Sportway is a major division of a wholesale distributor supplying a wide range of moderately priced sporting equipment to large chain stores. Sportway purchases about 60% of its goods from other companies, and manufactures the rest of the products in-house. The companys Plastics Department is currently manufacturing molded fishing tackle boxes. Sportway can manufacture and sell 8,000 tackle boxes annually, making full use of its direct labor capacity at available work stations. The selling price and costs of Sportways tackle boxes follow:

Selling price per box $86.00

Costs per box:

Molded plastic $ 8.00

Hinges, latches, handle 9.00

Direct labor ($15.00/hour) 18.75

Manufacturing overhead 12.50

Variable marketing & administrative cost 11.00

$59.25

Profit per box $26.75

Because Sportway believes it could sell 12,000 tackle boxes if it had sufficient manufacturing capacity, the company is considering purchasing the tackle boxes for distribution. Maple Products could provide up to 9,000 tackle boxes per year at a price of $68.00 per box, delivered to Sportway's facility.

Bart Johnson, Sportways product manager, has suggested that the company could make better use of its Plastics Department by manufacturing skateboards. Johnsons market study indicates an expanding market for skateboards and a need for additional suppliers. Johnson believes Sportway could sell 17,500 skateboards annually at a price of $45.00 per skateboard. Johnson's estimate of the costs to manufacture the skateboards appears below.

Selling price per skateboard $45.00

Costs per skateboard:

Molded plastic $ 5.50

Wheels, hardware 7.00

Direct labor ($15.00/hr.) 7.50

Manufacturing overhead 5.00

Variable marketing & administrative cost 3.00

$28.00

Profit per skateboard $17.00

In the Plastics Department, Sportway uses direct labor hours to allocate manufacturing overhead. Fixed manufacturing overhead costs for the current year total $50,000. Sportway can make any combination of tackle boxes and skateboards (i.e., the company does not have to choose just one product). Variable marketing and administrative costs for the purchased tackle boxes would be $4.00 per unit.

Required: You are the manager of the Sportway division. Prepare an analysis that (1) shows which products Sportway should manufacture and/or purchase (i.e., what will maximize the divisions profits?) and (2) shows the associated financial impact. Support your answer with appropriate calculations.

(Hint: You will need to split the manufacturing overhead into fixed and variable components. The fixed MOH component identified in your analysis of the tackle boxes should help you identify the fixed MOH for the skateboards.)