Accounting Scenario

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Accounting Scenario

Fixed overhead cost per ski pair = 100,000 divided by 10,000 = 10 dollars

Because Total overheads = 15 dollars, hence, variable costs of overhead = 15 – 10 = 5 dollars

i) Judging by the derived Calculations, it would be a better option if the company made the bindings. If they did this, the margin of contribution would amount to10 dollars for each pair. On the other hand, if the company subcontracted the task of making the bindings, the margin of contribution would amount to 9.5 dollars for each pair. This translates to a difference in profit of five dollars between the two alternatives.

ii) In order to be in a position to derive the maximum acceptable price of purchasing, this cost should be the one that results in a similar margin of contribution regarding the two possible options. On the basis of the derived calculations, this cost is 10 dollars per ski pair (5 dollar cost per ski binding)
iii) If the sales volume was at 12,500, it would still be more profitable to choose the option of making the bindings, regardless of the additional fixed costs. If Minnetonka chooses to make the bindings, the option will reveal more profits as compared to the option of her buying the bindings. The option of making the bindings will result in 15.20 dollars in the profit made as compared to profit worth13.50 dollars, if purchasing the bindings was the case. (Full analysis on excel spread sheet)

iv) The degree of control is among of the most fundamental principles that the management should consider in the course of the manufacturing process that would forfeited if the company opts to purchase the bindings from an external source. If the supply were delayed in any form, the consequences would therefore greatly influence Minnetonka’s decisions on operation. In addition, if the management opts to purchase the bindings, then this would mean a lay off procedure would have to be undertaken, denying numerous s employees their jobs because of this decision. On the other hand, Purchasing the bindings would rescue the company from shouldering the cost burden of renting or buying the necessary equipment required to in the process of making the bindings. In addition, subcontracting the entire or part of the binding process would leave the management with room to focus on more pressing matters or attend to other fundamental processes of the operation, meaning the goals would be achieved in a timely fashion.

Reference:

Garrod, N., Bošković, M., & Valentinčič, A. (January 01, 2005). Estimating cost of capital and growth using accounting fundamentals: An application to emerging markets. Programme and Collected Abstracts.

Accounting in interorganizational settings. (January 01, 2004). Accounting, Organizations and Society, 29, 1.

Iyengar, S. P. (January 01, 2006). COST ACCOUNTING. Finance India, 20, 3, 1055-1056.

Upchurch, A. (2002). Cost accounting. New York: Financial Times Prentice Hall.

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