Winter Sports Manufactures snowboards. Its cost of making 23,600 bindings is as follows:
Direct materials.................................................................................. $ 24,000
Direct labour.......................................................................................... 82,000
Variable manufacturing overhead ......................................................... 48,000
Fixed manufacturing overhead.............................................................. 82,000
Total manufacturing costs.................................................................. $236,000
Cost per pair ($236,000 / 23,600)...................................................... $ 10.00
Suppose Monroe will sell bindings to Winter Sports for $11 each. Winter Sports 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. Winter Sports’ accountants predict that purchasing the bindings from Monroe will enable the company to avoid $10,000 of fixed overhead. Prepare an analysis to show whether Winter Sports should make or buy the bindings.
2. The facilities freed by purchasing bindings from Monroe can be used to manufacture another product that will contribute $25,000 to profit. Total fixed costs will be the same as if Winter Sports had produced the bindings. Show which alternative makes the best use of Winter Sports’ facilities:
(a) Make bindings,
(b) Buy bindings and leave facilities idle,
(c) Buy bindings and make another product.