PlayTime, Inc., is a leading manufacturer of sporting equipment. The company is in the process of evaluating the best use of its Plastics Division, which is currently manufacturing molded fishing tackle boxes. The company manufactures and sells 12,000 tackle boxes annually, making full use of its available capacity. The selling prices and costs of the tackle boxes are as follows:

Managers believe they could sell 15,000 tackle boxes if the company had sufficient manufacturing capacity. Rod-N-Reel has offered to supply 10,000 tackle boxes per year at a price of $70 per box, including delivery to PlayTime’s facility. Cedric Smith, Playtime’s product manager, believes the company could make better use of its plastics department by manufacturing skateboards. A marketing report indicates that 17,500 skateboards could be sold at a price of $55 each. Variable costs to make the boards would be $25.50 per board.

Playtime has three options:

1. Make and sell 12,000 tackle boxes.

2. Make 12,000 tackle boxes, buy 3,000 additional tackle boxes, and sell 15,000 tackle boxes.

3. Make and sell 17,500 skateboards, and buy and sell 15,000 tackle boxes.

Required

Compare the company's operating income under the three options.

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$86.00 Selling price per box Costs per box Direct materials $17.00 Direct labor 18.75 Variable manufacturing overhead Fixed manufacturing overhead Variable selling & administrative Fixed selling & administrative 7.00 6.25 10.00 7.00 Total cost per box 66.00 Profit per box $20.00 *Allocated to products based on expected production volume. Per unit variable selling and administrative costs are the same for all products.