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.