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    Decision making :Make or buy

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    Sunshine State Fruit Company sells premium quality oranges and other citrus fruits by mail order. Protecting the fruit during shipping is important, so the comapany has designed and produces shipping boxes. The annual cost to make 80,000 boxes is:
    Materials $120,000
    Labor 20,000
    Indirect manufacturings costs:
    variable 16,000
    fixed 60000
    total 216,000

    Therefore, the cost per box averages $2.70
    Suppose Weyerhaeuser submits a bid to supply Sunshine State with boxes for $2.40 per box. Sunshine State must give Weyerhaeuser the box design specifications, and the boxes will be made according to those specs.

    1. How much, if any, would Sunshine State save by buying the boxes from Weyerhaeuser?
    2. What subjective factors should affect Sunshine State's decision whether to make or buy the boxes?
    3. Suppose all the fixed cost represent depreciation on equipment that was purchased for $600,000 and is just about at the end of its ten-year life. New replacement equipment will cost $1 million and is also expected to last ten years. In this case, how much, if any, would Sunshine State save by buying the boxes from Wyerhaeuser?

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    Solution Preview

    Part 1. In making the 80000 boxes next year following are the relevant items
    1. Materials $120,000
    2. Labor 20,000
    3. Indirect variable manufacturing cost 16,000
    4. Assuming fixed cost is material handling and setup cost 60000

    Therefore total relevant cost in making 80000 boxes = ...

    Solution Summary

    Solution contains analysis of the situation and calculation of savings.