Minnetonka Corporation
Not what you're looking for?
Activity-Based Costing
Unit 3 IP
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 conservative 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 $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 volume, the accounting department has developed the following cost per pair of skis and bindings:
Direct Labor: $35
Direct Material: $30
Total Overhead: $15
Total: $80
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.
2. What would be the maximum purchase price acceptable to the Minnetonka Corporation for the bindings? Support your answer with an appropriate explanation.
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. 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? Show calculations to support your answer.
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 buy the bindings?
Purchase this Solution
Solution Summary
The response addresses the queries posted in 597 Words and excel, APA References.
Solution Preview
Please find the Excel file attached.
Introduction
The Minnetonka Corporation is the leader producer in the production and sell of the water skis. The management of the company is now planning for the expansion of the business to face the global competition and to stabilize the sales throughout the year. A cross country ski line is developed after considering an in-depth research. But the management has a conservative nature that is causing development of a one type of ski for the coming winter season. The fixed cost will not be increased for the corporation because of available capacity. The new water skis can be sold to the wholesalers for $80 per pair. The management of the company also has another option to purchase the bindings from a subcontractor at $10.50 per pair that will be helpful to reduce the variable costs of the company.
Buy or Make Decision
The organization makes the capital budgeting decision on the basis of cost. The making cost of the skis ...
Education
- MBA (IP), International Center for Internationa Business
- BBA, University of Rajasthan
Recent Feedback
- "Thank You so much! "
- "Always provide great help, I highly recommend Mr. Sharma over others, thanks again. "
- "great job. I will need another help from you. "
- "first class!"
- "Thank you for your great notes. Will you be willing to help me with one more assignment? "
Purchase this Solution
Free BrainMass Quizzes
Balance Sheet
The Fundamental Classified Balance Sheet. What to know to make it easy.
Learning Lean
This quiz will help you understand the basic concepts of Lean.
SWOT
This quiz will test your understanding of the SWOT analysis, including terms, concepts, uses, advantages, and process.
Lean your Process
This quiz will help you understand the basic concepts of Lean.
Understanding Management
This quiz will help you understand the dimensions of employee diversity as well as how to manage a culturally diverse workforce.