Chittagong Sisters manufactures sweaters. A label is attached with each sweater with printed information about the product. The costs to produce each label (based on a production volume of 400,000 units of sweaters per year) are:

Direct Material

Tk. 1.0

Direct Labor

Tk. 0.5

Variable MOH

Tk. 0.3

Fixed MOH

Tk. 1.5

Total

Tk. 3.3

• Fixed MOH includes Tk. 100,000 of depreciation on equipment for which there is no alternative use and no market value.
• Tk. 200,000 of the fixed MOH are allocated fixed costs that will continue even if production of the labels is discontinued.
• The production manager who currently oversees production of the labels has worked for the firm for 10 years and the firm has no intention of firing him even if production of the labels is stopped. The production manager draws a salary of Tk. 50,000 and will be reassigned to some other position in the firm.
• Tk. 250,000 of the fixed MOH identified as production cost of labels can be avoided if production of the labels is stopped.

Rangpur Corporation recently approached Chittagong Sisters with an offer to supply all required labels for Tk. 2.5 per unit. Expected sales demand for the coming year will require 400,000 labels for 400,000 units of sweaters.

Question 1: Suggest if Chittagong Sisters should continue making the labels or buy from Rangpur Corporation.

Question 2: If Chittagong Sisters decides to buy the label from Rangpur Corporation, the freed capacity can be used to produce handkerchiefs which will generate a net profit of Tk. 500,000. Suggest if Chittagong Sisters should continue making the labels or buy from Rangpur Corporation.