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.
? Minnetonka should buy the bindings as it costs less per pair to buy them ($79.50) rather than to make them ($80.00):
make Discount Calculation buy
Direct Labor $ 35.00 -10% $35 - ($35 * .1) $ 31.50
Direct material $ 30.00 -20% $30 - ($30 * .2) $ 24.00
Overhead $ 15.00 -10% $15 - ($15 * .1) $ 13.50
subtotal $ 69.00
+ bindings $ 10.50
Total $ 80.00 $ 79.50
2. What would be the maximum purchase price acceptable to the Minnetonka Corporation for the bindings? Support your answer with an appropriate explanation.
? Perfectly competitive companies maximize profits by producing the quantity where the cost is less than or equal to the revenue generated. In this case, each pair costs $69 to buy. The optimal cost for the bindings should not exceed the price per pair ($80.00). Therefore, the maximum allowable price for the bindings should not exceed $80.00 (sale price) - $69.00 (bought manufacturing) = $11.00
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. ...