Questions: Rims Internally versus Buying Rims Outside Wheels, Inc Analysis of making Wheels Inc Alternative (Make Internally) Alternative 2 (Buy from Outside) Differential Amount Alternative 1 is: Variable Costs Cost to buy outside 0 800,000 800,000 Lower Direct Materials 200,000- 0 200,000 Higher Direct Labor 100,000- 0 100,000 Higher Manufacturing Overhead 300,000- 0 300,000 Higher Fixed Costs Factory / Equipment lease 70,000- 70,000 0 Factory Insurance 50,000- 50,000 0 Production Supervisors Salaries 100,000- 100,000 0 Total Production Costs Lower Which alternative is best? Explain

Rims Internally versus Buying Rims Outside Wheels, Inc Analysis of making Wheels Inc Alternative (Make Internally) Alternative 2 (Buy from Outside) Differential Amount Alternative 1 is: Variable Costs Cost to buy outside 0 800,000 800,000 Lower Direct Materials 200,000- 0 200,000 Higher Direct Labor 100,000- 0 100,000 Higher Manufacturing Overhead 300,000- 0 300,000 Higher Fixed Costs Factory / Equipment lease 70,000- 70,000 0 Factory Insurance 50,000- 50,000 0 Production Supervisors Salaries 100,000- 100,000 0 Total Production Costs Lower Which alternative is best? Explain
Transcript text: Rims Internally versus Buying Rims Outside Wheels, Inc Analysis of making \begin{tabular}{|c|c|c|c|c|c|} \hline Wheels Inc & & \begin{tabular}{c} Alternative \\ ( \\ (Make \\ Internally) \end{tabular} & \begin{tabular}{c} Alternative 2 \\ (Buy from \\ Outside) \end{tabular} & \begin{tabular}{c} Differential \\ Amount \end{tabular} & \begin{tabular}{c} Alternative \\ 1 is: \end{tabular} \\ \hline Variable Costs & & & & \\ \hline \begin{tabular}{c} Cost to buy \\ outside \end{tabular} & & $\$ 0$ & $\$ 800,000$ & $\$ 800,000$ & Lower \\ \hline Direct Materials & & $200,000-$ & $\$ 0$ & $\$ 200,000$ & Higer \\ \hline Direct Labor & & $100,000-$ & $\$ 0$ & $\$ 100,000$ & Higer \\ \hline \begin{tabular}{c} Manufacturing \\ Overhead \end{tabular} & & $300,000-$ & $\$ 0$ & $\$ 300,000$ & Higer \\ \hline \begin{tabular}{c} Fixed Costs \\ Factory / \\ Equipment lease \end{tabular} & & $70,000-$ & $\$ 70,000$ & $\$ 0$ & \\ \hline \begin{tabular}{c} Factory Insurance \end{tabular} & $50,000-$ & $\$ 50,000$ & $\$ 0$ & \\ \hline \begin{tabular}{c} Production \\ Supervisors \\ Salaries \end{tabular} & & $100,000-$ & $\$ 100,000$ & $\$ 0$ & \\ \hline \begin{tabular}{c} Total Production \\ Costs \end{tabular} & & & & Lower \\ \hline \end{tabular} Which alternative is best? Explain
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Solution

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To determine which alternative is best for Wheels, Inc. between making rims internally or buying them from an outside supplier, we need to analyze the costs associated with each option. Here is a breakdown of the costs:

Alternative 1: Make Internally
  • Direct Materials: $200,000
  • Direct Labor: $100,000
  • Manufacturing Overhead: $300,000
  • Fixed Costs (Factory/Equipment Lease): $70,000
  • Factory Insurance: $50,000
  • Production Supervisors' Salaries: $100,000

Total Cost for Making Internally: \[ 200,000 + 100,000 + 300,000 + 70,000 + 50,000 + 100,000 = \$820,000 \]

Alternative 2: Buy from Outside
  • Cost to Buy Outside: $800,000

Total Cost for Buying from Outside: \[ \$800,000 \]

Differential Analysis
  • Cost to Buy Outside: $800,000
  • Cost to Make Internally: $820,000

Differential Amount: \[ 820,000 - 800,000 = \$20,000 \]

Conclusion

The answer is B: Buy from Outside.

Explanation:

  • Cost Comparison: The total cost of making the rims internally is $820,000, whereas the cost of buying them from an outside supplier is $800,000. Therefore, buying from outside is $20,000 cheaper than making the rims internally.
  • Fixed Costs: Some fixed costs such as factory/equipment lease, factory insurance, and production supervisors' salaries are incurred regardless of the decision. However, these costs are already included in the internal production cost and do not change the differential analysis.
  • Variable Costs: The variable costs (direct materials, direct labor, and manufacturing overhead) are higher when making internally, contributing to the higher total cost.

Given the cost savings, the best alternative for Wheels, Inc. is to buy the rims from an outside supplier.

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