The Minnetonka 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 considerable research, a cross-country 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 skis for this coming winter. If the product is a success, further expansion in future years will be initiated.
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 pair 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
Minnetonka 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 Minnetonka 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%.
1. Should the Minnetonka Corporation make or buy the bindings? Show calculations to support your answer.
2. What would be the maximum purchase price acceptable to the Minnetonka Corporation for the bindings? Support your answer with an appropriate explanation.
3. Instead of sales of 10,000 pair of skis, revised estimates show sales volume at 12,500 pair. At this new volume, additional equipment, at an annual rental of $10,000 must be acquired to manufacture the bindings. This incremental cost would be the only additional fixed cost required even if sales increased to 30,000 pair. (This 30,000 level is the goal for the third year of production.) Under these circumstances, should the Minnetonka Corporation make or buy the bindings? Show calculations to support your answer.
4. What qualitative factors (i.e. issues with vendors, customers, or within the product itself) should the Minnetonka Corporation consider in determining whether they should make or buy the bindings?
What kind of HELP do you need? You need to be specific when asking questions here.
If all you do is post your entire assignment, nothing will happen since no one here will do your work for you. But if you are specific about what you don't understand about the assignment or exactly what help you need, someone might be able to assist you.
1. To determine whether Minnetonka Corporation should make or buy the bindings, we need to compare the costs of producing the bindings in-house versus purchasing them from a subcontractor.
Currently, the cost of producing bindings in-house is:
Direct Labor: $35
Direct Material: $30
Total Overhead: $15
Total: $80 per pair
If Minnetonka Corporation accepts the purchase proposal, the costs would be reduced by 10% for direct labor and variable overhead, and by 20% for direct material. Therefore, the revised cost of producing bindings in-house would be:
Direct Labor: $35 - 10% = $31.50
Direct Material: $30 - 20% = $24
Total Overhead: $15
Total: $31.50 + $24 + $15 = $70.50 per pair
The purchase price from the subcontractor is $10.50 per pair.
Based on these calculations, it is more cost-effective for Minnetonka Corporation to buy the bindings from the subcontractor.
2. To determine the maximum purchase price acceptable to Minnetonka Corporation, we need to compare the cost of producing the bindings in-house (revised cost) with the purchase price from the subcontractor.
The revised cost of producing bindings in-house is $70.50 per pair.
Minnetonka Corporation should accept the purchase proposal if the purchase price from the subcontractor is lower than the revised cost of producing the bindings in-house. Therefore, the maximum purchase price acceptable to Minnetonka Corporation would be $70.50 per pair or lower.
3. With the revised estimate of sales volume at 12,500 pair, additional equipment costing $10,000 per year would be required to manufacture the bindings. This additional fixed cost would be incurred regardless of whether sales increase to 30,000 pair in the future.
To determine whether Minnetonka Corporation should make or buy the bindings at this new volume, we need to compare the costs of producing the bindings in-house (including the additional equipment cost) versus purchasing them from the subcontractor.
The revised cost of producing bindings in-house (including the additional equipment cost) at the sales volume of 12,500 pair would be:
Direct Labor: $35 - 10% = $31.50
Direct Material: $30 - 20% = $24
Total Overhead: $15 + ($10,000 / 12,500 pairs) = $15.80
Total: $31.50 + $24 + $15.80 = $71.30 per pair
The purchase price from the subcontractor is still $10.50 per pair.
Based on these calculations, even with the additional equipment cost, it is still more cost-effective for Minnetonka Corporation to buy the bindings from the subcontractor even at the increased sales volume of 12,500 pair.
4. In addition to the quantitative factors discussed above, there are several qualitative factors that Minnetonka Corporation should consider when determining whether to make or buy the bindings:
- Quality: They should assess the quality control measures of the subcontractor and compare it to their own production capabilities. Ensuring that the purchased bindings meet the required quality standards is crucial.
- Reliability: They should evaluate the reliability and dependability of the subcontractor in terms of meeting delivery schedules and maintaining a consistent supply of bindings.
- Capacity: They should consider the capacity of the subcontractor to meet their current and future demand for bindings. It is important to ensure that the subcontractor can scale up production if needed.
- Strategic partnerships: If Minnetonka Corporation decides to buy the bindings, they should assess the relationship with the subcontractor. A strong and mutually beneficial partnership with the subcontractor can lead to better cooperation and potential cost savings in the long run.
- Core competencies: Minnetonka Corporation should evaluate whether producing bindings is a core competency of their business. If it is not, it might be more advantageous for them to focus on their core business of producing water skis and outsource the production of bindings to a subcontractor.