Problem: Make or Buy Decision
Bronson Company manufactures a variety of ballpoint pens. The company has just received an offer from an outside supplier to provide the ink cartridge for the company's Zippo pen line, at a price of $0.63 per dozen cartridges. The company is interested in this offer, since its own production of cartridges is at capacity.
Bronson Company estimates that if the supplier's offer were accepted, the direct labor and variable manufacturing overhead costs of the Zippo pen line would be reduced by 10% and the direct materials cost would be reduced by 20%.
Under present operations, Bronson Company manufactures all of its own pens from start to finish. The Zippo pens are sold through wholesalers at $3.30 per box. Each box contains one dozen pens. Fixed manufacturing overhead costs charged to the Zippo pen line total $50,000 each year. (The same equipment and facilities are used to produce several pen lines.) The present cost of producing one dozen Zippo pens (one box) is given below:
Direct materials $1.30
Direct labor 1.00
Manufacturing overhead 0.80
Total cost $3.1
Includes both variable and fixed manufacturing overhead, based on production of 100,000 boxes of pens each year.
Requirement 1:
(a) Calculate the total variable cost of one box of Zippo pens if the company manufactures all of its own pens from start to finish. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
(b) Calculate the total variable cost of one box of Zippo pens if the cartridges are purchased from the outside supplier. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
(c) Should Bronson Company accept the outside supplier's offer?
Requirement 2:
What is the maximum price that Bronson Company should be willing to pay the outside supplier per dozen cartridges? (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Requirement 3:
Due to the bankruptcy of a competitor, Bronson Company expects to sell 150,000 boxes of Zippo pens next year. As stated above, the company presently has enough capacity to produce the cartridges for only 100,000 boxes of Zippo pens annually. By incurring $22,000 in added fixed cost each year, the company could expand its production of cartridges to satisfy the anticipated demand for Zippo pens. The variable cost per unit to produce the additional cartridges would be the same as at present. Calculate the cost under the three alternatives. (Omit the "$" sign in your response.)
(a) Cost to produce all cartridges internally
(b) Purchase all cartridges externally
(c) Produce 100,000 boxes internally, and purchase 50,000 boxes externally