Deliveable Length- Excel Spreadsheet and 1-2 pages Consider the following scenar

Question

Deliveable Length- Excel Spreadsheet and 1-2 pages
Consider the following scenario:

The Ski Por Corporation which produces and sells to wholesalers a highly successful line of water skis, has decided to diversify to stabilize sales throughout the year. The company is considering the production of cross-country skis. After considreable research, a crosscountry ski line has been developed. Because of the conservative nature of the company management, however, Minnetonka's president has decided to introduce only one type of the new ski for this coming winter. If the product is a success, further expansion in furture years will be initiated. The ski selected is a mass-market ski with a special binding. It will be sold to the wholesalers for $80 per pair. Because of availability capacity, no additional fixed chargers will be incurred to produce the skis. A $100,000 fixed charge will be absorbed by the skis, however, to allocate a fair share of the company's present fixed cost to the new product. Using the estimated sales and production of 10,000 pairs of skis as the expected volume, the accounting department has developed the following cost per pair of skis and bindings:

Direct Labor: $35
Direct Material: $30
Total Overhead: $15
Totoal: $80

Ski Pro has approached a subcontractor to discuss the possibility of purchasing the bindings. The purchase price of the bindings from the subcontractor would be $5.25 per binding or $10.50 per pair. If the Ski Pro Corporation accepts the purchase proposal, it is predicted that direct labor and variable overhead costs would be reduced by 10% and direct material costs would be reduced by 20%

Write a 1-2 page paper, and create a spreedsheet that answers these questions

-Should the Ski Pro Corporation make or buy the bindings? Show calculations to support your answer.

-What would be the maximum purchase price acceptable to the Ski Pro Corporation for the bindings? Support your answer with an appropriate explanation.

-Instead of salses of 10,000 pairs of skis, revised estimates show sales volume at 12,500 pairs. At this new volume, additional equipment, at an annual rental of $10,000 must be aquired to manufacture the bindings. This incremetal cost would be the only additional fixed cost required even if sales increased to 30,000 pairs. ( This 30,000 level is the goal for the third year of production). Under these circumstances, should the Ski Pro Corporation make or buy the bindings? Show calculations to support your answer.

- What qualitative factors ( that is, issues with vendors, customers, or within the product itself) should the Ski Pro Corporation consider in determining whether they should make or buy the bindings?

Explanation / Answer

Variable Overhead Costs:

Fixed O/H = $100,000

Fixed O/H per pair = $100,000 / 10,000 = $10

Since Total OH = $15, therefore Variable OH Cost = $15 - $10 = $5

1) From the attached Calculations, it is better that the company makes the bindings since

if they make the bindings, the contribution margin would be $10 per pair, while if the

bindings were subcontracted, the contribution margin would be $9.5 per pair.

2) To be able to calculate the maximum purchase price acceptable, this price should be

the one that gives us the same contribution margin under the two alternatives. Based on

this and the attached calculations, this price is $10 per pair ($5 per binding)

3) At a sales volume of 12,500, it is still more profitable to make the bindings even if

there are additional fixed costs. This is because if Minnetonka makes the bindings, it will

make more profits than if she buys the bindings. If Minnetonka makes the bindings, the

profits will be $15.20 as opposed to $13.50 if buying the bindings. (Analysis is on the

attached sheet)

4) One of the most important factors that the company should consider is the degree of

control on the manufacturing process that would be given away if it buys the bindings

from an outside supplier. If there was any form of delay in supply, it might greatly affect

Minnetonka

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