Burge, Inc. is a wholesale distributor supplying a wide range of sporting equipment to large chain stores. The company is known for its quality products. Many times demand is so great that the company purchases some products from carefully screened suppliers to meet customer orders. About 60% of the products it sells come from suppliers and the remaining is manufactured internally.
Currently, the company has a Plastics Division that is manufacturing ski boots. Burge is able to manufacture and sell 5,000 pairs of ski boots annually, making full use of its machine capacity. Here is the selling price and costs associated with making ski boots:
Sales Price: $98
Cost per pair:
Molded Plastic : (8)
Other Direct Materials: (12)
Machine time: ($16 per hr) (24)
Factory Overhead: (18)
Selling & General Admin costs: (15)
Profit per pair: $21
Burge, Inc. believes it could sell 8,000 pairs annually if they had sufficient manufacturing capacity. Kasey Corp., a respected supplier, could provide 6,000 pairs of ski boots per year at a cost of $75 per pair.
Seth is the production manager at Burge, Inc. He believes the company could make better use of the manufacturing by making snowboard bindings. A market study was conducted and indicates that snowboards are an expanding market and there is a need for additional suppliers. Bruce believes that the company could sell 12,000 snowboard bindings annually at a price of $60 per binding.
He estimates the manufacturing cost of snowboard bindings to be the following:
Sales Price: $60
Cost per pair:
Molded Plastic: (16)
Other Direct Materials: (4)
Machine time: ($16 per hr) (8)
Factory Overhead: (6)
Selling & General Admin costs: (14)
Profit per pair: $12
Additional information for Burge, Inc. operations is provided below:
Total fixed and variable selling and administrative costs for the purchased ski boots would be $10 per pair. Burge uses machine hours to applicate factory overhead. Included in the factory overhead is $30,000 of fixed factory-wide overhead that has been allocated to the Plastics Division.
Recommend which product or products should be manufactured and/or purchased to maximize profits. Include an Excel analysis with computations and an executive memo to senior management of Burge, Inc. explaining the best strategic decision.