Question

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 $75 per unit. Wheels, Inc., incurs the following annual production costs to produce 10,000 rims internally.

Variable Production Costs				Per unit	For 10,000 Units
	Direct materials			$                22	$     220,000
	Direct labor			$                  9	$       90,000
	Manufacturing overhead			$                28	$     280,000
Fixed production costs
	Factory building and equip lease				$       70,000
	Factory insurance				$       50,000
	Production supervisor's salary				$     100,000

If production is outsourced the factory building and equipment lease costs will be cut in half . 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.

Question 38 (2 points)

Phillips may determine the best course is to make the rims internally even if an outside supplier saves them money. Why might this be the case?

Question 38 options:

	Shipping delays from outside suppliers are too frequent.
	Quality control is an issue when rims are not manufactured internally
	The trained workforce keeps their skills that can be used for other manufacturing.
	All of the above could be reasons to manufacture internally even if more costly.

Question 39 (2 points)

What would be the best choice for Phillips in the short run?

Question 39 options:

	Continue to make the rims internally
	Reduce the salary of the production supervisor
	Open a new factory in another country
	Outsource the rims to an outside supplier

Question 40 (2 points)

Question 40 options:

How much will profits improve by making the correct choice between the outsourcing and producing internally?

Answer 1