Hahn Enterprises, which produces and sells to wholesalers a very successful line of skiwear, has decided to diversify its product line. It is considering the production of sunscreen that will be sold in small plastic tubes. The sunscreen will be sold to wholesalers in boxes of 100 tubes for $ 10 per box. Due to available capacity, no additional facility-sustaining costs will be incurred to manufacture the sunscreen; however, $ 200,000 of facility-sustaining overhead will be allocated to the new product line. Hahn estimates that production and sales of sunscreen will be 200,000 boxes during the first year and that 1,000 production runs costing $ 100 each will be required. The estimated cost per box is as follows:
Direct labor ........................................................ $ 2.00
Direct materials .................................................. 3.50
Total overhead .................................................... 2.25
Total unit cost ..................................................... $ 7.75
As an alternative, Hahn is discussing the possibility of purchasing the plastic tubes for the sunscreen from an outside supplier. The purchase price of the empty tubes will be $ 1.60 per box of 100 tubes. If Hahn purchases the tubes, it is estimated that direct labor, direct materials, and unit-related overhead will decrease by 25, 60, and 20 percent, respectively. (Hint: Total overhead per unit is $ 2.25 if and only if 200,000 boxes are produced. Divide overhead into its facility-sustaining, batch-related, and unit-related components.)
Required
A. What is the relevant cost of the make alternative?
B. What is the relevant cost of the buy alternative?
C. Should Hahn make or buy the tubes?
D. If the supplier raises the price of the tubes to $ 3.00 per box, should Hahn make or buy the tubes?
E. Refer to part D. If Hahn can rent the space needed for producing tubes to another company for $ 60,000, should it make or buy the tubes?
F. What factors other than cost should Hahn consider before making this decision?