Question

The Cross Country Ski Company currently produces bindings for the skis that it also produces and sells. The monthly cost of producing 600 sets of bindings is as follows:

Unit-level raw materials	$17,250
Unit-level direct labor	$11,000
Unit-level overhead	$6,500
Batch-level costs	$3,750
Product-level costs	$9,200
Allocated facility-level costs	$15,000

Winter Sports Enterprises has offered to sell comparable bindings to Cross Country Ski Company for $68.50 per set. The Cross Country Ski Company is contemplating a decision whether they should continue to produce the bindings in-house or outsource the production to Winter Sports Enterprises.  

Required:

1. Identify the costs that are relevant to this business decision.

2. Should Cross Country Ski Company continue to manufacture the bindings? Support your answer showing appropriate computations to support your decision.

Answer 1

Given, Cross Country Ski Company Produces Bindings. The monthly costs of Prducing 600 sets of bindings is as follows

Unit Level Rawmaterials - $17,250

Unit level Direct Labour - $11,000

Unit Level Overhead - $6500

Batch Level Costs - $3750

Produvt Level Cost - $9200

Allocalted Facility Level costs - $ 15000

Winter Sports Enterprise offers for a price of $68.50

1) Costs that are relevant for Decision Making: Relevant costs are those costs which effects the decision making of the management.

The costs that are relevant for decision making in this situation are Rawmaterial costs, Labour Costs, Overhed costs, Batch level costs and Product level costs.

Here, Facility level costs are not relevant costs because these costs are not avoidable for decision making. Whatever be the option these costs are existed and hence not relevant for decision making.

2)

Calculation Of Production Costs Per Set
Particulars	Amount
Unit Level Rawmaterials	$17,250
Unit level Direct Labour	$11,000
Unit Level Overhead	$6,500
Batch Level Costs	$3,750
Produvt Level Cost	$9,200
Total production costs	$47,700
Total Units	600 sets
Production cost per set	$79.5 ($47,700 / 600 sets )

Since the Manufacturing Cost is $79.50 more than the offer price given by Winter Sports Enterprise which is $68.50 , Cross Country Ski Company should not manufacture.

The company can have a gain of $ 11 ($79.50 - $68.50) per sandal set from buying the product instead of making the product.