Boston Beer Company prints the labels for all of its beer bottles. Boston Beer\'

Question

Boston Beer Company prints the labels for all of its beer bottles. Boston Beer's costs to produce 1,000,000 labels annually are:

Direct materials...........................

$30,000

Direct labor..................................

$50,000

Variable overhead.......................

$20,000

Fixed overhead.............................

$70,000

An outside supplier has offered to print Boston Beer’s labels for 13 cents per label. If the labels are purchased from the outside supplier, $15,000 of annual fixed overhead could be avoided and the space now being used for printing could be rented to another company for $45,000 per year.

What is the change in net annual operating income if Boston Beer chooses to buy the labels from the outside supplier and rents the available space? Should Boston Beer proceed with this offer? (Ignore the impact of selling any of Boston’s printing equipment.)

Direct materials...........................

$30,000

Direct labor..................................

$50,000

Variable overhead.......................

$20,000

Fixed overhead.............................

$70,000

Explanation / Answer

Relavent costs to produce = Direct materials + Direct labour + Variable overhead + Avoidable fixed overhead + Opportunity cost of lost rent

= 30,000 + 50,000 + 20,000 + 15,000 + 45,000

= 160,000

Relavent cost to buy = 1,000,000 * 0.13 = 130,000

Change in net annual operating income if Boston Beer chooses to buy the labels from the outside supplier and rents the available space = 160,000 - 130,000 = 30,000

Should Boston Beer proceed with this offer? - Yes

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