1. (20 pts) Sunshine Fruit Co. makes its own shipping boxes. The annual cost to
ID: 2600344 • Letter: 1
Question
1. (20 pts) Sunshine Fruit Co. makes its own shipping boxes. The annual cost to make 80,000 boxes is: Materials Labor Indirect Manufacturing Costs $120,000 20,000 Variable Fixed 16,000 60,000 $216,000 Total Suppose Weyerhouser offers to sell them boxes for $2.10 per box Given the above, should Sunshine Fruit make or buy the boxes? Suppose that all the above fixed costs are depreciation for equipment which is at the end of its 10-year life and was purchased for S600,000. New replacement equipment will cost S800,000 and have a 10-year life also. Will this fact make a difference for the make or buy decision? a) b)Explanation / Answer
Solution a:
Variable cost of 80000 boxes = $120,000 + $20,000 + $16,000 = $156,000
Fixed Cost = $60,000
Variable cost per unit = $156,000 / 80000 = $1.95 per box
Sunshine fruit com is having offer to buy box at $2.10 per box. If buy decesion will be taken then company has to incur fixed cost as same is unavoidable. Therefore buy decesion will attract excess cost of $0.15 ($2.10 - $1.95) per box. Therefore sunshine fruit should make the boxes.
Solution b:
As all fixed cost is just a depreciation cost of equipment which is its 10 years end lift. Therefore if Sunshine company choose to buy the boxes then it can avoid fixed cost as no need to replace equipment at a cost of $800,000.
Therefore cost per box in buy model = $2.10 per box
Cost per box in make model = [($80000*1.95) + $80,000 (Depreciation)]/80000 = $2.95 per box
Therefore company should buy the boxes.
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