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Cost-Benefit Analysis of Make-or-Buy Decision for Ski Pro Corporation

A cost-benefit analysis of a make-or-buy decision for Ski Pro Corporation, evaluating the financial implications of each option.

Claire Mitchell
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Cost-Benefit Analysis of Make-or-Buy Decision for Ski ProCorporationConsiderthefollowingscenario:TheSkiProCorporation,whichproducesandsellstowholesalersahighlysuccessfullineofwaterskis,hasdecidedtodiversifytostabilizesalesthroughouttheyear.Thecompanyisconsideringtheproductionofcross-countryskis.Afterconsiderableresearch,across-countryskilinehasbeendeveloped.Becauseoftheconservativenatureofthecompanymanagement,however,Minnetonka’spresidenthasdecidedtointroduceonlyonetypeofthenewskiforthiscomingwinter.Iftheproductisasuccess,furtherexpansioninfutureyearswillbeinitiated.Theskiselectedisamass-marketskiwithaspecialbinding.Itwillbesoldtowholesalersfor$80perpair.Becauseofavailabilitycapacity,noadditionalfixedchargeswillbeincurredtoproducetheskis.A$100,000fixedchargewillbeabsorbedbytheskis,however,toallocateafairshareofthecompany’spresentfixedcoststothenewproduct.Usingtheestimatedsalesandproductionof10,000pairsofskisastheexpectedvolume,theaccountingdepartmenthasdevelopedthefollowingcostperpairofskisandbindings:DirectLabor:$35DirectMaterial:$30TotalOverhead:$15Total:$80SkiProhasapproachedasubcontractortodiscussthepossibilityofpurchasingthebindings.Thepurchasepriceofthebindingsfromthesubcontractorwouldbe$5.25perbinding,or$10.50perpair.IftheSkiProCorporationacceptsthepurchaseproposal,itispredictedthatdirect-laborandvariable-overheadcostswouldbereducedby10%anddirect-materialcostswouldbereducedby20%.Writea1–2pagepaper,andcreateaspreadsheetthatanswersthefollowingquestions:1.ShouldtheSkiProCorporationmakeorbuythebindings?Showcalculationstosupportyouranswer.2.WhatwouldbethemaximumpurchasepriceacceptabletotheSkiProCorporationforthebindings?Supportyouranswerwithanappropriateexplanation.3.Insteadofsalesof10,000pairsofskis,revisedestimatesshowsalesvolumeat12,500pairs.Atthisnewvolume,additionalequipment,atanannualrentalof$10,000mustbeacquiredtomanufacturethebindings.Thisincrementalcostwouldbetheonly

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