Krass Snowboard Mfg. Inc. manufactures snowboards. Its cost of making 1,800 bindings is as follows:
Direct materials....................................................................... $17,520
Direct labour........................................................................... 3,100
Variable manufacturing overhead ........................................... 2,080
Fixed manufacturing overhead................................................ 6,800
Total manufacturing costs....................................................... $29,500
Cost per pair ($29,500 ÷ 1,800).............................................. $ 16.39 (rounded)
Suppose O’Brien will sell bindings to Krass for $14 each. Krass will pay $1.00 per unit to transport the bindings to its manufacturing plant, where it will add its own logo at a cost of $0.20 per binding.
Requirements
1. Krass’ accountants predict that purchasing the bindings from O’Brien will enable the company to avoid $2,200 of fixed overhead. Prepare an analysis to show whether Krass should make or buy the bindings.
2. The facilities freed by purchasing bindings from O’Brien can be used to manufacture another product that will contribute $3,100 to profit. Total fixed costs will be the same as if Krass had produced the bindings. Show which alternative makes the best use of Krass’ facilities:
(a) Make bindings,
(b) Buy bindings and leave facilities idle, or
(c) Buy bindings and make another product.