Ugh, I'm so annoyed. Okay, I do online schooling, so if I need to talk to my instructor, it's an email thing. For reference, it's an accelerated school, so each week I do a project. I got a B on my project last week, dragging down my A in the class overall. So I send an email to my teacher today because I am working on my current project and wanted to make sure I did better and was on the right track. I told her that I had read the chat archives and the chapter, but was still unsure. What does she send back to me? "Please read the chat archives for further information". It's not like I am asking for the answers! I simply want to know if I am headed in the right direction or not.
Can anyone help me out with this? I have the questions and answers, I just want to make sure I am using the right calculations and doing this correctly. Thanks for anyone that can help!!!
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
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?
My answer so far:
1. Labor at $35 a pair multiplied by 10,000 pairs equals $350,000
Material at $30 a pair multiplied by 10,000 pairs equals $300,000
Overhead at $15 a pair multiplied by 10,000 pairs equals $150,000
The total cost equals $800.000
Ten percent labor at 350,000 multiplied by .10 equals $35,000
Ten percent overhead at150,000 multiplied by .10 equals $15,000
Twenty percent materials at 300,000 multiplied by .20 equals $60,000
Total savings are $110,000
Bindings at $10.50 a pair multiplied by 10,000 pairs equals $105,000
Net savings $5,000
When the company takes a look at the smaller size of the percentage that would be saved $.50 a pair they ought to create the bindings themselves.
2) The maximum purchase price should be $7.50 a pair. With such a price, The Minnetonka Cooperation would be able to save $35,000 at $3.50 a pair.
3) The cost in the first year for additional equipment would be $1 a pair at 10,000/10,000. By the third year, the additional cost per pair would drop to $.33 a pair while sales have tripled. Based on these calculations, investing in the equipment and manufacturing the binders would be a good choice.
4) Based on the above calculations, it appears that they should create their own binders. If the company were to make the binders, it would have complete authority over the dealers, the quality of materials, quality of work, and more. Having such control reduces the risk of people that work outside the company, such as contractors, not delivering in a timely manner or possibly delivering substandard goods. By assembling the binders on their own, the company has more direct control over the quality and cost. These factors toughen the company’s capability to meet their production goals.