Minnetonka 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 Minnetonka 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%.
1. Should the Minnetonka Corporation make or buy the bindings? Show calculations to support your answer.
Minnetonka should buy the bindings as it costs less per pair to buy them ($79.50) rather than to make 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
2.......
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