Question

Wheels, Inc, is 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.

Variable production costs Per unit Total annual cost at 10,000 units

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 lease $70,000

factory insurance $50,000

production supervisors salary    $100,000

Total production costs $820,000

If production is outsourced, all variable 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.

Task to perform:

a. Perform differential analysis using the figures presented. Ans assume that making rims internally is Alternative 1, and buying the rims from an outside manufacture is Alternative 2.

b. Which alternative is best? Please clearly explain.

Please present answers clearly. Thank you

Answer 1