Chapter 25, Problem P25.31BPGB

Making outsourcing decisions

Winter Sports manufactures snowboards. Its cost of making 2, 100 bindings is as follows:

Direct materials 					$ 17,600
Direct labor 						2,600
Variable overhead 					2, 120
Fixed overhead 						6,800
Total manufacturing costs for 2, 100 bindings 		 $ 29,120

Suppose Lewis will sell bindings to Winter Sports for $15 each. Winter Sports would pay $2 per unit to transport the bindings to its manufacturing plant, where it would add its own logo at a cost of $0.40 per binding.

Requirements

1. Winter Sports’s accountants predict that purchasing the bindings from will enable the company to avoid $2, 100 of fixed overhead. Prepare an analysis to showwhether Winter Sports should make or buy the bindings.
2. The facilities freed by purchasing bindings from Lewis can be used to manufacture
another product that will contribute $3,100 to profit. Total fixed costs will be the same as if Winter Sports had produced the bindings. Show which alternative makes the best use of Winter Sports’s facilities: (a) make bindings, (b) buy bindings and leave facilities idle, or (c) buy bindings and make another product.