Question

Ski- On Inc., buys 12,000 bindings each year at $20.00 per binding. The bindings are used in Ski-On's competition slalom skis. Ski-On has some excess space (currently being leased out) that could be used to manufacture the bindings for the following per-unit costs (based on 12,000 units)

Direct Material: $12.00

Direct Labor: $ 4.00

Variable Manufacturing Overhead: $2.50

Fixed Manufacturing overhead: $6.00

Total: $24.50

Fixed manufacturing overhead is allocated to all manufactured products and tracts at the rate of 150 percent of direct labor costs. If Ski-On decided to manufacture the bindings, they will have to cancel the current lease of excess space to a third party. Current annual revenue from the lease of excess space is $20,000. In addition, Ski-On would have to lease equipment to make the bindings at a cost of $10,000 per year.

1.) Assuming Ski-On continues to need 12,000 bindings annually, should they make the bindings "in-house" or continue to buy them from the outside supplier? What is the dollar difference in favor of your recommendation?

2.) What is the price per unit that Ski-On would indifferent as to whether they made the bindings or continued to buy them from outside supplier. consider only the economic impact of the decision.

Answer 1