Snowboard Inc Outsourcing Production Eliminates All Variable Production Costs,the Production Supervisor's Salary,and

question 33

Essay

Snowboard Inc.currently produces snowboards.Management is interested in outsourcing production of snowboards to a reputable manufacturing company that can supply the snowboards for $250 per unit.Snowboard Inc.incurs the following annual production costs to produce 6,000 snowboards internally:
$$\begin{array} { l c c } & \text { Per Unit } & \begin{array} { c } \text { Tatal annual } \\\text { Cost at 6,000 units }\end{array} \\ \text { Variable praductim costs: } & & \\\text { Direct materials } & \$ 180 & \$ 1,080,000 \\\text { Direct labor } & 50 & 300,000 \\\text { Manufacturing overhead } & 20 & 120,000 \\\text { Fixcd production costs: } & & \\\text { Factory building and equiprnent lease } & & 220,000 \\\text { Factory insurarce } & & 90,000 \\\text { Production supervisor salary } & &65,000 \\\text { Total production costs } & & \$ 1,875,000\end{array}$$
Outsourcing production eliminates all variable production costs,the production supervisor's salary,and factory insurance costs.Factory building and equipment lease costs will remain the same regardless of the decision to outsource or to produce internally.
(1)Perform a differential analysis,assuming that making the snowboard internally is alternative 1,and buying the snowboard from an outside manufacturer is alternative 2.
(2)Explain which alternative is best and why.

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Definitions:

Contingent Liability

A potential financial obligation that depends on a future event occurring or not occurring.

Reasonably Possible

A term used to describe the likelihood of an event occurring that is more than remote but less than probable, often used in financial reporting.

Not Estimable

A term indicating that something cannot have its value, size, or amount accurately determined or calculated.

Contingent Liability

A potential financial obligation that may arise in the future, depending on the occurrence or non-occurrence of one or more uncertain events.