Company A makes downhill ski equipment. Assume that company B has offered to produce ski pole for company A for $18 per pair. Company A needs 100,000 pairs of poles per period. Company A can avoid $125,000 of fixed costs if it outsources; the remaining fixed costs are unavoidable. Company A currently has the following costs at a production level of 100,000 pairs of poles.
Manufacturing Costs Total Cost Cost per pair
Direct Materials $750,000 $7.50
Direct Labor $80,000 $0.80
Variable MOH $520,000 $5.20
Fixed MOH $650,000 $6.50
Total $2,000,000 $20.00
Required:
Should company A outsource ski pole production if the next best use of freed capacity is to leave it idle?
Answers: 2
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