Bronson Company manufactures a variety of ballpoint pens. The company has just r
ID: 2493956 • Letter: B
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 $0.52 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 offer were 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 $56,000 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 $1.10 1.20 0.60 Total cost $2.90 Includes both variable and fixed manufacturing overhead based on production of 140,000 boxes of pens each year Required a. Calculate the total variable cost of producing one box of Zippo pens? (Do not round intermediate calculations Round your answer to 2 decimal places. Omit the "$ sign in your response.) Total relevant variable cost per box b. 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 boxExplanation / Answer
Answer:1a
The fixed overhead costs are common and will remain the same regardless of whether the cartridges are produced internally or purchased outside. Hence, they are not relevant. The variable manufacturing overhead cost per box of pens is $0.20, as shown below:
Total manufacturing overhead cost per box of pens..............................
$0.60
Less fixed manufacturing overhead ($56,000 ÷ 140,000 boxes)..........
0.40
Variable manufacturing overhead cost per box.....................................
$0.20
The total variable cost of producing one box of Zippo pens is:
Direct materials.....................................................................................
$1.10
Direct labor...........................................................................................
1.20
Variable manufacturing overhead.........................................................
0.20
Total variable cost per box....................................................................
$2.50
Answer:1b
If the cartridges for the Zippo pens are purchased from the outside supplier, then the variable cost per box of Zippo pens would be:
Direct materials ($1.10 × 80%).............................................................
$0.88
Direct labor ($1.20 × 90%)...................................................................
1.08
Variable manufacturing overhead ($0.20 × 90%).................................
0.18
Purchase of cartridges...........................................................................
0.52
Total variable cost per box....................................................................
$2.66
Answer:1c
The company should reject the outside supplier’s offer. Producing the cartridges internally costs $0.16 less per box of pens than purchasing them from the supplier.
Answer:2
The company would not want to pay any more than $0.36 per box, since it can make the cartridges for this amount internally.
Answer:3 (a)
The company has three alternatives for obtaining the necessary cartridges. It can:
#1
Produce all cartridges internally.
#2
Purchase all cartridges externally.
#3
Produce the cartridges for 140,000 boxes internally and purchase the cartridges for 50,000 boxes externally.
Answer:3 b
Alternative #1—Produce all cartridges internally:
Variable costs (190,000 boxes × $0.36 per box).....................................
$68400
Fixed costs of adding capacity................................................................
38,000
Total cost.................................................................................................
$106400
Alternative #2—Purchase all cartridges externally:
Variable costs (190,000 boxes × $0.52 per box).....................................
$98800
Alternative #3—Produce 140,000 boxes internally, and purchase 50,000 boxes externally:
Variable costs:
140,000 boxes × $0.36 per box......................................................
$50400
50,000 boxes × $0.52 per box........................................................
26,000
Total cost.............................................................................................
$76400
Answer:3c Produce 140,000 boxes internally, and purchase 50,000 boxes externally:
Total manufacturing overhead cost per box of pens..............................
$0.60
Less fixed manufacturing overhead ($56,000 ÷ 140,000 boxes)..........
0.40
Variable manufacturing overhead cost per box.....................................
$0.20
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