Exhibit 7-3 Cap Incorporated Currently Manufactures Hats.Management Is Interested in Outsourcing Production

Multiple Choice

Exhibit 7-3
Cap Incorporated currently manufactures hats.Management is interested in outsourcing production to a reputable manufacturing company that can supply the hats for $5 per unit.Cap produces 20,000 hats each year.Variable production costs are $2 and annual fixed costs are $75,000.If production is outsourced,all variable costs and 60 percent of annual fixed costs will be eliminated.
-Refer to Exhibit 7-3.Which is the best alternative,producing internally or outsourcing?

A) Outsourcing the production of hats results in $15,000 in savings compared to internal production.
B) Outsourcing the production of hats results in $30,000 in savings compared to internal production.
C) Producing the hats internally results in $30,000 in savings compared to outsourcing production.
D) Producing the hats internally results in $15,000 in savings compared to outsourcing production.
E) None of the answer choices is correct.