Rossignol makes downhill ski equipment. Assume that Atomic has offered to produce ski poles for Rossignol for \($18\) per pair. Rossignol needs 100,000 pairs of poles per period.

Rossignol can only avoid \($125,000\) of fixed costs if it outsources; the remaining fixed costs are unavoidable. Rossignol currently has the following costs at a production level of 100,000 pairs of poles:

1. Should Rossignol outsource ski pole production if the next best use of the freed capacity is to leave it idle? What effect will outsourcing have on Rossignol operating income?
2. If the freed capacity could be used to produce ski boots that would provide \($500,000\) of operating income, should Rossignol outsource ski pole production?

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Manufacturing Costs Direct Materials Direct Labor Variable MOH Fixed MOH Total Total Cost $750,000 Cost per Pair (100,000 pairs) $7.50 80,000 0.80 520,000 5.20 650,000 6.50 $2,000,000 $20.00