What is outsourcing?
Outsourcing refers to the process of accomplishing the business tasks and activities by the third parties against a fixed, predetermined consideration.
Business activities refer to the variety of functions performed in the business entity. Major business activities are bifurcated into operating, investing, and financing activities.
In business terms, outsourcing refers to a practice in which an outsider is hired or allowed by a business entity to perform planned or existing business tasks. It facilitates the business entities to fulfill their needs from outside rather than making in-house.
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.
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.
Cool Systems manufactures an optical switch that it uses in its final product. The switch has the following manufacturing costs per unit:
Direct materials $5.00
Direct labor 3.00
Variable overhead 6.00
Fixed overhead 7.00
Manufacturing product cost $21.00
Another company has offered to sell Cool Systems the switch for $15.00 per unit. If Cool Systems buys the switch from the outside supplier, the idle manufacturing facilities cannot be used for any other purpose, yet none of the fixed costs are avoidable.
Prepare an outsourcing analysis to determine whether Cool Systems should make or buy the switch.
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