Wild Ride manufactures snowboards. Its cost of making 1,900 bindings is as follows:
Direct materials.......................................................... $ 17,600
Direct labor................................................................ 3,500
Variable overhead...................................................... 2,050
Fixed overhead........................................................... 7,000
Total manufacturing costs for 1,900 bindings........... $ 30,150
Suppose Lancaster will sell bindings to Wild Ride for $16 each. Wild Ride would pay $2 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. Wild Ride’s accountants predict that purchasing the bindings from Lancaster will enable the company to avoid $2,400 of fixed overhead. Prepare an analysis to show whether Wild Ride 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 $3,200 to profit. Total fixed costs will be the same as if Wild Ride had produced the bindings. Show which alternative makes the best use of Wild Ride’s facilities: (a) make bindings, (b) buy bindings and leave facilities idle, or (c) buy bindings and make another product.