Make vs$.$ Buy

Example $1$:

Heritage 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 Zebra pen line, at a

price of $$1\mathrm{.}25$ per box of cartridges. The company is interested in this offer because its own

production of cartridges is at capacity. The company estimates that if the supplier's offer were

accepted, the direct labor and variable manufacturing overhead costs of the Zebra pen line would

be reduced by $20\%$ and the direct materials cost would be reduced by $40\%.$

Under present operations, Heritage Company manufactures all its pens from start to finish. The

Zebra pens are sold through wholesalers at $$5$ per box. Fixed manufacturing overhead costs

charged to the Zebra pen line total $$75,000$ each year and will remain regardless of outsourcing

$($The same equipment and facilities are used to produce several pen lines.$)$ The present cost of

producing one box of Zebra pens is given below:

$*$Contains both fixed and variable overhead based on the production of $100,000$ boxes of pens

per year.

Construct an incremental analysis of whether the company should make or buy the ink

cartridge using an Excel worksheet.

What is the maximum price that Heritage Company should pay an outside supplier for pen

cartridges? Please explain.