Question

Cool BoardsCool Boards

manufactures snowboards. Its cost of making

2,000

bindings is as​ follows:

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​(Click the icon to view the​ costs.)Suppose

HemingwayHemingway

will sell bindings to

Cool BoardsCool Boards

for

$14

each.

Cool BoardsCool 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 $0.60

per binding.Read the requirements

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.Requirement 1.

Cool Boards'Cool Boards'

accountants predict that purchasing the bindings from

Hemingway

will enable the company to avoid

$2,000

of fixed overhead. Prepare an analysis to show whether

Cool Boards

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 Hemingway
Transportation
Logo
Total differential cost of 2,000 bindings

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Data Table

	Direct materials	$17,500
	Direct labor	3,300
	Variable overhead	2,120
	Fixed overhead	6,600
	Total manufacturing costs for 2,000 bindings	$29,520

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Requirements

1.

Cool Boards'Cool Boards' accountants predict that purchasing the bindings from HemingwayHemingway will enable the company to avoid $2,000 of fixed overhead. Prepare an analysis to show whether Cool BoardsCool Boards should make or buy the bindings.

2.

The facilities freed by purchasing bindings from HemingwayHemingway can be used to manufacture another product that will contribute $ 2 comma 600$2,600 to profit. Total fixed costs will be the same as if Cool BoardsCool Boards had produced the bindings. Show which alternative makes the best use of Cool Boards'Cool Boards' ​facilities: (a) make​ bindings, (b) buy bindings and leave facilities​ idle, or​ (c) buy bindings and make another product.

Answer 1

1.

Incremental Analysis - Outsourcing Decision
Particulars	Make Bindings	Buy (Outsource) Bindings	Difference
Variable costs:
Direct material	$17,500.00		$17,500.00
Direct labor	$3,300.00		$3,300.00
Variable overhead	$2,120.00		$2,120.00
Fixed costs	$2,000.00		$2,000.00
Purchase price from Livingston		$28,000.00	-$28,000.00
Transportation		$2,000.00	-$2,000.00
Logo		$1,200.00	-$1,200.00
Total cost of 2000 bindings	$24,920.00	$31,200.00	-$6,280.00

Decision = Make

2.

Incremental Analysis - Outsourcing Decision
Particulars	(a) Make Bindings	Buy (Outsource) Bindings
(b) Leave facilties idle	© Make another product
Variable costs:
Direct material	$17,500.00
Direct labor	$3,300.00
Variable overhead	$2,120.00
Fixed costs	$2,000.00		$2,000.00
Purchase price from Lancasters		$28,000.00	$28,000.00
Transportation		$2,000.00	$2,000.00
Logo		$1,200.00	$1,200.00
Less: Profit from another product	$0.00	$0.00	-$2,600.00
Expected net cost of obtaining 2000 bindings	$24,920.00	$31,200.00	$30,600.00

Decision = Continue to make