The ski selected is a mass market ski with a special binding and will be sold fo

Question

The ski selected is a mass market ski with a special binding and will be sold for $80 per pair. A $125000 fixed charge will be absorbed by the ski, however, to allocate a fair share of the company's present fixed cost to the new product.

Using the estimated sales and production of 10000 pair of skis as the expected volume,

Direct labor $35

Direct material 30

Total overhead 15
Total cost $80

They discussed the purchasing of the binding from a subcontractor at $5.25 per binding, or $10.50 per pair with direct-labor and variable cost would be reduced by 10% and direct materials costs would be reduced by 20%.

Instead of 10000 pairs of skis, revised estimates show sales volume at 12500 pairs. At this new volume, additional equipment, at an annual rental of 10000, must be acquired to manufacture the bindings. This incremental cos would be the only additional fixed cost required, even if sales increased to 30000 pairs. (The 30000 level is the goal for the third year of production.) Under these circumstances, should the Corporation make or buy the bindings? Show calculations to support the answer.

Explanation / Answer

1) labor @ $35/pr x 10,000 prs = $350,000 material @ $30/pr x 10, 000prs = $300,000 overhead @ $15/pr x 10,000prs = $150,000 total cost $800.000 ten percent labor/ 350,000 x .10 = $35,000 ten percent overhead/ 150,000 x .10 = $15,000 twenty percent materials/ 300,000 x.20 = $60,000 Total savings $110,000 Bindings @ $10.50/pr x 10,000prs = $105,000 Net savings $5,000 Based on the small percentage that would be saved $.50/pr they should make the bindings. 2)$ 7.50/pr This would save $35,000/ $3.50/pr. 3) First year cost for additional equipment would be $1/pr 10,000/10,000 by year three the additional cost per pair would fall to $.33/pr while sales have tripled. They should invest in the equipment and make the binders. 4) If Minnetonka makes the binders they have direct influence and control over the vendors they deal with, quality of materials, workmanship etc. This eliminates the possibility of sub-contractors who cannot deliver on time and /or deliver inferior goods. By making the binders Minnetonka has more direct control over the quality and cost of the binders and stregthens their ability to meet production goals.

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