Hello, I am having troubles figuring this question out. Here is the 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 $80 per unit. Wheels, Inc., incurs the following annual production costs to produce 10,000 rims internally.

Per Unit Total Annual Cost

at 10,000 Units

Variable production costs

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 supervisor's salary $100,000

Total production costs $820,000

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

Required:

1. Perform differential analysis using the format presented in Figure 7.2 (page 492 of the textbook).Assume making the rims internally is Alternative 1, and buying the rims from an outside manufacturer is Alternative 2.
2. Which alternative is best? Explain.

Here is what the figure looks like:

Alternative 1 Alternative 2 (Make (Buy from Differential Internally) Outside) Amount Alternative 1 Is Variable costs Cost to buy from outside 00 $ 700,000 $(700,000) Lower Direct materials 300,000 0 300,000 Higher Direct labor 160,000 0 160,000 Higher Manufacturing overhead 100,000 100,000 Higher Fixed costs Factory equipment lease 110,000 110,000 = 0 Factory building rent 290,000 290,000 0 Production supervisors' salaries 140,000 90,000 50,000 Higher Total production costs $1,100,000 $1,190,000 = $ (90,000) Lower