Curtis Corporation is beginning to manufacture Mighty Mint, a new mouthwash in a
ID: 2444101 • Letter: C
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 packages of 30 containers for $18 per package. Management allocated $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’ 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 will be eliminated. Salary plus benefits for this position are $70,000 per year.
-Should Curtis make or buy the containers? What is the incremental cost (benefit) of buying the containers as opposed to making them?
Explanation / Answer
when the product is manufactured sales 100000 units at $18 per package $1,800,000 Costs: materials@6.50 per package $650,000 Direct labor@$3.50 per package $350,000 overheads@$3 per package $300,000 Total variable cost $1,300,000 contribution margin $500,000 Fixed expenses $200,000 Net income $300,000 When the product is purchased sales $1,800,000 Costs: Direct materials is saved by10% $585,000 Direct labor is saved by 20% $280,000 overheads are saved by 15% $255,000 container cost @$1.75 $175,000 Total variable cost $1,295,000 contribution margin $505,000 Less: Fixed expenses $130,000 $375,000 Add: additional space cost $15,000 Net income $390,000 Note: out of fixed expenes $70000 is reduced as the supervisory position is eliminated. Net income when the product is By manufactured $300,000 Net income when the product is purchased $390,000 cost benefit $90,000
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.