Cold Sports manufactures snowboards. Its cost of making 2,000 bindings is as follows:
Direct materials ......................................... $ 17,510
Direct labor ................................................. 2,600
Variable overhead ......................................... 2,060
Fixed overhead ............................................ 7,000
Total manufacturing costs for 2,000 bindings .... $ 29,170
Suppose Topnotch will sell bindings to Cold Sports for $15 each. Cold Sports would pay $3 per unit to transport the bindings to its manufacturing plant, where it would add its own logo at a cost of $0.50 per binding.
Requirements
1. Cold Sports's accountants predict that purchasing the bindings from Topnotch will enable the company to avoid $2,300 of fixed overhead. Prepare an analysis to show whether Cold Sports should make or buy the bindings.
2. The facilities freed by purchasing bindings from Topnotch can be used to manufacture another product that will contribute $3,100 to profit. Total fixed costs will be the same as if Cold Sports had produced the bindings. Show which alternative makes the best use of Cold Sports's facilities:
(a) Make bindings,
(b) Buy bindings and leave facilities idle, or
(c) Buy bindings and make another product?