6-65 Make or Buy 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 conser vative 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 580 per pair Because of available capacity, no additional fixed charges will be incurred to produce the skis A $125.000 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 costs per pair of skis und bindings: 1 Direct labor Direct materials Total overhead Total cost $35 30 IS $80 Minnetonka hus approached a subcontractor to discuss the possibility of purchasing the bindings. The purchase price of the bindings from the subcontractor would be 55,25 per binding, or $10.50 per pair in the Minnetonka Corporation accepts the purchase proposal, it is predicted that direct labor and variable-overhead costs would be reduced by 10% and direct materials costs would be reduced by 203 1. Should the Minnetonka Corporation make or buy the bindings/ Show calculations to support your answer 280 PART 1 - FOCUS ON DECISION MAKING 2. What would be the maximum purchase price acceptable to the Minnetonka Corporation for the hinding Support your answer with an appropriate explanation 3. Instead of sales of 10.000 pairs of skin 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 man- ufacture the bindings. This incremental cost would be the only additional fixed cost required even if sales increased to 10,000 pairs (The 10.000 level is the goal for the third year of produe Under these circumstances, should the Minnetonka Corporation make or buy the bindings? Show calculations to support your answer 4. The company has the option of making and buying at the same time. What would be your answer to number of this storative were considered Show calculations to support your answer 3. Whor menquantifiable factors should the Minnetonka Corporation consider in determining whether they should make or by the bindings