Chapter 8, Problem 8.52AP

Outsourcing decision given alternative use of capacity (Learning Objective 6)

Mountain Sports manufactures snowboards. Its cost of making 1,850 bindings is as follows:

Direct materials	$ 18,500
Direct labor	2,900
Variable manufacturing overhead	1,285
Fixed manufacturing overhead	7.100
Total manufacturing costs	$ 29,785
Cost per pair ($29,785 ÷ 1,850)	$ 16.10

Suppose an outside supplier will sell bindings to Mountain Sports for $14 each. Mountain Sports will pay $1.00 per unit to transport the bindings to its manufacturing plant, where it will add its own logo at a cost of $0.70 per binding.

Requirements

1. 1. Mountain Sports’ accountants predict that purchasing the bindings from the outside supplier will enable the company to avoid $2,000 of fixed overhead. Prepare an analysis to show whether the company should make or buy the bindings.
2. 2. The facilities freed by purchasing bindings from the outside supplier can be used to manufacture another product that will contribute $2,800 to profit. Total fixed costs will be the same as if Mountain Sports had produced the bindings. Show which alternative makes the best use of Mountain Sports facilities: (a) make bindings, (b) buy bindings and leave facilities idle, or (c) buy bindings and make another product.