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P8-64B. Outsourcing decision given alternative use of capacity (Learning Objective 6) Snowy Mountain manufactures snowboards. Its cost of making 19,000 bindings is as follows: Direct materials Direct labor Variable manufacturing overhead. Fixed manufacturing overhead Total manufacturing costs Cost per pair ($228,000 / 19,000) $ 22,000 81,000 44,000 81,000 $228,000 $ 12.00 Suppose an outside supplier will sell bindings to Snowy Mountain for $15 each. Snowy Mountain would pay $2.00 per unit to transport the bindings to its manufacturing plant, where it would add its own logo at a cost $0.50 of per binding. Requirements 1. Snowy Mountain's accountants predict that purchasing the bindings from an outside supplier will enable the company to avoid $1,900 of fixed overhead. Prepare an analysis to show whether the company should make or buy the bindings. Snowy Mountain Outsourcing Analysis Make Bindings Buy Bindings Difference Total cost: Direct materials Direct labor Variable overhead Fixed overhead Purchase price from outsider $ Transportation * $ Logo * $ Total cost of 19,000 bindings Decision: Should Snowy Mountain make or buy the bindings? 2. The facilities freed by purchasing bindings from the outside supplier can be used to manufacture another product that will contribute $3,100 to profit. Total fixed costs will be the same as if Snowy Mountain had produced the bindings. Show which alternative makes the best use of Snowy Mountain's facilities: (a) make bindings, (b) buy bindings and leave facilities idle, or (c) buy bindings and make another product. Snowy Mountain Best Use of Facilities Analysis Buy Leave Facilities Idle Make Make Another Product Direct materials Direct labor Variable overhead Fixed overhead Purchase price from outsider x $ * $ Transportation Logo Expected profit from other products Expected net cost of obtaining 19,000 bindings Decision: Should Snowy Mountain continue to make the bindings, buy the bindings and leave the facilities idle, or buy the bindings and make another product