Make-or-Buy Decision. 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.

If production is outsourced, all variable production costs, factory building and equipment lease costs, and factory insurance costs will be eliminated. The production supervisors 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:

Perform differential analysis using the format presented in Figure 7.2 "Make-or-Buy Differential Analysis for Best Boards, Inc.". Assume making the rims internally is Alternative 1, and buying the rims from an outside manufacturer is Alternative 2.

Which alternative is best? Explain.

Summarize the result of outsourcing production using the format presented in Figure 7.3 "Summary of Differential Analysis for Best Boards, Inc.".

Compare the format used in requirement a with that of requirement c.

Total Annual Cost at 10,000 Units Per Unit Variable production costs Direct materials Direct labor Manufacturing overhead $20 10 30 $200,000 100,000 300,000 Fixed production costs Factory building and equipment lease Factory insurance Production supervisor's salary 70,000 50,000 100,000 $820,000 Total production costs