Snowy Mountain manufactures snowboards. Its cost of making 19,000 bindings is as follows:
Direct materials ............................................................................... $ 22,000
Direct labor ........................................................................................ 81,000
Variable manufacturing overhead ...................................................... 44,000
Fixed manufacturing overhead .......................................................... 81,000
Total manufacturing costs .............................................................. $228,000
Cost per pair ($228,000 / 19,000) ...................................................... $ 12.00
Suppose an outside supplier will sell bindings to Snowy Mountain for $15 each. Snowy Mountain would pay $2.00 per unit to transport the bindings to its manufacturing plant, where it would add its own logo at a cost $0.50 of per binding.
Requirements
1. Snowy Mountain's accountants predict that purchasing the bindings from an outside supplier will enable the company to avoid $1,900 of fixed overhead. Prepare an analysis to show whether the company should make or buy the bindings.
2. The facilities freed by purchasing bindings from the outside supplier can be used to manufacture another product that will contribute $3,100 to profit. Total fixed costs will be the same as if Snowy Mountain had produced the bindings. Show which alternative makes the best use of Snowy Mountain's facilities: (a) make bindings, (b) buy bindings and leave facilities idle, or (c) buy bindings and make another product.