Question

Green and White packages small LED lights for plane instrument panels. Cost data for this packaging process are as follows:  

		Unit Cost
Packaging materials (e.g., boxes, bubble-wrap)		$2.107
Packaging direct labor		$0.612
Indirect materials (e.g., tape, labels)		$0.441
Packaging supervision (variable)		$0.355
Other fixed manufacturing overhead (given the number of units in the contract)		$1.338
Total packaging cost		$4.854

An outside supplier has offered to do all the packaging for a price of $4 per unit for all packaging-related activities if Green and White signs a one-year contract for a minimum of 151,300 units produced each year. Green and White could use the factory space now occupied by the packaging process to expand production to another product line. This expansion is expected to generate an additional $150,000 in profit per year.  

3. Make or Buy: What are the total relevant costs of continuing to package the products internally; that is, which of the annual costs is avoidable if Green and White outsources the packaging process? (1 point)

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4. Make or Buy: What is the relevant cost of outsourcing the packaging process considering the profit from expanding production of another product? (1 point)

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Answer 1

3. Total packing cost is $4.854 out of which $1.338 is Other fixed manufacturing overhead, which will incur even if we outsource the packing because it is fixed overhead.

So Total Relevant cost of the Packing is (4.854-1.338) = 3.516

4. If we do packaging Internally our total relevant cost for 151,300 units will be (151300*3.516) = 531,970.

If we outsource the Packaging our total cost will be (151,300*4) = 605,200.

There will be saving of $150,000 per year if we outsource.

So our relevant cost of Outsourcing will be (605,200 - 150,000) = 455,200