Bastion Company, a manufacturer of several types of ballpoint pens, has just received an offer from an outside supplier to provide the ink cartridge for the company’s Zappo pen line, at a price of $0.48 per dozen cartridges. The company is interested in this offer, since its own production of cartridges is at capacity.

Bastion Company estimates that if the supplier’s offer were accepted, the direct labour and variable manufacturing overhead costs of the Zappo pen line would be reduced by 10% and the direct materials cost would be reduced by 20%.

Under current operations, Bastion Company manufactures all of its own pens from start to finish. The Zappo pens are sold through wholesalers at $4 per box. Each box contains one dozen pens. Fixed manufacturing overhead costs charged to the Zappo 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 Zappo pens (one box) is given below:

Direct materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.50

Direct labour. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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.

Required:

1. Should Bastion Company accept the outside supplier’s offer? Show computations.

2. What is the maximum price that Bastion Company should be willing to pay the outside supplier per dozen cartridges? Explain.

3. Due to the bankruptcy of a competitor, Bastion Company expects to sell 150,000 boxes of Zappo pens next year. As stated above, the company has enough capacity to produce the cartridges for only 100,000 boxes of Zappo pens annually. By incurring $30,000 in added fixed cost each year, the company could expand its production of cartridges to satisfy the anticipated demand for Zappo pens. The variable cost per unit to produce the additional cartridges would be the same as at present. Under these circumstances, how many boxes of cartridges should be purchased from the outside supplier and how many should be made by Bastion? Show computations to support your answer.

4. What qualitative factors should Bastion Company consider in determining whether it should make or buy the ink cartridges?