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The Ski Pro Corporation_Activity Based Costing




Question;Accounting;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: $30Total 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 1?2 page paper, and create a spreadsheet that answers the following;questions;1.;Should the Ski Pro Corporation make or buy the bindings? Show;calculations to support your answer.;2.;What would be the maximum purchase price acceptable to the Ski;Pro Corporation for the bindings? Support your answer with an appropriate;explanation.;3.;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.;4.;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?


Paper#44605 | Written in 18-Jul-2015

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