Wheels, Inc., currently manufactures its own custom rims for automobiles. Management is interested in outsourcing production of these rims to a reputable manufacturing company that can supply the rims for $80 per unit. Wheels, Inc., incurs the following annual production costs to produce 10,000 rims internally.

Total Annual Cost at 10 000 Units

Per unit

Variable production costs

Direct materials $20 $200 000

Direct labor $10 $100 000

Applied (and actual) factory overhead $30 $300 000

Fixed production costs

Factory building and equipment and lease $70 000

Factory Insurance $50 000

Production Supervisory salary $100 000

Total production costs $820 000

If production is outsourced, all variable production costs, factory building and equipment lease costs, and factory insurance costs will be eliminated. The production supervisor's salary cost will remain regardless of the decision to outsource or to produce internally because the supervisor recently signed a long-term contract with Wheels, Inc.

Required:

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

b. Which alternative is best? Explain.