Carvey Company manufactures a variety of ballpoint pens. The company has just re
ID: 2483154 • 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 $0.8 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 $5 per box. Each box contains one dozen pens. Fixed manufacturing overhead costs charged to the pen line total $15,000 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 50,000 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 90,000 boxes of pens next year. As previously stated, the company presently has enough capacity to produce the cartridges for only 50,000 boxes of pens annually. By incurring $16,000 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 $0.8 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 $5 per box. Each box contains one dozen pens. Fixed manufacturing overhead costs charged to the pen line total $15,000 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
1a.
Calculate the total variable cost of producing one box of pens? (If the ink cartridge are produced internally.)
Answer
The fixed overhead costs are common and will remain the same regardless of whether the cartridges are produced internally or purchased outside. Hence, they are not relevant. The variable manufacturing overhead cost per box of pens is $0.50, as shown below:
Total manufacturing overhead cost per box of pens..............................
$0.80
Less fixed manufacturing overhead ($15,000 ÷ 50,000 boxes)............
0.30
Variable manufacturing overhead cost per box......................................
$0.50
The total variable cost of producing one box of Zippo pens is:
Direct materials.....................................................................................
$1.60
Direct labor...........................................................................................
1.50
Variable manufacturing overhead..........................................................
0.50
Total variable cost per box....................................................................
$3.60
1b
If the cartridges for the Carvey pens are purchased from the outside supplier, then the variable cost per box of Carvey pens would be:
Direct materials ($1.60 × 80%).............................................................
$1.28
Direct labor ($1.50 × 80%)...................................................................
1.20
Variable manufacturing overhead ($0.50 × 80%)..................................
0.40
0Purchase of cartridges.........................................................................
0.80
Total variable cost per box....................................................................
$3.68
1c Should Carvey Company accept the outside supplier’s offer?
Answer
The company should reject the outside supplier’s offer. Producing the cartridges internally costs $0.08 less per box of pens than purchasing them from the supplier.
Cost avoided by purchasing the cartridges:
Direct materials ($1.60 × 20%).........................................................
$0.32
Direct labor ($1.50 × 20%)...............................................................
0.30
Variable manufacturing overhead ($0.50 × 20%)..............................
0.10
Total costs avoided............................................................................
$0.72
Cost of purchasing the cartridges..........................................................
$0.80
Cost savings per box by making cartridges internally...........................
$0.08
Note that the avoidable cost of $0.72 above represents the cost of making one box of cartridges internally.
2.
What is the maximum price that Carvey Company should be willing to pay the outside supplier per dozen cartridges?
Answer
The company would not want to pay any more than $0.72 per box, since it can make the cartridges for this amount internally
. The company has three alternatives for obtaining the necessary cartridges. It can:
#1
Produce all cartridges internally.
#2
Purchase all cartridges externally.
#3
Produce the cartridges for 50,000 boxes internally and purchase the cartridges for 15,000 boxes externally.
The costs under the three alternatives are:
Alternative #1—Produce all cartridges internally:
Variable costs (50,000 boxes × $0.72 per box).......................................
$36,000
Fixed costs of adding capacity.................................................................
16,000
Total cost.................................................................................................
$52,000
Alternative #2—Purchase all cartridges externally:
Variable costs (50,000 boxes × $0.80 per box).......................................
$40,000
Alternative #3—Produce 50,000 boxes internally, and purchase 15,000 boxes externally:
Variable costs:
50,000 boxes × $0.72 per box........................................................
$36,000
15,000 boxes × $0.80 per box........................................................
12,000
Total cost..............................................................................................
$48,000
Or, in terms of total cost per box of pens, the answer would be:
Alternative #1—Produce all cartridges internally:
Variable costs (50,000 boxes × $3.60 per box).......................................
$180,000
Fixed costs of adding capacity.................................................................
16,000
Total cost.................................................................................................
$196,000
Alternative #2—Purchase all cartridges externally:
Variable costs (50,000 boxes × $3.68 per box).......................................
$184,000
Alternative #3—Produce the cartridges for 50,000 boxes internally, and purchase the cartridges for 15,000 boxes externally:
Variable costs:
50,000 boxes × $3.60 per box........................................................
$180,000
15,000 boxes × $3.68 per box........................................................
55,200
Total cost..............................................................................................
$235,200
Thus, the company should accept the outside supplier’s offer, but only for the cartridges for 50,000 boxes.
4. In addition to cost considerations, Bronson should take into account the following factors:
a) The ability of the supplier to meet required delivery schedules.
b) The quality of the cartridges purchased from the supplier.
c) Alternative uses of the capacity that is used to make the cartridges.
d) The ability of the supplier to supply cartridges if volume increases in future years.
e) The problem of alternative sources of supply if the supplier proves undependable.
Total manufacturing overhead cost per box of pens..............................
$0.80
Less fixed manufacturing overhead ($15,000 ÷ 50,000 boxes)............
0.30
Variable manufacturing overhead cost per box......................................
$0.50
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