The ski selected is a mass market ski with a special binding and will be sold for $80 per pair. A $125000 fixed charge will be absorbed by the ski, however, to allocate a fair share of the company’s present fixed cost to the new product.
Using the estimated sales and production of 10000 pair of skis as the expected volume,
Direct labor $35
Direct material 30
Total overhead 15
Total cost $80
They discussed the purchasing of the binding from a subcontractor at $5.25 per binding, or $10.50 per pair with direct-labor and variable cost would be reduced by 10% and direct materials costs would be reduced by 20%.
What would be the maximum purchase price acceptable to the Corporation for the bindings? Support your answer with and appropriate explanation.