Problem: Sunshine State Fruit Company sells premium quality oranges and other citrus fruits by mail order. Protecting the fruit during shipping is important, so the comapany has designed and produces shipping boxes. The annual cost to make 80,000 boxes is:
Materials $120,000
Labor 20,000
Indirect manufacturings costs:
variable 16,000
fixed 60000
total 216,000
Therefore, the cost per box averages $2.70
Suppose Weyerhaeuser submits a bid to supply Sunshine State with boxes for $2.40 per box. Sunshine State must give Weyerhaeuser the box design specifications, and the boxes will be made according to those specs.
Problem 1. How much, if any, would Sunshine State save by buying the boxes from Weyerhaeuser?
Problem 2. What subjective factors should affect Sunshine State's decision whether to make or buy the boxes?
Problem 3. Suppose all the fixed cost represent depreciation on equipment that was purchased for $600,000 and is just about at the end of its ten-year life. New replacement equipment will cost $1 million and is also expected to last ten years. In this case, how much, if any, would Sunshine State save by buying the boxes from Wyerhaeuser?