Question

A1 Vineyard 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 60,000 boxes is as follows:
Materials .......... $ 96,000
Labor ............ 12,000
Indirect manufacturing costs
Variable ........... 9,600
Fixed ........... 46,800
Total ........... $164,400

Therefore, the cost per box averages $2.74.
Suppose Weyerhaeuser submits a bid to supply Vineyard with boxes for $2.24 per box.
Vineyard must give Weyerhaeuser the box design specifications, and the boxes will be made according to those specs.
1. How much, if any, would Vineyard save by buying the boxes from Weyerhaeuser?
2. What subjective factors should affect Vineyard’s decision about whether to make or buy the boxes?
3. Suppose all the fixed costs represent depreciation on equipment that was purchased for $234,000 and is just about at the end of its 5-year life. New replacement equipment will cost $375,000 and is also expected to last 5 years. In this case, how much, if any, would Vineyard save by buying the boxes from Weyerhaeuser?



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  • CreatedNovember 19, 2014
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