Make or buy decision for ski bindings
The ski selected is a mass market ski with a special bindings. it will be sold to wholesaler 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 volum, the accounting dept has developed the following cost per pair of skis and bindings:
Direct labor $35
Direct material $30
Total overhead $15
The company 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 company 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 20%
1) Shoud the company make or buy the bindings? Show calculations to support your answer.
2) 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 company make or buy the bindings? Show calculations to support your answer.