Carvey Company manufactures a variety of ballpoint pens. The company has just re
ID: 2582440 • 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:
Direct materials $ 1.6
Direct labor 1.5
Manufacturing overhead .8 *
Total cost $ 3.90
* Includes both variable and fixed manufacturing overhead, based on production of 50,000 boxes of pens each year.
Required:
1a. Calculate the total variable cost of producing one box of pens? (If the ink cartridge are produced internally.)
1b. Calculate the total variable cost of producing one box of pens? (If the ink cartridge are purchased from the outside supplier.)
2. What is the maximum price that Carvey Company should be willing to pay the outside supplier per dozen cartridges?
3. 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.
a. Under these circumstances, how many boxes of cartridges should be purchased from the outside supplier and how many should be made by Carvey?
Number of Boxes Made: _____
Number of Boxes Purchased: ____
b. Compute the total relevant cost for the following alternatives.
Produce all cartridges internally: ____
Produce all cartridges externally: ____
Produce the cartridges as per 3a. above: ____
Explanation / Answer
Particulars Cost of Making Buying Total manufacturing overhead cost per box of pens 0.8 Less fixed manufacturing overhead ($15,000 ÷ 50,000 boxes) 0.3 Variable manufacturing cost per box 0.5 The total variable cost of producing one box of company's pen line Direct Material 1.6 1.28 (1.6*0.8) Direct Labor 1.5 1.2 (1.5*0.8) Variable Manufacturing overhead 0.5 0.4 (0.4*0.8) Purchase of cartridges 0 0.8 Total Variable cost per box 3.6 3.68 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 2 The company would not want to pay any more than $0.72 per box, since it can make the cartridges for this amount internally 3 Alt 1 making Variable costs (90000*0.72) 64800 Fixed costs of adding capacity 16000 total Cost 80800 Alt 2 buying Variable costs (90000*0.8) 72000 Alt 3 Produce 50,000 boxes internally, and purchase 40,000 boxes externally 50000*.72 36000 40000*.8 32000 total Cost 68000 Interms of total cost Variable costs (90000*3.6) 324000 Fixed costs of adding capacity 16000 total Cost 340000 Alt 2 buying Variable costs (90000*3.68) 331200 Alt 3 Produce 50,000 boxes internally, and purchase 40,000 boxes externally 50000*3.6 180000 40000*3.68 147200 total Cost 327200 Thus, the company should accept the outside supplier’s offer, but only for 40,000 boxes of cartridges
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