appendix 4

Appendix Four (Make or Buy packaging boxes) Objective: Since the demand for packaging material will be high, CC is exploring the possibility of buying the packaging materials from an outside supplier or buying an equipment to produce them Inhouse. Scenario: A new printing and fabrication equipment can be bought for $2,000,000. The equipment would have a five-year useful life and $ 500,000 salvage value. Alternately, an outside supplier has offered to supply the package material at $ 100 per skid under a five-year contract. The cost card for the packaging material is as under for the current level of activity of 40,000 skids Item Direct materlals Direct labour Overhead Amount $ 35.00 $ 40.00 $ 45.00 $ 120.00 Total cost per unit Breakdown of overhead cost is as under: Supplies Supervision Depreciation General Overhead $ 6.00 18.00 9.00 22.00 Supervision is directly traceable to manufacturing activity. The new equipment would reduce direct labour and variable overhead by 2596. Supervision cost and direct materials would not be affected by the installation of the new equipment. General overhead will remain unaffected and there is no opportunity cost for the space currently available. Methodology The group would analyze the net advantage or disadvantage of buying the equipment. WMM has internal funds to buy the equipment and would not need to borrow