Amir Company manufactures a variety of ball-point pens. The company has just received an offer from an outside supplier to provide the ink cartridge for the company's Zippo pen line at a price of $3.84 per box of a dozen cartridges. The company is interested in this offer, since its own production of cartridges is at capacity. Amir estimates that if the suppliers offer were accepted, all current variable costs will be reduced by 15%.

Under present conditions, Amir manufactures all of its own pens from start to finish. The Zippo pens are sold through wholesalers at $56 per box. Each box contains one dozen pens. Fixed overhead costs charged to the Zippo pen total $400,000. The present cost of producing one dozen Zippo pens (one box) based on a production level of 100,000 boxes is given below:

Direct Material$12.00

Direct Labor 8.00

Total Overhead 6.40

Total $26.40

Required:

Should the Amir Company accept the outside supplier's offer? (Assume production levels are expected to be maintained at 100,000 boxes of pens.)

What is the maximum price that Amir would be willing to pay the outside supplier per dozen cartridges? What qualitative factors should Amir consider in determining whether they should make or buy the cartridges?