Carvey Company manufactures a variety of ballpoint pens. The company has just re
ID: 2476651 • Letter: C
Question
Carvey Company manufactures a variety of ballpoint pens. The company has just received an offer from an outside supplier to provide the ink cartridge for the company’s pen line, at a price of $0.9 per dozen cartridges. The company is interested in this offer because its own production of cartridges is at capacity.
Carvey Company estimates that if the supplier’s offer were accepted, the direct labor and variable manufacturing overhead costs of the pen line would be reduced by 20% and the direct materials cost would be reduced by 20%.
Under present operations, Carvey Company manufactures all of its own pens from start to finish. The pens are sold through wholesalers at $8 per box. Each box contains one dozen pens. Fixed manufacturing overhead costs charged to the pen line total $30,000 each year. (The same equipment and facilities are used to produce several pen lines.) The present cost of producing one dozen pens (one box) is given below:
* Includes both variable and fixed manufacturing overhead, based on production of 150,000 boxes of pens each year.
Calculate the total variable cost of producing one box of pens? (If the ink cartridge are produced internally.) (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
Calculate the total variable cost of producing one box of pens? (If the ink cartridge are purchased from the outside supplier.) (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
What is the maximum price that Carvey Company should be willing to pay the outside supplier per dozen cartridges? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
Due to the bankruptcy of a competitor, Carvey Company expects to sell 170,000 boxes of pens next year. As previously stated, the company presently has enough capacity to produce the cartridges for only 150,000 boxes of pens annually. By incurring $31,000 in added fixed cost each year, the company could expand its production of cartridges to satisfy the anticipated demand for pens. The variable cost per unit to produce the additional cartridges would be the same as at present.
Under these circumstances, how many boxes of cartridges should be purchased from the outside supplier and how many should be made by Carvey?
Compute the total relevant cost for the following alternatives. (Do not round intermediate calculations.Round your total variable cost per box to 2 decimal places.)
Carvey Company manufactures a variety of ballpoint pens. The company has just received an offer from an outside supplier to provide the ink cartridge for the company’s pen line, at a price of $0.9 per dozen cartridges. The company is interested in this offer because its own production of cartridges is at capacity.
Carvey Company estimates that if the supplier’s offer were accepted, the direct labor and variable manufacturing overhead costs of the pen line would be reduced by 20% and the direct materials cost would be reduced by 20%.
Under present operations, Carvey Company manufactures all of its own pens from start to finish. The pens are sold through wholesalers at $8 per box. Each box contains one dozen pens. Fixed manufacturing overhead costs charged to the pen line total $30,000 each year. (The same equipment and facilities are used to produce several pen lines.) The present cost of producing one dozen pens (one box) is given below:
Explanation / Answer
1.a) Total variable cost of producing one box of pens? (If the ink cartridge are produced internally) = $4.1.
Calculation given below:
1-b) Total variable cost of producing one box of pens? (If the ink cartridge are purchased from the outside supplier)
=$3.28 (4.1*0.8 20% being the savings in variable costs) + 0.9 (cost of ink cartridges purchased from outside) = 4.18.
1-c) Should the Carvery company accept the outside supplier's offer ?
No. The reason is that it increases the variable cost of one box of pens by $0.08. Further there wont be any savings in fixed mfg overheads.
2) Maximum price that Carvey Company should be willing to pay the outside supplier per dozen cartridges is $0.82.
$0.82 is the savings per box of pens that can be obtained by buying the cartridges from outside.
3-a) If the supplier is not willing to reduce the cost of the cartridges from $0.9 per dozen, then maximum possible production should be internal and the rest should be from ouside sources. Hence, 150000 cartridges should be made internally and 20000 cartridges should be outsourced.
3-b) Relevant cost for all the alternatives (for manufacture of 170000 boxes). Relevant cost is the total variable cost + additional fixed costs.
Purchase all cartridges externally = 4.18*170000 + 0 = $710,600
Produce the cartridges as per 3 -a = 150000*4.1 + 20000*4.18 + 0 = 698600
Produce all cartridges internally = 4.1*170000 + 31000 = 728,000
C) The alternative of 3-a is beneficial, as the total relevant cost is minimum for it.
cost of producing 150,000 boxes: total cost unit cost direct materials 270000 1.8 direct labor 240000 1.6 variable mfg overhead 105000 0.7 fixed mfg overhead 30000 0.2 645000 4.3 total variable cost of one box = 1.8+1.6+.7 = $4.1Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.