Curtis Corporation is beginning to manufacture Mighty Mint, a new mouthwash in a

Question

Curtis Corporation is beginning to manufacture Mighty Mint, a new mouthwash in a small spray container. The product will be sold to wholesalers and large drugstore chains in packages of 30 containers for $20 per package. Management allocates $225,000 of fixed manufacturing overhead costs to Mighty Mint. The manufacturing cost per package of 30 containers for expected production of 100,000 packages is as follows:

Direct material $7.50 Direct labor $4.00 Overhead (fixed & variable) $3.50 Total $15.00

The company has contacted a number of packaging suppliers to determine whether it is better to buy or manufacture the spray containers. The lowest quote for the container is $1.85 per 30 units. It is estimated that purchasing the containers from a supplier will save 10 percent of direct materials, 20 percent direct labor, and 15 percent of variable overhead. Curtis's manufacturing space is highly constrained. By purchasing the spray containers, the company will not have to lease additional manufacturing space that is estimated to cost $17,000 per year. If the containers are purchased, one supervisory position can be eliminated. Salary plus benefits for this position are $72,000 per year.

Ques: Should Curtis make or buy the containers? What is the incremental cost (benefit) of buying the containers as opposed to making them?

Explanation / Answer

The company should buy the packets as the saving is more than the cost to buy the container.

Saving per packet is 2.63 which is greater than $1.85 which is the cost to buy the container

Savings Direct material 7.5 10% 0.75 Direct Labor 4 20% 0.8 Overhead fixed 2.25 Overhead variable 1.25 15% 0.1875 Total saving on 100,000 packets 1.7375          173,750 Cost saving on manufacturing space            17,000 Salary saved            72,000 Total saving          262,750 Total saving per packet                 2.63

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