Curtis Corporation is beginning to manufacture Mighty Mint, a new mouthwash in a

Question

Curtis Corporation is beginning to manufacture Mighty Mint, a new mouthwash in a small spray container. The product will be sold to wholesalers and large drugstore chains in package of 30 containers for $18 per package. Management allocates $200,000 of fixed manufacturing overhead costs to Mighty Mint. The manufacturing cost per package of 30 containers for expected production of 100,000 packages is as follows:

Direct material $6.50

Direct Labor $3.50

Overhead (fixed and variable) $3.00

Total $13.00

The company has contacted a number of packaging suppliers to determine whether it is better to buy or manufacture the spray containers. The lowest quote for the containers is $1.75 per 30 units. It is estimated that purchasing the containers from a supplier will save 10 percent of direct materials, 20 percent of direct labor, and 15 percent of variable overhead. Curtis’s manufacturing space is highly constrained. By purchasing the spray containers, the company will not have to lease additional manufacturing space that is estimated to cost $15,000 per year. If the containers are purchased, one supervisory position can be eliminated. Salary plus benefits for this position are $700,000 per year.

Required:

Should Curtis make or buy the containers? What is the incremental cost (benefit) of buying the containers as opened to making them?

Explanation / Answer

Cost of Manufacturing Mint Containers Direct Material(6.5 *10%) 0.65 Direct Labor(3.5 *20%) 0.7 For Calculating the variable Overhead,we need to calculate the Variable Overhead for the   manufacture of mighty Mint First calculate the containers manufactured which is 30*100,000=3,000,000 Now Total Overhead = 3,000,000 * 3                               = 9,000,000 If V is the variable Overhead 9,000,000 = 3,000,000V + 200,000 Hence V = 2.93 Hence total manufacturing Costs, Direct Material(6.5 *10%) 0.65 Direct Labor(3.5 *20%) 0.7 Variable Overhead (2.93 * 0.15) 0.44 Hence total manufacturing Costs, 1.79 Variable Manufacturing cost for the year ( 1.79 * 3,000,000 = 5,370,000 ) 5,370,000 Add: Fixed Costs Lease costs 15,000 Salary of supervisory position 700,000 Total Costs 6,085,000 Buying Costs ( 1.75 * 3,000,000 ) 5,250,000 Comparing the two alternatives,we see that by buying ,the company will save 6,085,000 - 5,250,000= $ 835,000 Hence, It is better if the company goes for buying the containers.

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