Mr. Saurons company in Dol Guldur 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 Nenya pen line, at a price of $0.48 per dozen cartridges. The company is interested in investigating whether this offer is worth pursuing. Mr. Sauron estimates that if the suppliers offer were accepted, the variable direct labor and variable manufacturing overhead costs of the Nenya pen line would be reduced by 10% and the direct materials cost would be reduced by 20%. Under present operations, Mr. Sauron manufactures all of its own pens from start to finish. The Nenya pens are sold through wholesalers at $5 per box. Each box contains one dozen pens. Fixed manufacturing overhead costs allocated to the Nenya pen line total $50,000 each year. (The same equipment and facilities are used to produce several pen lines.) The present cost of producing one dozen Nenya pens (one box) is given below: Direct materials $1.50 Direct labor 1.00 Manufacturing overhead 0.80* Total cost $3.30 *Includes both variable and fixed manufacturing overhead, based on production of 100,000 boxes of pens each year. REQUIRED: 1. Should Mr. Sauron accept the outside suppliers offer for the cartridges? Show computations. 2. What is the maximum price that Mr. Sauron should be willing to pay the outside supplier per dozen cartridges? Explain.

3. Assume for part 3 alone that the company has decided to revise the selling price per box of Nenya pens. The company has decided to now use a 50% markup on full production cost to determine the selling price. What will be the new selling price per box of Nenya pens?

4. Go back to the original data for the Nenya pens and ignore the issue with outsourcing and part 3 above. Assume the company is also producing Vilya pens with the following cost structure per dozen pens (BOX):

Direct Materials 0.50

Direct Labor 2.00

Manufacturing OH 0.60 (allocated based on 100,000 boxes per year)

Total cost $3.10

Fixed MOH costs allocated to the Vilya pen line also total $50,000 per year and the selling price for Vilya pens per box is also $5.00 (same as Nenya). Labor hours are a scarce resource and the company wishes to maximize the total contribution margin. Assuming that labor costs are $12/ hour and that 1920 Hours are available per year, how many labor hours should be given to the Vilya pen line and how many to Nenya? The company can choose to produce as many units of either pen as it desires. Demand for the pens is not a constraint. Please provide calculations in support of your answer.

5. How would your answer to part (4) above change, if at all, if annual demand for the Nenya pens was15000 boxes and annual demand for the Vilya pens was 6000 boxes?