# Make or Buy, Sunshine State Fruit Company, Choice of Product

6-A1, 6-A2, 6-A3, and 6-B3

6-A1 Make or Buy

Sunshine State Fruit Company sells premium-quality oranges and other citrus fruits by mail order. Protecting the fruit during shipping is important so the company has designed and produces shipping boxes. The annual cost to make 80,000 boxes is

Materials 120,000

Labor 20,000

Indirect manufacturing costs

Variable 16,000

Fixed 60,000

Total 216,000

Therefore, the cost per box averages $2.70.

Suppose Weyerhaeuser submits a bid to supply Sunshine State with boxes for $2.10 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 costs represent depreciation on equipment that was purchased for $600,000 and is just about at the end of its 10-year life. New replacement equipment will cost $800,000 and is also expected to last 10 years. In this case, how much, if any, would Sunshine State save by buying the boxes from Weyerhaeuser?

6-A2 Choice of Products

The Ibunez Tool Company has two products: a plain circular saw and a professional circular saw. The plain saw sells for $70 and has a variable cost of $50. The professional saw sells for $100 and has a variable cost of $70.

1. Compute contribution margins and contribution-margin ratios for plain and professional saws.

2. The demand is for more units than the company can produce. There are only 20,000 machine hours of manufacturing capacity available. Two plain saws can be produced in the same average time (1 hour) needed to produce one professional saw. Compute the total contribution margin for 20,000 hours for plain saws only and for professional saws only. Which product is the best use of machine hours?

3. Use two or three sentences to state the major lesson of this problem.

6-A3 Joint Products: Sell or Process Further

The Mussina Chemical Company produced three joint products at a joint cost of $117,000. These products were processed further and sold as follows.

Chemical Additional

Product Sales Processing Costs

A $230,000 $190,000

B 330,000 300,000

C 175,000 100,000

The company has had an opportunity to sell at split of directly to other processors. If that alternative had been selected, sales would have been A, $54,000; B, $32,000; and C, $54,000.

The company expects to operate at the same level of production and sales in the forthcoming year. Consider all the available information, and assume that all costs incurred after split off are variable.

1. Could the company increase operating income by altering its processing decisions? If so, what would be the expected overall operating income?

2. Which products should be processed further and which should be sold at split off?

6-B3 Dropping a Product Line

Hambley's Toy Store is on Regent Street in London. It has a magic department near the main door. Suppose that management is considering dropping the magic department, which has consistently shown an operating loss. The predicted income statements, in thousands of pounds, follow (for ease of analysis, only three product lines are shown):

General Electronic Magic

Total Merchandise Products Dep.

Sales 6,000 5,000 400 600

Variable expenses 4,090 3,500 200 390

Contribution margin 1,910(32%) 1,500(30%) 200(50%) 210(35%)

Fixed expenses

(compensation,

depreciation,

property taxes,

insurance, etc. 1,110 750 50 310

Operating income (loss) 800 750 150 (100)

The 310,000 of magic department fixed expenses include the compensation of employees of 100,000. These employees will be released if the magic department is abandoned. All of the magic department's equipment is fully depreciated, so none of the 310,000 pertains to such items. Furthermore, disposal values of equipment will be exactly offset by the costs of removal and remodeling.

If the magic department is dropped, the manager will use the vacated space for either more general merchandise or more electronic products. The expansion of general merchandise would not entail hiring any additional salaried help, but more electronic products would require an additional person at an annual cost of 25,000. The manager thinks that sales of general merchandise would increase by 300,000; electronic products, by 200,000. The manager's modest predictions are partially based on the fact that she thinks the magic department has helped lure customers to the store and, thus, improved overall sales. If the magic department is closed, that lure would be gone.

Should the magic department be closed? Explain, showing computations.

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#### Solution Preview

6-A1 Make or Buy

Sunshine State Fruit Company sells premium-quality oranges and other citrus fruits by mail order. Protecting the fruit during shipping is important so the company has designed and produces shipping boxes. The annual cost to make 80,000 boxes is

Materials 120,000

Labor 20,000

Indirect manufacturing costs

Variable 16,000

Fixed 60,000

Total 216,000

Therefore, the cost per box averages $2.70.

Suppose Weyerhaeuser submits a bid to supply Sunshine State with boxes for $2.10 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?

Total cost if buying from Weyerhaeuser = 80,000 x $2.10 = $168,000

Total amount save = $216,000 - $168,000 = $48,000

2. What subjective factors should affect Sunshine State's decision whether to make or buy the boxes?

Sunshine will have to consider if Weyerhaeuser would be able to supply the boxes according to the design and specs or not. In addition, will they use Sunshine State design for other customers?

3. Suppose all the fixed costs represent depreciation on equipment that was purchased for $600,000 and is just about at the end of its 10-year life. New replacement equipment will cost $800,000 and is also expected to last 10 years. In this case, how much, if any, would Sunshine State save by buying the boxes from Weyerhaeuser?

New depreciation cost = $800,000/10 years = $80,000

Materials 120,000

Labor 20,000

Indirect manufacturing costs

Variable 16,000

Fixed 80,000

Total 236,000

Total amount save = $236,000 - $168,000 = $68,000

6-A2 Choice of Products

The Ibunez Tool Company has two products: a plain circular saw and a professional circular ...

#### Solution Summary

This solution is comprised of a detailed explanation to answer how much, if any, would Sunshine State save by buying the boxes from Weyerhaeuser.