The Ski Pro Corporation_Activity Based Costing




Consider the following

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

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

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%.

a 1–2 page paper, and create a spreadsheet that answers the following

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

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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