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.What are the total production costs if the hats are outsourced?

A) $130,000
B) $145,000
C) $100,000
D) $60,000
E) None of the answer choices is correct.