Make Vs Buy

1. What is the cost of making bindings internally? ( AIU Online Virtual Campus, 2008)

• Material is 20% of direct material cost- $30 is direct material cost. 30x20%=$6

• Direct Labor is 10% of Direct Labor Cost- $35 is the given direct labor. 35x10%=$3.50

• Total fixed overhead is $100,000 and the total number of units is 10,000. The fixed overhead per unit is 100,000/10,000=$10

• Total overhead per unit is $15. The variable overhead per unit is the fixed cost subtracted from the total overhead- 15-10=$5

• The variable overhead for a pair of bindings is 10% of the variable overhead- 5x10%=$0.50

• The total cost for a pair of bindings is

o Direct Material = $6

o Direct Labor = $3.50

o Variable overhead = $0.50

o Total Cost = $ 10

The total cost of Minnetonka making the bindings is $10 dollars. The subcontractor gave a bid of $10.50 a pair for the bindings. Since the cost of making the bindings is less, Minnetonka should make the bindings.

2. What would be the maximum purchase price acceptable to the Minnetonka Corporation for the bindings? ( AIU Online Virtual Campus, 2008)

Because the total cost of Minnetonka making the bindings is $10.00, this is the maximum purchase price they should accept. If they were to pay any more than the $10.00, the company would be showing a loss in profit. (Horngren, Sundem, Stratton, Burgstahler, & Schatzberg, 2008)

3. Instead of sales 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 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? ( AIU Online Virtual Campus, 2008)

The additional yearly charge for the increased productions is $10,000. So for 12,500 units, the additional per unit charge for the bindings would be 10,000/12,500 = $0.80. The total cost of making the bindings would now be $10 + $0.80 = $10.80

Since the price to buy the bindings from the subcontractor is $10.50, Minnetonka should now buy the bindings to save themselves $0.30 a pair for the bindings. (Horngren, Sundem, Stratton, Burgstahler, & Schatzberg, 2008)

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