Mountain FunMountain Fun manufactures snowboards. Its cost of making 2,000 bindings is as follows:

	Direct materials	$17,530
	Direct labor	2,600
	Variable overhead	2,070
	Fixed overhead	6,500
	Total manufacturing costs for 2,000 bindings	$28,700

Suppose

LewisLewis

will sell bindings to

Mountain FunMountain Fun

for

$ 12$12

each.

Mountain Funwould pay $1 per unit to transport the bindings to its manufacturing plant, where it would add its own logo at a cost of $0.60 per binding.

1.

Mountain Fun's accountants predict that purchasing the bindings fromLewis

will enable the company to avoid $2,300 of fixed overhead. Prepare an analysis to show whether Mountain Fun should make or buy the bindings.

2.

The facilities freed by purchasing bindings from Lewis

can be used to manufacture another product that will contribute $2,700 to profit. Total fixed costs will be the same as if Mountain Fun had produced the bindings. Show which alternative makes the best use of Mountain Fun's facilities: (a) make bindings, (b) buy bindings and leave facilities idle, or (c) buy bindings and make another product.

	Make	Outsource	Difference
Binding costs	Bindings	Bindings	(MakeOutsource)
Variable costs:
Direct materials
Direct labor
Variable overhead
Fixed costs
Purchase price from Lewis
Transportation
Logo
Total differential cost of 2,000 bindings