The Lotion Co., which produces and sells to wholesalers summer lotions, wants to now produce winter products. It will produce a lip balm to be sold in a small tube. It will be sold to wholesalers in boxes of 24 tubes for $8.00 per box. Due to available capacity, no extra fixed charges will be incurred, but a $100,000 fixed charge will be absorbed by the product to allocate a fair share of the company's present fixed costs to the new product.
The following costs reflect an estimated sales and production of 100,000 boxes:
DM $3.00/box
DL 2.00/box
Total OH 1.50/box
$6.50/boxa
The company can buy the tubes for the balm from a cosmetics manufacturer for $.90/box. If the Lotion Co. does buy the tubes (from the outside manufacturer), DL and VO costs would go down by 10% and the DM costs would go down by 20%.
Should Lotion Co. make or buy the tubes?