Make-or-BuIncremental Analysis - Make or Buy Decision
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Incremental Analysis - Make or Buy Decision
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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 drugstores 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
Direct materials $7.50
Direct labor 4.00
Overhead (fixed and variable) 3.50
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 containers 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 of
direct labor, and 15 percent of variable overhead. Curtis's manufacturing
additional manufacturing space, which 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.