Ski Pro Corporation Case Study

Ski Pro

Ski Pro Corporation produces and sells a highly successful line of water skis. This unique product ebbs and flows with the seasons in sales. In winter month's sales quadruple in anticipation for the summer. This rise and fall leave the corporation struggling in summer months to clear inventories and slows products.

To offset this inconsistent pattern of sales Ski Pro Corporation has decided to adventure into Cross Country Ski production and sales. They have determined that a mass market ski with special bindings would be sold to wholesalers for $80 per pair. Management has also determined that a total of 10,000 pairs of skis will be produces this year. They have also calculated costs associated with adding this product into their manufacturing lines. Direct Labor will incur $35, Direct Material $30, and Total Overhead $15, equaling an $80 cost to produce this product. To help offset some direct/indirect expenses management has approached a subcontractor for production of the special bindings. The contractor can produce the bindings for $5.25 per binding or $10.50 for a pair. This would reduce variable overhead costs by 10% and direct material costs by 20%.

Ski Pro Corporation should buy these bindings from the subcontractor. The subcontractors can produce the bindings for $10.50 a set, a slightly larger ($.50) price than if Ski Pro Corporation were to manufacturing the same product. However, this slightly higher price is off set with the 10% decrease in variable-overhead and 20% decrease in direct-material costs. Rendering the cost per ski and binding set to $70.5 a set, leaving an annual contribution margin of $95,000. Whereas manufacturing the skis and bindings leave zero contribution margins. See attached calculations. On the other hand, if Ski Pro Corporation estimated sales of 12,500 pairs and only a $10,000 increase in fixed costs it would benefit the business to manufacture the binding. The manufacturing increase would also allow Ski Pro to produce up to 30,000 units, which recuses the cost of bindings to $3.67 a pair. This reduction in cost would allow Ski Pro to manufacture opposed to subcontracting them out.

A major qualitative factor that somewhat prohibits subcontracting is issues with production over demand. If the contractor who is awarded the contract cannot produce the maximum annual sales goals or if venders who the contractor uses become unreliable based on quality or numbers being produced, this also creates a need for interaction from customer to contractor or having a position to mediate the relationship between product already purchased and customer service.

All these factors considered, Ski Pro Corporation should manufacture their binding. This allows for quality control and is also more efficient based on long term goals for the business.