Carvey Company manufactures a variety of ballpoint pens. The company has just re

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 $0.60 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 10% 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 $4 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 givern 9 Direct materials Direct labor $1.3 1.10 0.60 Total cost $3.00 includes both variable and fixed manufact and fixed manufacturing overhead based on production of 100 000 boxes of pens

Explanation / Answer

Calculation of total variable cost of producing one box of pens (If the ink cartridge are produced internally)

Particulars

Amount

Direct materials

$1.30

Direct labour

$1.10

Manufacturing overheads variable
(0.60-(30,000 yearly fixed cost/100,000 units per year)

$0.30

Ans

Total variable cost

$2.70

Calculation of total variable cost of producing one box of pens (If the ink cartridge are produced from outside supplier)

Particulars

Amount

Direct materials (1.30*90%)

$1.17

Direct labour (1.10*80%)

$0.88

Cost of cartridge from outside

$0.60

Manufacturing overheads variable
(0.60-(30,000 yearly fixed cost/100,000 units per year) *90%

$0.27

Ans

Total variable cost

$2.92

Calculation of total variable cost of producing one box of pens (If the ink cartridge are produced internally)

Particulars

Amount

Direct materials

$1.30

Direct labour

$1.10

Manufacturing overheads variable
(0.60-(30,000 yearly fixed cost/100,000 units per year)

$0.30

Ans

Total variable cost

$2.70

Calculation of total variable cost of producing one box of pens (If the ink cartridge are produced from outside supplier)

Particulars

Amount

Direct materials (1.30*90%)

$1.17

Direct labour (1.10*80%)

$0.88

Cost of cartridge from outside

$0.60

Manufacturing overheads variable
(0.60-(30,000 yearly fixed cost/100,000 units per year) *90%

$0.27

Ans

Total variable cost

$2.92

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