Cool Boards manufactures snowboards. Its cost of making 2,100 bindings is as follows:
Direct materials ............ $ 17,580
Direct labor ............ 2,600
Variable overhead .......... 2,100
Fixed overhead ............ 6,500
Total manufacturing costs for 2,100 bindings..$ 28,780
Suppose Lewis will sell bindings to Cool Boards for $ 15 each. Cool Boards would pay $ 1 per unit to transport the bindings to its manufacturing plant, where it would add its own logo at a cost of $ 0.40 per binding.
1. Cool Boards’ accountants predict that purchasing the bindings from Lewis will enable the company to avoid $ 2,600 of fixed overhead. Prepare an analysis to show whether Cool Boards should make or buy the bindings.
2. The facilities freed by purchasing bindings from Lewis can be used to manufac-ture another product that will contribute $ 3,500 to profit. Total fixed costs will be the same as if Cool Boards had produced the bindings. Show which alterna-tive 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.