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
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
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
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 nonquantifiable factors should the Minnetonka Corporation
consider in determining whether they should make or buy the bindings?