Ski Pro-Corporation, Produces Sells Wholesalers a Highly

¶ … Ski Pro-Corporation, produces sells wholesalers a highly successful line water skis, decided diversify stabilize sales year. The company production cross-country skis. After considerable research, a cross-country ski line developed.

The table below summarizes the calculations in the two different scenarios. In scenario no.1, the company produces both the skis and the bindings. The costs for direct labor, direct material and total overhead are shown in the first column.

Skis and Bindings

Outsourced Bindings

Direct Labor

Direct Material

Total Overhead

Total Cost

The second column shows the costs of the company if making the bindings is outsourced to a subcontractor and purchased rather than internally produced. The costs for direct labor, direct material and total overhead were calculated by decreasing 10% for direct labor and total overhead and 20% for direct material from the costs for all these elements in scenario 1.

To the total cost, $10.50 was also added for each pair of skis. This represents the price paid to purchase the bindings from the subcontractor. In this case, the total cost is $79.5 (price of bindings included).

In the 2nd scenario, the total cost is lower with $0.5 as compared to scenario no.1. This means that it is better to select this option and buy the bindings rather than make them internally. The purchasing price of the bindings is lower than the costs involved in producing them. This is reflected in the overall total cost.

2. The maximum acceptable price for the Ski Pro-Corporation is $11.00 for the pair of bindings. First, the total cost for the ski production is calculated, taking into consideration the potential savings if the bindings production is outsourced. The total cost in this case is $69. The total cost if the bindings are produced internally is $80. As such, the maximum acceptable price for the Ski Pro-Corporation to pay for the bindings is $11, because in this case, the total cost would be equal to the cost of producing the bindings internally.

3. Everything that is produced over the 10,000 skis incurs the acquisition of the $10,000 equipment. This means that in order to calculate whether it is still profitable to purchase the bindings or not, we need to take into consideration the cost savings made by purchasing the bindings rather than producing them. As mentioned, these savings amount to $0.50 per pair of skis when the bindings are purchased. We multiply this by the difference between the new quantity that needs to be produced and the old one (2,500 pieces) -- acknowledging that for the first 10,000 pieces, no equipment needs to be purchased. The result is $1,250 -- much lower than the cost of the equipment ($10,000). It still makes more sense to buy the bindings that to purchase the equipment and produce them internally.

If the company makes 30,000 skis a year, this means 20,000 over the 10,000 for the beginning, the savings by purchasing the bindings would equal $10,000, exactly the amount for the equipment. As such, in all scenarios, it is more profitable for the company to purchase the bindings rather than produce them internally.

4. First of all, the reputation of the company is built on the quality of the products it is able to deliver to its customers and final consumers. Before deciding whether to outsource the production of the bindings or not, it needs to determine whether the bindings are at the same level, qualitatively, as the bindings that it would produce internally. If not, then the final effect this has on the consumers is equivalent to a decrease in the volume of sales.

Second, the reliability of the supplier needs to be considered as well. Can the subcontractor making the bindings deliver them on time? If this is not always the case, then the entire production cycle might be affected, this being translated into less skis being produced and sold on the market. The trustworthiness of the partner will determine, as such, whether choosing an external partner to make the bindings is, indeed, a reasonable choice.