P20-25A Making outsourcing decisions [20–30 min]
Outdoor Life manufactures snowboards. Its cost of making 2,000 bindings is as follows:
Direct materials
$ 17,550
Direct labor
3,400
Variable overhead
2,040
Fixed overhead
6,300
Total manufacturing costs for 2,000 bindings
$ 29,290

Suppose Lancaster will sell bindings to Outdoor Life for $14 each. Outdoor Life
would pay $3 per unit to transport the bindings to its manufacturing plant, where it
would add its own logo at a cost of $0.70 per binding.
Requirements
1. Outdoor Life’s accountants predict that purchasing the bindings from Lancaster
will enable the company to avoid $2,100 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 Lancaster can be used to manufacture
another product that will contribute $2,700 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.
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