Hamilton Containers manufactures a variety of boxes used for packaging. Sales of
ID: 2342349 • Letter: H
Question
Hamilton Containers manufactures a variety of boxes used for packaging. Sales of its Model A20 box have increased significantly to a total of 430,000 A20 boxes. Hamilton has enough existing production capacity to make all of the boxes it needs. The variable cost of making each A20 box is $0.80. By outsourcing the manufacture of these A20 boxes, Hamilton can reduce its current fixed costs by $103,200. There is no alternative use for the factory space freed up through outsourcing, so it will just remain idle What is the maximum Hamiton will pay per Model A20 box to outsource production of this box? Begin by identifying the basic formula that is used to determine the indifferent outsourcing cost per unit. Cost if making A20 boxes Variable costs Fixed costs Cost if outsourcing A20 boxes Variable costsFixed costs Using the basic formula you determined above solve for the indifferent outsourcing cost per unit. The maximum Hamilton will pay to outsource production of its A20 boxes is $Explanation / Answer
Answer:
The variable cost per box is $0.80.
The avoidable fixed cost per switch is $0.24($1,03,200 fixed cost / 430000 units) .
Hoffman would be indifferent between outsourcing and making the A20 boxes if the outsourcing price was $1.04 ($0.80 + 0.24) per A20 box. That is sum of fixed and variable cost.
Therefore, a maximum price of $1.04 can Hoffman will pay to outsource production of this box.
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