Mountain FunMountain Fun manufactures snowboards. Its cost of making 2,000 bindi

Question

Mountain FunMountain Fun manufactures snowboards. Its cost of making 2,000 bindings is as follows:

Direct materials

$17,530

Direct labor

2,600

Variable overhead

2,070

Fixed overhead

6,500

Total manufacturing costs for 2,000 bindings

$28,700

Suppose

LewisLewis

will sell bindings to

Mountain FunMountain Fun

for

$ 12$12

each.

Mountain Funwould pay $1 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.

1.

Mountain Fun's accountants predict that purchasing the bindings fromLewis

2.

The facilities freed by purchasing bindings from Lewis

Direct materials

$17,530

Direct labor

2,600

Variable overhead

2,070

Fixed overhead

6,500

Total manufacturing costs for 2,000 bindings

$28,700

Explanation / Answer

1)

By making binding in home ,it will save 31400-28700= $ 2700.so mountain should make bindings

2)

expected cost if buying bindings and make another product= 31400-2700 =$ 28700

Since the total cost of making bindings and buying and make another product is same that is $ 28700 .so mountain shuld be indifferent between both two alterntives.

That is mountain is indifferent as to make bindings or buy and make another product .will result in lower cost in either case.

Make Binding Buy binding Direct material 17530 Direct labor 2600 variable overhead 2070 fixed overhead 6500 4200      [6500-2300] purchase cost 24000    [2000*12] Transportation cost 2000      [2000*1] Logo cost 1200      [2000*.60] Total cost 28700 31400

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