# 3 Activity Based Costing

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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%.

* Minnetonka should buy the bindings as it costs less per pair to buy them (\$79.50) rather than to make them (\$80.00):

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. What would be the maximum purchase price acceptable to the Minnetonka Corporation for the bindings? Support your answer with an appropriate explanation.

* Perfectly competitive companies maximize profits by producing the 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 the price per pair (\$80.00). Therefore, the maximum allowable price for the bindings should not exceed \$80.00 (sale price) - \$69.00 (bought manufacturing) = \$11.00

3. Instead of sales of 10,000 pair of skis, revised estimates show sales volume at 12,500 pair. At this new volume, additional equipment, at an annual rental of \$10,000 must be acquired to manufacture the bindings. This incremental cost would be the only additional fixed cost required even if sales increased to 30,000 pair. (This

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