P20-25A Outdoor Life manufactures snowboards. Its cost of making 2,000 bindings is as follows

QUESTION

P20-25A
Making outsourcing decisions

P20-25A Outdoor
Life manufactures snowboards. Its cost of making 2,000 bindings is as follows:
Direct
materials 17,550
Direct labor
3,400
Variable
overhead 2,040
Fixed
overhead 6,300
Total
manufacturing costs for 2,100 bindings 29,290

Suppose
Lancaster will sell bindings to Outdoor Life for $14 each. Outdoor Life would
pay $3 per unit to transport the bindings to its manufacturing plant, where it
would add its own logo at a cost of $0.70 per binding.

Requirements

1. Outdoor Life’s accountants predict that purchasing the bindings from
Lancaster will enable the company to avoid $2,100 of fixed overhead. Prepare an
analysis to show whether Outdoor Life should make or buy the bindings.

2. The facilities freed by purchasing bindings from
Lancaster can be used to manufacture another product that will contribute
$2,700 to profit. Total fixed costs will be the same as if Outdoor Life had
produced the bindings. Show which alternative makes the best use of Outdoor
Life’s facilities: (a) make bindings, (b) buy bindings and leave facilities
idle, or (c) buy bindings and make another product.

ANSWER:

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