The ski selected is a mass-market ski with a special binding. It will be sold to

Question

The ski selected is a mass-market ski with a special binding. It will be sold to wholesalers for $80 per pair. Because of availability capacity, no additional fixed charges 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 costs 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
Total: $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%.

Explanation / Answer

labor -------------- 35 x 10,000 = $350,000

material ---------------30 x 10, 000prs = $300,000

overhead -----------15 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 x 10,000 = $105,000

small percentage that would be saved-------- $.50 per pr

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