Question

Curtis Corporation is beginning to manufacture Mighty Mint, a new mouthwash in a small spray container. The product will be sold to wholesalers and large drugstore chains in packages of 30 containers for each $20 per package. Management allocates $225,000 of fixed manufacturing overhead costs to Mighty Mint. The manufacturing cost per package of 30 containers for expected production of 200,000 packages is as follows:

Direct material	$ 8.00
Direct labor	5.00
Overhead ($2.25 fixed and $1.25 variable)	3.50
Total	$15.00

The company has contacted a number of packaging suppliers to determine whether it is better to buy or manufacture the spray containers. The lowest quote for the containers is $1.85 per 30 units. It is estimated that purchasing the containers from a supplier will save 10 percent of direct materials, 20 percent of direct labor, and 15 percent of variable overhead. Curtis's manufacturing space is highly constrained. By purchasing the spray containers, the company will not have to lease additional manufacturing space that is estimated to cost $17,000 per year. If the containers are purchased, one supervisory position can be eliminated. Salary plus benefits for this position are $80,000 per year. What is the incremental cost (benefit) of buying the containers as opposed to making them?

$124,500 net benefit.

$192,000 net benefit.

$27,500 net benefit.

Some other answer.

Answer 1

Solution:

Saving in Total Variable Costs if company Buy Spray containers from outside suppliers = 200,000* [(8*10%) + (5*20%)+ (1.25*15%)]

= 200,000* [0.80 + 1 + 0.1875]

= 200,000 * 1.9875

= $397,500

Saving in Fixed costs = $17000+ $80000 = $97,000

Purchse cost of 200,000 packages from outside supplier = 200,000 *$1.85 = $370,000

Now, incremental cost (benefit) of buying the containers as opposed to making them = Saving in Variable Costs + savin in Fixed Cost - Buying cost

= $397,500 + $97,000 - $370,000

= $124,500 net benefit

Hence, First option is correct.