Activity Based Costing Analysis Essay Example

Minnetonka has reached out to a subcontractor for the purpose of discussing the purchase of bindings. The subcontractor has proposed two options: either buying each binding at a price of $5.25, or purchasing a pair for $10.50.

If the Minnetonka Corporation accepts the purchase proposal, it is expected that the direct labor and variable-overhead costs will decrease by 10% and the direct-material costs will decrease by 20%.

• Should Minnetonka Corporation choose to make or buy the bindings? Provide calculations to support your answer.

* Minnetonka should buy the bindings as it is cheaper to buy them ($79.50) instead of making them ($80.00):

make Discount Calculation
buy
Direct Labor $35.00 -10% $35 - ($35 * .1) $31.50
Direct material $30.00 -20% $30 - ($30 * .2) $24.00
Overhead $15.00 -10% $15 - ($15 * .1) $13.50
subtotal $69.00+ bindings $10.50
Total  $80.00  $79.50

...
What would be the maximum acceptable purchase price for the bindings for Minnetonka Corporation? Support your answer with an appropriate explanation.
* In a perfectly competitive market, companies maximize profits by producing a quantity where the cost is less than or equal to the revenue generated.In this case, each pair costs $69 to buy.The optimal cost for the bindings should not exceed tprice per pair ($80).The maximum allowable price for the bindings should be $11.00, calculated as the difference between the sale price of $80.00 and the manufacturing cost of $69.00.
Revised estimates indicate that a sales volume of 12,500 pairs of skis will be achieved instead of the initial projection of 10,000 pairs.
To accommodate this increased volume, additional equipment must be acquired to manufacture the bindings. The annual rental cost for this equipment is $10,000.
If sales further increase to 30,00
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