Snow Ride manufactures snowboards. Its cost of making 1,900 bindings is as follows:
Direct materials ....................................... $ 17,590
Direct labor ................................................ 3,200
Variable overhead ........................................ 2,080
Fixed overhead ........................................... 6,300
Total manufacturing costs for 1,900 bindings ... $ 29,170
Suppose Livingston will sell bindings to Snow Ride for $13 each. Snow Ride 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. Snow Ride's accountants predict that purchasing the bindings from Livingston will enable the company to avoid $2,100 of fixed overhead. Prepare an analysis to show whether Snow Ride should make or buy the bindings.
2. The facilities freed by purchasing bindings from Livingston can be used to manufacture another product that will contribute $3,100 to profit. Total fixed costs will be the same as if Snow Ride had produced the bindings. Show which alternative makes the best use of Snow Ride's facilities: (a) make bindings, (b) buy bindings and leave facilities idle, or (c) buy bindings and make another product.