Computing the Advantage to Making or Buying
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Make-or-Buy Decision
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 $19 per package. Management allocates $260,000 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 $7.00
Direct labor 4.50
Overhead (fixed and variable) 5.00
Total $16.50
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 $1.75 per 30 units. It is estimated that purchasing the containers from a supplier will save 15 percent of direct materials, 20 percent of 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 $16,000 per year. If the containers are purchased, one supervisory position can be eliminated. Salary plus benefits for this position are $71,000 per year.
Required
Should Curtis make or buy the containers? What is the incremental cost (benefit) of buying the containers as opposed to making them?
Make or buy Buy is my option.
Incremental cost (benefit) $
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Solution Summary
Given a product's fixed and variable costs under make and buy scenarios, this solution illustrates how to decide which course of action to take using an Excel 97-2003 spreadsheet.
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