29 Jun Question 6-A1
Question
6-A1
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 $112,000
Labor 20,000
Indirect manufacturing cost
Variable 16,000
Fixed 60,000
Total $208,000
Therefore, the cost per box averages $2.60
Suppose Weyerhauser submits a bid to supply Sunshine State with boxes for $2.10 per box. Sunshine State must give Weyerhauser 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 for Weyerhauser?
2. What subjective factors should affect Sunshine State’s decision about 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 Weyerhauser?
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