Question

X−Perience manufactures snowboards. Its cost of making 1,900 bindings is as​ follows:

	Direct materials	$17,540
	Direct labor	3,300
	Variable overhead	2,110
	Fixed overhead	6,500
	Total manufacturing costs for 1,900 bindings	$29,450

Suppose Witherspoon will sell bindings to X−Perience for $ 13 each. X−Perience 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.

Requirement 1. X−Perience's accountants predict that purchasing the bindings from Witherspoon will enable the company to avoid $2,300 of fixed overhead. Prepare an analysis to show whether X−Perience should make or buy the bindings. ​(Only enter the net relevant costs. For the Difference​ column, use a minus sign or parentheses only when the cost of outsourcing exceeds the cost of making the bindings​ in-house.)

	Make	Outsource	Difference
Binding costs	Bindings	Bindings	(Make—Outsource)
Variable costs:
Direct materials
Direct labor
Variable overhead
Fixed costs
Purchase price from Witherspoon
Transportation
Logo
Total differential cost of 1,900 bindings

Should X−Perience make or buy the​ bindings?​

Decision:

▼

Buy the bindings.

Make the bindings.

Requirement 2. The facilities freed by purchasing bindings from Witherspoon can be used to manufacture another product that will contribute $2,700 to profit. Total fixed costs will be the same as if X−Perience had produced the bindings. Show which alternative makes the best use of X−Perience's facilities. ​(Only enter the net relevant costs. Enter all costs as positive values. Use a minus sign or parentheses for decreases to net costs​.)

		Outsource Bindings
	Make	Facilities	Make New
Binding costs	Bindings	Idle	Product
Variable Costs:
Direct materials
Direct labor
Variable overhead
Fixed costs
Purchase price from Witherspoon
Transportation
Logo
Expected profit from new product
Expected net cost of obtaining 1,900 bindings

Which alternative makes the best use of

Upper X minus Perience'sX−Perience's

​facilities?​

Decision:

▼

Buy the binding and leave the facilities idle.

Buy the binding and use the facilities to make the other product.

Make the bindings.

Answer 1

Solution 1:

Incremental Analysis - Outsourcing Decision
Particulars	Make Bindings	Buy (Outsource) Bindings	Difference
Variable costs:
Direct material	$17,540.00		$17,540.00
Direct labor	$3,300.00		$3,300.00
Variable overhead	$2,110.00		$2,110.00
Fixed costs	$2,300.00		$2,300.00
Purchase price from Livingston		$24,700.00	-$24,700.00
Transportation		$5,700.00	-$5,700.00
Logo		$950.00	-$950.00
Total cost of 1900 bindings	$25,250.00	$31,350.00	-$6,100.00

Decision : Make the bindings

Solution 2:

Incremental Analysis - Outsourcing Decision
Particulars	(a) Make Bindings	Buy (Outsource) Bindings
		(b) Leave facilties idle	© Make another product
Variable costs:
Direct material	$17,540.00
Direct labor	$3,300.00
Variable overhead	$2,110.00
Fixed costs	$2,300.00		$2,300.00
Purchase price from Lancasters		$24,700.00	$24,700.00
Transportation		$5,700.00	$5,700.00
Logo		$950.00	$950.00
Less: Profit from another product	$0.00	$0.00	-$2,700.00
Expected net cost of obtaining 1900 bindings	$25,250.00	$31,350.00	$30,950.00

Decision : Make the bindings