Blue INK manufactures a variety of ballpoint pens. The company has just received an offer from an outside supplier to provide the ink cartridge for the Cutter pen line, at a price of $0.48 per dozen cartridges. The company is interested in this offer because its own production of cartridges is at capacity.
Blue INK estimates that if the supplier’s offer were accepted; the direct labor and variable manufacturing overhead costs of the Cutter pen line would be reduced by 10% and the direct materials cost would be reduced by 40%.
Under present operations, Blue INK manufacturers all of its own pens from start to finish. The Cutter pens are sold through wholesalers at $4 per box. Each box contains one dozen pens. Fixed manufacturing costs charged to the Cutter pen line total $50,000 each year. (The same equipment and facilities are used to produce several pen lines.)
The present cost of producing one dozen Cutter pens (one box) is given below:
Direct labor 1.00
Manufacturing overhead 0.80*
Total cost $3.30
*Includes both variable and fixed manufacturing overhead, based on production of 100,000 boxes of pens each year.
a)Should Blue INK accept the outside supplier’s offer? Show computations.
b)What is the maximum price that Blue INK should be willing to pay the outside supplier per dozen cartridges? Explain.
c)What qualitative factors should Blue INK consider in determining whether it should make or buy the ink cartridges?