Question

Bronson 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 Zippo pen line, at a price of $0.58 per dozen cartridges. The company is interested in this offer because its own production of cartridges is at capacity Bronson Company estimates that if the supplier's offerwere accepted, the direct labor and variable manufacturing overhead costs of the Zippo pen line would be reduced by 10% and the direct materials cost would be reduced by 20% Under present operations, Bronson Company manufactures all of its own pens from start to finish. The Zippo pens are sold through wholesalers at $7 per box. Each box contains one dozen pens. Fixed manufacturing overhead costs charged to the Zippo pen line total $70,000 each year. (The same equipment and facilities are used to produce several pen lines.) The present cost of producing one dozen Zippo pens one box) is given below Direct materials Direct labor Manufacturing overhead $1.40 1.10 0.70 Total cost S3.20 Includes both variable and fixed manufacturing overhead, based on production of 140,000 boxes of pens each year Required: 1a. Calculate the total variable cost of producing one box of Zippo pens? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.) Total relevant variable cost per box 1b. Calculate the total variable cost of purchasing one box of Zippo pens? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.) Total relevant variable cost per box 3.10 1c. Should Bronson Company accept the outside supplier's offer? No O Yes 2. What is the maximum price that Bronson Company should be willing to pay the outside supplier per dozen cartridges? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "S" sign in your response.) Maximum price 0.46 per box 3. Due to the bankruptcy of a competitor, Bronson Company expects to sell 190,000 boxes of Zippo pens next year. As previously stated, the company presently has enough capacity to produce the cartridges for only 140,000 boxes of Zippo pens annually. By incurring $39,000 in added fixed cost each year, the company could expand its production of cartridges to satisfy the anticipated demand for Zippo pens. The variable cost per unit to produce the additional cartridges would be the same as at present. a. Under these circumstances, how many boxes of cartridges should be purchased from the outside supplier and how many should be made by Bronson? Number of boxes made Number of boxes purchased b. Compute total cost for the following alternatives. (Do not round intermediate calculations. Round your total variable cost per box to 2 decimal places. Omit the "$" sign in your response.) Produce all cartridges internally Purchase all cartridges externally Produce the cartridges as per 3a above S 126,400 si 110.200 95,000 C. Which alternative is beneficial? O Purchase all cartridges externally Produce the cartridges as per 3a above. Produce all cartridges internally

Answer 1

1a
Total Variable cost of one box
Total Manufacturing overhead cost per box	0.7
Less: Fixed manufacturing overhead	0.5	70000/140000
Variable manufacturing overhead	0.2
Fixed overhead will remain even if purchased from outside
Total variable cost
Direct material	1.4
Labour	1.1
Variable overhead	0.2
Total Variable cost per box	2.7
1b
Variable cost of purchasing one box
Material   1.40*80%	1.44
Labour      1.10*90%	0.99
Overhead 0.2*90%	0.18
Purchase of cartridges	0.58
Total variable cost per box	3.19
1c
No company should not accept the offer as variable cost is more under second option
2
Total cost reduced now,
Material   1.40*20%	0.36
Labour      1.10*10%	0.11
Overhead 0.2*10%	0.02
Total cost avoided	0.49
the company would pay maximum 0.49.
3
If all produced internally
Total cost (190000*2.7)	513000
Additional Fixed cost	39000
	552000
If all purchased externally
Total cost (190000*3.19)	606100
if 140000 internally and 50000 externally
Variable cost of 140000 = 140000*2.7	378000
Variable cost of 50000 = 50000*3.19	159500
	537500
so last option is best., to buy only extra 50000 boxes externally.
3a
Boxes made	140000
Boxes purchased	50000
3b
Produce all internally	552000
Produce all externally	606100
as per 3a above	537500
c. option second, as per 3a