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Ski Pro Corp Problem: Managerial Accounting using Excel

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Consider the following scenario and provide assistance:

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%.

Imagine you had to 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 Summary

This solution provides a complete computation and explanation of the given accounting problem formatted in Excel.

Solution Preview

** Please see the attachment for the Excel formatted portion of the solution **

In order to decide whether Ski Pro should make or buy the bindings, Ski Pro needs to look at the avoidable costs and compare them with the cost of purchasing the bindings. Ski pro needs to look at the avoidable costs only since these are the costs which would not be incurred if the bindings were not to be made and thus would represent cost savings for Ski Pro. Against these costs savings, Ski Pro would incur the cost of purchasing the bindings. If the cost savings are higher then it would be better to purchase the bindings and if the cost savings are lower, the Ski Pro is better off by making the bindings.
The avoidable costs are those costs which would change if the bindings were not made. From the question, the avoidable costs would be the reduction in the costs if the bindings are not made. ...

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