Sunshine State Fruit Company sells premium-quality oranges and other citrus fruits by mail order. Protecting the fruit during shipping is important, so the company has designed & produces shipping boxes. The annual cost to make 80,000 boxes is:
|
Material
|
$112,000
|
|
Labour
|
20,000
|
|
Indirect manufacturing costs %u2013 variable
|
16,000
|
|
Indirect manufacturing costs %u2013 fixed
|
60,000
|
|
Total
|
208,000
|
Therefore, the box Cost per box averages = $2.60
Suppose Weyerhaeuser submits a bid to supply Sunshine State with boxes for $2.10 per box. Sunshine must give Weyerhaeuser the box design specifications, and the boxes will be made according to those specs.
- How much, if any, would Sunshine State save by buying the boxes from Weyerhaeuser?
- What subjective factors should affect Sunshine%u2018s decision about whether to make or buy the boxes?
- Suppose all the fixed costs represent depreciation on equipment that was purchased for $600,000 and is just about at the end of its 10-year life. New replacement equipment will cost $800,000 and is also expected to last 10 years. In this case, how much, if any, would Sunshine save by buying the boxes from Weyerhaeuser?