Do-it makes downhill ski equipment. Assume that Atomic has offered to produce ski poles for Do-it for $24 per pair. Do-it needs 160,000 pairs of poles per period. Do-it can only avoid $130,000 of fixed costs if it outsources; the remaining foxed costs are unavoidable. Do-it currently has the following costs at a production level of 160,000 pairs of poles:
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1. Should Do-it outsource ski pole production if the next best use of the freed capacity is to leave it idle? What effect will outsourcing have on Do-it's operating income?
2. If the freed capacity could be used to produce ski boots that would provide $1,710,000 of operating income, should Do-it outsource ski pole production?
1. Should Do - it outsource ski pole production if the next best use of the freed capacity is to leave it idle? What effect will outsourcing have on Do-it's operating income?
Begin by preparing the incremental analysis for outsourcing decision. (Use a minus sign or parentheses in the Difference column if the cost to make exceeds the cost to outsource)
Incremental Analysis Outsourcing Decisions Make Ski Poles Outsource Ski Poles Difference
Variable costs:
Plus: Fixed costs
Total cost of producing 160,000 pairs of poles
Data Table
-X
Cost per pair
Manufacturing Costs Total Cost (160,000 pairs)
Direct Materials $ 1,280,000 $ 8.00
Direct Labor 80,000 0.50
Variable MOH 880,000 5.50
Fixed MOH 976,000 6.10
Total $ 3,216,000 $ 20.10
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