Outdoor Life manufactures snowboards. Its cost of making 1,890 bindings is as follows:
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18,000
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. . . . . . . . . 3,200
Variable manufacturing overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... . . . . . . 2,340
Fixed manufacturing overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... . . . . . 6,700
Total manufacturing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30,240
Cost per pair ($30,240  1,890). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16.00
Suppose an outside supplier will sell bindings to Outdoor Life for $13 each. Outdoor Life will pay $2.00 per unit to transport the bindings to its manufacturing plant, where it will add its own logo at a cost of $0.40 per binding.
Requirements
1. Outdoor Life's accountants predict that purchasing the bindings from the outside supplier will enable the company to avoid $2,000 of fixed overhead. Prepare an analysis to show whether Outdoor Life should make or buy the bindings.
2. The facilities freed by purchasing bindings from the outside supplier can be used to manufacture another product that will contribute $3,300 to profit. Total fixed costs will be the same as if Outdoor Life had produced the bindings. Show which alternative makes the best use of Outdoor Life's facilities: (a) make bindings, (b) buy bindings and leave facilities idle, or (c) buy bindings and make another product.