Winter Fun makes downhill ski equipment. Assume that Atomic has offered to produce ski poles for Winter Fun for $19 per pair. Winter Fun needs 120,000 pairs of poles per period. Will
only avoid $160,000 of fixed costs if it outsources; the remaining fixed costs are unavoidable. Winter Fun currently has the following costs at a production level of 120,000 pairs of poles
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1.
2.
Should Winter Fun outsource ski pole production if the next best use of the freed capacity is to leave it idle? What effect will outsourcing have on Winter Fun's operating income?
If the freed capacity could be used to produce ski boots that would provide $818,000 of operating income, should Winter Fun outsource ski pole production?
1. Should Winter Fun outsource ski pole production if the next best use of the freed capacity is to leave it idle? What effect will outsourcing have on Winter Fun'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.)
Outsource Ski
Poles
Incremental Analysis Outsourcing Decisions
Variable costs:
Plus: Fixed costs
Total cost of producing 120,000 pairs of poles
instructor
***
Make Ski Poles
Difference
Data table
Manufacturing Costs
Direct Materials
Direct Labor
Variable MOH
Fixed MOH
Total
$
Total Cost
840,000 $
90,000
612,000
732,000
$ 2,274,000 $
Cost per pair
(120,000 pairs)
7.00
0.75
5.10
6.10
18.95