ACCT310: Unit 3 Individual Project
Professor Sharon Borowicz
Du Date 06/26/2011
The decision to perform a service in house or outsource to another country or just another company is referred to as a make versus buy decision. Make versus buy decisions use differential cost perspective and should cover more than one year of analysis. That being said, Ski Pro Corporation needs to decide whether to offer cross-country skis to supplement its sinter season revenue and if so whether to buy the bindings or make them in-house. In an effort to help the management with this decision, this document will offer a differential cost perspective and will explain Ski Pro Corporation choices. Please examine the excel document that was prepared alongside this document to see the figures and calculations preformed for this analysis.
Thank you for your consideration
Ski Pro Management
There are many pressures on a business to do more with less; one way to accomplish this is to outsource certain services at a significant cost savings to a business. This may be the case for Ski Pro Corporation; the included documents will determine whether to make bindings for the new product offering or to outsource the bindings. To determine these decisions a differential cost analysis has been prepared.
Understanding the steps to a differential cost analysis is essential to properly applying its information. Differential cost show how a decision will change a business??™s costs; this is different than just comparing total costs of making in-house to the total cost of outsourcing. It takes into account variable costs and opportunity costs unlike a total cost look. Opportunity costs are the loss of opportunity in the use of an asset or resource other than its chosen alternative (MICHEL, 2004). An example of an opportunity cost would be the sale of a stadium by a city without looking at the added revenue of the concession stand and the parking revenue when considering selling to a firm.
In this analysis one should:
1. Define the problem
2. Calculate the in-house costs that are beneficial to the business
3. Calculate the total cost of outsourcing
4. Compare the cost savings to the costs incurred
5. Evaluate the decision for the forecasted results
Refer to the excel document for the calculations of Ski Pro Corporation make versus buy analysis. In Scenario one it is more effective for Ski Pro Corporation to make the bindings for the cross-country skis. The maximum purchase price acceptable for the bindings would be $5.00 because that would allow the company to save money given the current overhead costs. In the second scenario, where the volume increases and the overhead increases than it would be more effective to buy the bindings. This would save the company $66,250 dollars total annually.
The Ski Pro Corporation should look at the non-financial costs to determine its buy-versus-make decision also (factors, 2005,2000, 1995,1987). These include the effects on the employees that new products and equipment could make. It will cost labor hours to employee people to run the new machines necessary to build the bindings and may cost jobs to replace employees or retrain employees to manage equipment and departments. Then there is the employee effect if the business continues to purchase the bindings: like lost revenue may cause layoffs to supplement profits; there is the scheduling consideration for new employees and shifts with the new machines when making its own bindings. There is the relationships with the suppliers when purchasing bindings and making bindings. Suppliers will need to be sought again when making the bindings and establishing relationships will need to be managed (again); then there are the suppliers that will lose business if the switch to making bindings is made and the goodwill that could be lost for the company, which can and will affect its profitability also. Then, last but not least, either decision will affect the customer. They will either love the new product offering or not, but those that do not will undoubtedly leave dissatisfied and those that are will put the word out with bad reviews and word of mouth comments to family, friends and coworkers which will affect profitability and goodwill established by the company in past years. Those that love the new offering will need to be ???wooed??? into the new product line and that will affect the profitability and satisfied customers still need to be shown the ???value??? in the product; through marketing and sales.
All in all, both decisions will need to be considered carefully and analyzed fully both for the quantitative and qualitative factors to make the best decision for Ski Pro Corporation.
factors, q. (2005,2000, 1995,1987). definition for qualitative factors. Retrieved June 25, 2011, from AllBusiness: http://www.allbusiness.com/glossaries/qualitative-factors/4948241-1.html
MICHEL, R. G. (2004, August). Make or Buy–Using cost analysis to decide whether to outsource public services. Retrieved June 24, 2011, from GFOA.org: http://www.gfoa.org/downloads/GFRAug04.pdf