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    In-Sourcing vs Outsourcing

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    Managerial Accounting

    Details: Consider the following scenario:

    The Ski Pro 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 ski 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 pairs 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

    Ski Pro 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 Ski Pro 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%.

    Write a paper, and create a spreadsheet that answers the following questions:

    Should the Ski Pro Corporation make or buy the bindings? Show calculations to support your answer.

    What would be the maximum purchase price acceptable to the Ski Pro Corporation for the bindings? Support your answer with an appropriate explanation.

    Instead of sales of 10,000 pairs of skis, 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 manufacture the bindings. This incremental cost would be the only additional fixed cost required even if sales increased to 30,000 pairs. (This 30,000 level is the goal for the third year of production.) Under these circumstances, should the Ski Pro Corporation make or buy the bindings? Show calculations to support your answer.

    What qualitative factors (that is, issues with vendors, customers, or within the product itself) should the Ski Pro Corporation consider in determining whether they should make or buy the bindings?

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    Solution Preview

    Part A

    You should start this question by analyzing the numbers. Comparing the cost of making the bindings with the cost of buying them will help you determine the best option.

    Make Buy
    Purchase price (10,000 x $10.50) 105,000
    Less Savings: Direct labor ($3.50 x 10,000) 35,000
    Variable overhead (1.50 x 10,000) 15,000
    Direct material ($6 x 10,000) 60,000
    Total Costs 110,000 105,000

    Net Savings if we buy 5,000

    1. Should the Ski Pro Corporation make or buy the bindings? Show calculations to support your answer.

    Answer: Since there are no additional fixed costs, the firm will save a total of $5,000 if it chooses to outsource the production of the bindings for 10,000 pairs of skis. It is, therefore, a good idea for the firm to outsource (buy) the bindings.

    2. What would be the maximum ...

    Solution Summary

    A Step by step explanation of the calculations required before a business can decide whether to make an item themselves or outsource the job.