Q1) The Minnetonka Corporation, that manufactures and sells to wholesalers a highly successful line of water skis, has decided to diversify to stabilize sales throughout the year. Company is considering production of cross-country skis.
After considerable research, a cross-country ski line has been developed. Because of conservative nature of the company management, though, Minnetonka's president has decided to introduce only one kind of the new skis for this coming winter. If product is a success, further expansion in future years will be initiated.
Ski selected is a mass-market ski with special binding. It will be sold to wholesalers for $80 per pair. Because of availability capacity, no extra fixed charges will be incurred to manufacture the skis. A $100,000 fixed charge will be absorbed by the skis, though, to assign a fair share of the company's present fixed costs to new product.
Using estimated sales and production of 10,000 pair of skis as expected volume, accounting department has developed the following cost per pair of skis and bindings:
Direct Labor: $35
Direct Material: $30
Total Overhead: $15
Total: $80
Minnetonka has approached subcontractor to explain possibility of purchasing bindings. Purchase price of the bindings from subcontractor would be $5.25 per binding, or $10.50 per pair. If Minnetonka Corporation accepts the purchase proposal, it is forecasted that direct-labor and variable-overhead costs would be decreased by 10% and direct-material costs would be reduced by 20%.
1. Should Minnetonka Corporation make or buy bindings? Illustrate computations to support your answer.
2. What would be maximum purchase price acceptable to Minnetonka Corporation for the bindings? Support your answer with an suitable explanation.
3. Instead of sales of 10,000 pair of skis, revised estimates show sales volume at 12,500 pair. At this new volume, extra equipment, at the annual rental of $10,000 should be acquired to manufacture bindings. This incremental cost would be the only additional fixed cost needed even if sales increased to 30,000 pair. (This 30,000 level is goal for third year of production.) Under these situations, should Minnetonka Corporation make or buy bindings? Illustrate calculations to support your answer.
4. What qualitative factors (i.e. issues with vendors, customers, or within product itself) should Minnetonka Corporation consider in finding whether they muts make or buy bindings?