Coffee Mugs, Inc., currently manufactures ceramic coffee mugs. Management is interested in outsourcing production to...
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Coffee Mugs, Inc., currently manufactures ceramic coffee mugs. Management is interested in outsourcing production to a reputable manufacturing company that can supply the cups for $2 per unit. Coffee Mugs produces 100,000 mugs each year. Variable production costs are $0.80 and annual fixed costs are $150,000. If production is outsourced, all variable costs and 40 percent of annual fixed costs will be eliminated.
Perform differential analysis and explain which alternative is best, Alternative 1 (producing internally) or Alternative 2 (outsourcing). Show your calculations.
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