Carvey Company manufactures a variety of ballpoint pens. The company has just received an offer from an outside supplier to provide the ink cartridge for the companys pen line, at a price of $0.8 per dozen cartridges. The company is interested in this offer because its own production of cartridges is at capacity.

Carvey Company estimates that if the suppliers offer were accepted, the direct labor and variable manufacturing overhead costs of the pen line would be reduced by 20% and the direct materials cost would be reduced by 20%.

Under present operations, Carvey Company manufactures all of its own pens from start to finish. The pens are sold through wholesalers at $5 per box. Each box contains one dozen pens. Fixed manufacturing overhead costs charged to the pen line total $15,000 each year. (The same equipment and facilities are used to produce several pen lines.) The present cost of producing one dozen pens (one box) is given below:

Direct materials $ 1.6

Direct labor 1.5

Manufacturing overhead .8 *

Total cost $ 3.90

* Includes both variable and fixed manufacturing overhead, based on production of 50,000 boxes of pens each year.

Required:

1a. Calculate the total variable cost of producing one box of pens? (If the ink cartridge are produced internally.)

1b. Calculate the total variable cost of producing one box of pens? (If the ink cartridge are purchased from the outside supplier.)

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

3. Due to the bankruptcy of a competitor, Carvey Company expects to sell 90,000 boxes of pens next year. As previously stated, the company presently has enough capacity to produce the cartridges for only 50,000 boxes of pens annually. By incurring $16,000 in added fixed cost each year, the company could expand its production of cartridges to satisfy the anticipated demand for pens. The variable cost per unit to produce the additional cartridges would be the same as at present.

a. Under these circumstances, how many boxes of cartridges should be purchased from the outside supplier and how many should be made by Carvey?

Number of Boxes Made: _____

Number of Boxes Purchased: ____

b. Compute the total relevant cost for the following alternatives.

Produce all cartridges internally: ____

Produce all cartridges externally: ____

Produce the cartridges as per 3a. above: ____