3.
Downhill Boards (DB), a producer of snow boards, is evaluating a new process for
applying the finish to its snow boards. Durable Finish Company (DFC) has offered to
apply the finish for $170,000 in fixed costs and a unit variable cost of $0.65. Downhill
Boards currently incurs a fixed annual cost of $125,000 and has a variable cost of $0.90
per unit. Annual demand for the snow boards is 160,000.
a)
Calculate the annual cost of the current process used at Downhill Boards.
b)
Calculate the annual cost if Durable Finish Company applies the finish.
c)
Find the indifference point for these two alternatives.
d)
How much of a change in demand is needed to justify outsourcing the process?

Solutions
Answer:

SM 4-2

4.
Fast Finish, Inc. (FFI) has made a technological breakthrough in snow board finish
application. FFI will apply the finish for $0.23 per unit in variable costs plus a fixed
annual cost of $230,000. Use the cost and demand information given in Problem 3 for
Downhill Boards to evaluate this proposal.
a)
What will it cost Downhill Boards to outsource the finishing process?
b)
At what demand level does it make sense economically to outsource the finishing
process?
c)
What additional factors should be considered when making this outsourcing decision?
Answer: