2024 – P20 25A Making outsourcing decisions P20 25A Outdoor Life manufactures snowboards Its cost of making

P20-25A Making outsourcing decisions

 

P20-25A Outdoor Life manufactures snowboards. Its cost of making 2,000 bindings is as follows:

Direct materials 17,550  

Direct labor 3,400  

Variable overhead 2,040

Fixed overhead 6,300  

Total manufacturing costs for 2,100 bindings 29,290  

 

Suppose Lancaster will sell bindings to Outdoor Life for $14 each. Outdoor Life would pay $3 per unit to transport the bindings to its manufacturing plant, where it would add its own logo at a cost of $0.70 per binding.  

 

Requirements
1. Outdoor Life’s accountants predict that purchasing the bindings from Lancaster will enable the company to avoid $2,100 of fixed overhead. Prepare an analysis to show whether Outdoor Life should make or buy the bindings.

 

2. The facilities freed by purchasing bindings from Lancaster can be used to manufacture another product that will contribute $2,700 to profit. Total fixed costs will be the same as if Outdoor Life had produced the bindings. Show which alternative makes the best use of Outdoor Life’s facilities: (a) make bindings, (b) buy bindings and leave facilities idle, or (c) buy bindings and make another product.