Q31PGB - Horngren'S Financial And Managerial Accounting

Question

Cold Sports manufactures snowboards. Its cost of making 2,000 bindings is as follows:

Direct materials                             \(17,510

Direct labor                                2,600

Variable overhead                            2,060

Fixed overhead                            7,000

Total manufacturing costs for 2,000 bindings        \)29,170

Suppose Topnotch will sell bindings to Cold Sports for \(15 each. Cold Sports would pay \)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. Cold Sports’s accountants predict that purchasing the bindings from Topnotch will enable the company to avoid \)2,300 of fixed overhead. Prepare an analysis to show whether Cold Sports should make or buy the bindings. 

2. The facilities freed by purchasing bindings from Topnotch can be used to manufacture another product that will contribute $3,100 to profit. Total fixed costs will be the same as if Cold Sports had produced the bindings. Show which alternative makes the best use of Cold Sports’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

Answer

The company should make the bindings.

Step 1: Meaning of Short-Term Decisions

Short-term decisions are the steps a business entity takes to ensure the optimum utilization of available resources in the short run. In this process, a business focuses on profit maximization and recovery of associated variable expenses.

Step 2: Preparation of analysis

Particulars	Make ($)	Buy ($)
Direct materials	17,510
Direct labor	2,600
Variable overhead	2,060
Fixed overhead	7,000	4,700
Purchase cost (2000*15)		30,000
Transportation (2000*3)		6,000
Logo cost (2000*0.50)		1,000
Total cost	$29,170	$41,700

Comment:

The cost of buying the bindings is more than the making costs; hence, the company should continue making the bindings.

Step 3: Selection of alternative

Particulars	Make ($)	Buy ($)	Buy and make another product ($)
Cost of making	29,170
Cost of buying		41,700	41,700
Increase in fixed overhead			2,300
Less: Increase in operating income			(3,100)
Total cost	$29,170	$41,700	$40,900

Comment:

As per the above-shown analysis, the company should focus on making the bindings because it costs less than other alternatives.