Chapter 25, Question 3:

Outdoor Life manufactures snowboards. Its cost of making 1,900 bindings is as follows:

Suppose Hemingway will sell bindings to Outdoor Life for $12 each. Outdoor Life would pay $3 per unit to transport the bindings to its manufacturing plant, where it would add its own logo at a cost of $0.40 per binding.

Requirements:

Requirement 1. Outdoor Life's accountants predict that purchasing the bindings from Hemingway will enable the company to avoid $2,300 of fixed overhead. Prepare an analysis to show whether Outdoor Life should make or buy the bindings. (Only enter the net relevant costs. For the Difference column, use a minus sign or parentheses only when the cost of outsourcing exceeds the cost of making the bindings in-house.)

Direct materials $ Direct labor Variable overhead 17,500 3,500 2,100 7,000 30,100 Fixed overhead Total manufacturing costs for 1,900 bindings 1. Outdoor Life's accountants predict that purchasing the bindings from Hemingway will enable the company to avoid $2,300 of fixed overhead. Prepare an analysis to show whether Outdoor Life should make or buy the bindings The facilities freed by purchasing bindings from Hemingway can be used to manufacture another product that will contribute $3,200 to profit. Total fixed costs will be the same as if Outdoor Life had produced the bindings. Show which alternative makes the best use of Outdoor Life's facilities: (a) make bindings, (b) buy bindings and leave facilities idle, or (c) buy bindings and make another product. Make Outsource Bindings Difference (Make-Outsource) Binding costs Bindings Variable costs: Direct materials Direct labor Variable overhead Fixed costs Purchase price from Hemingway Transportation Logo Total differential cost of 1,900 bindings