Q1) ABC produces snowboards. Its cost of making 1,700 bindings is given below:
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Direct materials
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$17,600
|
|
Direct labor
|
3,100
|
|
Variable overhead
|
2,080
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|
Fixed overhead
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6,600
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Total manufacturing costs for 1,700 bindings
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$29,380
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Assume Livingston will sell bindings to ABC for $14 each ABC would pay $2 per unit to transport bindings to its manufacturing plant, where it would add its own logo at cost of $0.60 per binding.
Required:
a) ABC's accountants forecast that buying bindings from Livingston will allow company to avoid $1,800 of fixed overhead. Make analysis to illustrate whether ABC must make or buy bindings.
b) Facilities freed by buying bindings from Livingston can be utilized to manufacture another product which will contribute $2,800 to profit. Total fixed costs will be same as if ABC had produced bindings. Illustrate which alternative makes best use of ABC's facilities: a) make bindings, (b) purchase bindings and leave facilities idle, or (c) purchase bindings and make another product.