Outsourcing decision given alternative use of capacity (Learning Objective 6)

X-Perience manufactures snowboards. Its cost of making 1,800 bindings is:

Suppose O’Brien will sell bindings to X-Perience for $14 each. X-Perience 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. X-Perience’s 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 X-Perience 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 X-Perience had produced the bindings.
Show which alternative makes the best use of X-Perience’s facilities:

(a) make bindings,

(b) buy bindings and leave facilities idle, or

(c) buy bindings and make another product.

Transcribed Image Text:

Direct materials.......... Direct labor........ Variable manufacturing overhead Fixed manufacturing overhead. ........... Total manufacturing cost............... Cost per pair ($220,000+20,000)........ $ 20,000 80,000 40,000 80,000 $220,000 $ 11