Questions: 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 - 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 the production is outsourced, the costs of variable production and 80 percent of the fixed production will be eliminated. However, the company has to bear 20 percent of the fixed production costs regardless of the decision to outsource or produce internally. 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.

To address the question, we need to perform a differential analysis to compare the costs of producing windshields internally versus outsourcing the production. Let's break down the steps:

Alternative 1: Produce Internally

1. Variable Production Costs:

   • Per Unit: \$8
   • Total for 15,000 units: \$8 * 15,000 = \$120,000

2. Direct Materials:

   • Total: \$120,000

3. Direct Labor:

   • Total: \$150,000

4. Factory Overhead:

   • Total: \$165,000

5. Fixed Production Costs:

   • Total: \$390,000

Total Cost for Alternative 1:
\[ \$120,000 + \$120,000 + \$150,000 + \$165,000 + \$390,000 = \$945,000 \]

Alternative 2: Outsource Production

1. Cost of Purchasing Windshields:

   • Per Unit: \$45
   • Total for 15,000 units: \$45 * 15,000 = \$675,000

2. Remaining Fixed Production Costs:

   • 20% of \$390,000 = \$78,000

Total Cost for Alternative 2:
\[ \$675,000 + \$78,000 = \$753,000 \]

To determine the best alternative, we compare the total costs:

• Alternative 1 (Produce Internally): \$945,000
• Alternative 2 (Outsource Production): \$753,000

Conclusion:
The best alternative is to outsource production, as it results in a lower total cost of \$753,000 compared to producing internally at \$945,000.

Using the format in Figure 7.3, we summarize the result of outsourcing production:

• Cost Savings from Outsourcing:
  • Total Cost of Producing Internally: \$945,000
  • Total Cost of Outsourcing: \$753,000
  • Cost Savings: \$945,000 - \$753,000 = \$192,000

Summary:
Outsourcing the production of windshields results in a cost savings of \$192,000 annually, making it the more cost-effective option for Quality Glass.

In summary, outsourcing production is the better financial decision for Quality Glass, as it reduces costs significantly compared to internal production.