Problem:
OmniSport Inc is a wholesale distributor supplying a wide range of moderately priced sporting equipment to large chain stores. OminSport has an enviable reputation for quality of its products. In fact, the demand for its products is so great that at times OmniSport cannot satisfy the demand and must delay or refuse some orders, in order to maintain its production quality. Additionally, OmniSport purchases some of its products from outside suppliers in order to meet the demand. Theses suppliers are carefully chosen so that their products maintain the quality image that OmniSport has attained. About 60 percent of OmniSport’s products are purchased from other companies while the remainder of the products are manufactured by OmniSport. The company has a Plastics Department that is currently manufacturing the boot for the in-line skates. OmniSport is able to manufacture and sell 5,000 pairs of skates annually, making full use of its machine capacity at available workstations. Presented below are the selling proce and costs associated with OmniSport’s skates:
Selling price per pair of skates $98
Costs per pair
Molded plastic $8
Other direct materials 12
Machine time ($16 per hr) 24
Manufacturing overhead 18
Selling and admin cost 15 77
Profit per pair $21
Because OmniSport believes it could sell 8,000 pairs of skates annually if it had sufficient manufacturing capacity, the company has looked into the possibility of purchasing the skates for distribution. Colcott Inc., a steady supplier of quality products, would be able to provide 6,000 pairs of skates per year at a price of $75 per pair delivered to OmniSport’s facility. Jack Pertrone, OmniSport’s product manager, has suggested that the company could make better use of its Plastics Department by manufacturing snowboard bindings. To support his position, Petrone has a market study that indicates an expanding market for snowboards and a need for additional suppliers. Petrone believes that OmniSport could expect to sell 12,000 snowboard bindings annually at a price of $60 per binding. Petrone’s estimate the costs to manufacture the bindings is present below:
Selling price per snowboard binding $60
Costs per binding
Molded plastic $16
Other direct materials 4
Machine time ($16 per hr) 8
Manufacturing overhead 6
Selling and administrative cost 14 48
Profit per binding $12
Other information pertinent to OmniSport’s operations is presented below:
An allocated $6 fixed overhead cost per unit is included in the selling and administrative cost for all of the purchased and manufactured products. Total fixed and variable selling and administrative costs for the purchased skates would be $10 per pair. In the Plastics Department, OmniSport uses machine hours as the application base for manufacturing overhead. Included in the manufacturing overhead for the current year is $30,000 of fixed,, factory-wide manufacturing overhead that has been allocated to the Plastics Department.
Required:
In order to maximize OmniSport Inc.’s profitability, recommend which product or products should be manufactured and/or purchased. Prepare an analysis based on the data presented that will show the associated financial impact. Support your answer with appropriate calculations and strategic considerations.