Production of Wakeboards Cost increase to buy from outside $(700,000) Direct materials cost savings 300,000 Direct labor cost savings 160,000 Manufacturing overhead cost savings 100,000 Supervisor salaries cost savings 50,000 Cost increase from outsourcing $ (90,000)Quality Glass currently manufactures windshields for automobiles. Management is interested in outsourcing production of these windshields to a reputable manufacturing company that can supply the windshields for $45 per unit. Quality Glass incurs the following annual production costs to produce 15,000 windshields internally. Total Annual Cost at 15,000 Units Per Unit Variable production costs $ 8 Direct materials $ 10 $ 120,000 Direct labor $ 11 150,000 Applied (and actual) factory overhead 165,000 Fixed production costs 390,000 Total production costs $ 825,000 If production is outsourced, all variable production costs will be eliminated, and 80 percent of fixed production costs will be eliminated. Regardless of the decision to outsource or to produce internally, 20 percent of fixed production costs will remain. Required: a. Perform differential analysis using the format presented in Figure 7.2. Assume making windshields internally is Alternative 1, and buying windshields 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 Figure 7.3