P8-46A Outsourcing decision given alternative use of capacity (Learning Objectiv
ID: 2573775 • Letter: P
Question
P8-46A Outsourcing decision given alternative use of capacity (Learning Objective 6) Cool Boards manufactures snowboards. Its cost of making 30,125 bindings is as follows Direct materials.. Direct labor Variable manufacturing overhead. Fixed manufacturing overhead.. Total manufacturing costs. Cost per pair ($241,000 ÷ 30,125) ..." 25,000 83,000 50,000 83,000 $ 8.00 Suppose an outside supplier will sell bindings to Cool Boards for $17 each. Cool Boards 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 $0.50 per binding. Requirements 1. Cool Board's accountants predict that purchasing the bindings from the outside sup- plier will enable the company to avoid $2,200 of fixed overhead. Prepare an analysis to show whether Cool Boards should make or buy the bindings. The facilities freed by purchasing bindings from the outside supplier can be used to manufacture another product that will contribute $2,600 to profit. Total fixed costs will be the same as if Cool Boards had produced the bindings. Show which alternative makes the best use of Cool Boards facilities: (a) make bindings, (b) buy bindings and leave facilities idle, or (c) buy bindings and make another product. 2.Explanation / Answer
Req1: Cost of buying the Bindings Cost of purchasing the bindings from supplier(30125 units@ 17) 512125 Add: Transport cost(30125 units@ 1) 30125 Add: Cost of Logo (30125 units@ 0.50) 15062.5 Total cost of buying the bindings 557312.5 Relevant cost of manufacture: Direct material 25000 Direct labour 83000 Variable manufacturing cost 50000 Avoidable fixed overheads 2200 Total cost of manufacture of bindings 160200 Hence, the ccompany must produce the bindings itself. Req 2: Freed capacity can be used to manufacture another product line give contribution of $2600 with avoidable fixed cost of $2200 to be incurred. Hence, the increase in revenue from new product line will be $400 ( 2600-2200). Therefore, net cost of buying the bindings along with new product line will be $ 556912.50 (557312.5-400) . Hence, the bindings should never be purchased from outside as it will lead to a loss. Therefore, company should make the bindings itself only.
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