X-Perience manufacturers snowboards. Its cost of making 1,700 bindings is as follows:
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Direct materials
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$17,600
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Direct labor
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3,100
|
|
Variable overhead
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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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Suppose Livingston will sell bindings to X-Perience for $14 each. X-Perience would pay $2 per unit to transport the bindings to its manufacturing plant, where it would add its own logo at a cost of $0.60 per binding.
Required:
a) X-Perience's accountants predict that purchasing the bindings from Livingston will enable the company to avoid $1,800 of fixed overhead. Prepare an analysis to show whether X-Perience should make or buy the bindings.
b) The facilities freed by purchasing bindings from Livingston can be used to manufacture another product that will contribute $2,800 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: a) make bindings, (b) buy bindings and leave facilities idle, or (c) buy bindings and make another product.