25PGA - Horngren'S Financial And Managerial Accounting

Question

Snow Ride manufactures snowboards. Its cost of making 1,900 bindings is as follows:

Direct materials                                                       \(17,590

Direct labor                                                              3,200

Variable overhead                                                   2,080

Fixed overhead                                                        6,300

Total manufacturing costs for 1,900 bindings         \)29,170

 

Suppose Livingston will sell bindings to Snow Ride for \(13 each. Snow Ride would pay \)3 per unit to transport the bindings to its manufacturing plant, where it would add its own logo at a cost of \(0.50 per binding. 

 

Requirements 

 

1. Snow Ride’s accountants predict that purchasing the bindings from Livingston will enable the company to avoid \)2,100 of fixed overhead. Prepare an analysis to show whether Snow Ride should make or buy the bindings. 

 

2. The facilities freed by purchasing bindings from Livingston can be used to manufacture another product that will contribute $3,100 to profit. Total fixed costs will be the same as if Snow Ride had produced the bindings. Show which alternative makes the best use of Snow Ride’s facilities: (a) make bindings, (b) buy bindings and leave facilities idle, or (c) buy bindings and make another product.

Step-by-Step Solution

Answer

The company should focus on making the bindings.

Step 1: Meaning of Accountant

An accountant refers to an individual appointed by an entity to maintain and record its financial transactions in the company's books. An accountant must be aware of accounting principles, concepts, and standards.

Step 2: Preparation of analysis

Analysis

Particulars	Make ($)	Buy ($)	Difference ($)
Variable cost (Working notes)	22,870	31,350	(8,480)
Add: Fixed cost (Working notes)	6,300	4,200	2,100
Total cost of 1900 bindings	$29,170	$35,550	$(6,380)

 

Working Notes:

Computation of variable and fixed costs:

Particulars	Make ($)	Buy ($)
Variable cost	17590+3200+2080=22,870	1900*(13+3+0.5)=31,350
Fixed cost	6300	6300-2100=4200

 

Comment:

Based on the analysis above, it is advisable that the company should make the bindings.

Step 3: Identification of best alternative

Particulars	Make	Leave facility idle	Make another product
Variable cost	22,870	31,350	31,350
Add: Fixed cost	6,300	4,200	4,200
Less: Profit from another product			(3,100)
Total cost of 1900 bindings	$29,170	$35,550	$32,450

 

Comment:

Based on the analysis above, the company should focus on making bindings because it costs less than other alternatives.