Production Decisions

Introduction

The Minnetonka Corporation, who specializes in water skis, has done some research and has developed a cross-country ski with a special binding to sell. They want to do this so they can stabilize sales throughout the year. They will sell this ski at $80 per pair to wholesalers. A fixed charge of $100,000 of fixed costs will be incurred. The expected volume will be estimated by the sales and production of 10,000 pair of skis. Skis and bindings cost will be (1) Direct labor: $35 (2) Direct material: $30 (3) Total overhead: $15 which total $80. They have discussed purchasing the bindings. Per binding: $5.25 or $10.50 per pair. If they accept this offer then direct-labor and variable-overhead costs will decrease 10%. Direct-material costs will decrease 20%. I will explain if they should make or buy the bindings and what would be an acceptable price for them. Then we take a look at volume of sales revised at 12,500 pair. I will explain if they should make or buy then and what qualitative factors they should be kept in mind when making such a decision.

Make or Buy

Table: 1.

Bindings for Cross-Country Skis

Purchase Price: $10.50 per pair Developed Cost to make Changes Calculations Revised Cost to buy

Direct labor $35 -10% $35 - ($35 * .1) $31.50

Direct material $30 -20% $30 - ($30 * .2) $24.00

Total overhead $15 -10% $15 - ($15 * .1) $13.50

TOTAL $80 $69.00

Make or buy is the question. I believe that at this point it would be best with this information to buy the bindings. The reason why I believe this is because to buy them at $69.00

cost less than to make