Colorado Ski Company makes downhill ski equipment. Assume that New Mexico Ski Company has offered to produce ski poles for Colorado Ski Company for $18 per pair. Colorado Ski Company needs 100,000 pairs of poles per period. Colorado Ski Company can only avoid $125,000 of fixed costs if it outsources; the remaining fixed costs are unavoidable.

Colorado Ski Company currently has the following costs at a production level of 100,000 pairs of poles:

Manufacturing Costs

Total Cost

Cost per Pair

Direct Materials

$ 750,000

$ 7.50

Direct Labor

80,000

0.80

Variable MOH

520,000

5.20

Fixed MOH

650,000

6.50

Total

$2,000,000

$20.00