Problem

Structuring a Make-or-Buy Problem

Coed Scents, a national producer of young adult perfumes and colognes, needs to determine if it would be cheaper to produce 100,000 bottles of its most popular perfume, Two AM, for sale in its college town shops or to purchase them from an outside supplier for $25 each. Cost information on internal production includes the following:

Fixed overhead will continue whether Two AM is produced internally or externally. No additional costs of purchasing will be incurred beyond the purchase price.

Required:

1. What are the alternatives for Coed Scents?

2. List the relevant cost(s) of internal production and of external purchase.

3. Which alternative is more cost effective and by how much?

4. Now assume that Coed Scents internal audit team learned through a special data analytics project that intellectual property theft is a significant threat for outsourced production. The team estimates that if Coed Scents outsources its production, it will need to spend $350,000 to manage intellectual property theft of its Two AM brand by competitors operating in the country where the outsourced production occurs. Which alternative is more cost effective and by how much?

\begin{tabular}{lrc} & Total Cost & Unit Cost \\ \hline Direct materials & $2,000,000 & $20.00 \\ Direct labor & 350,000 & 3.50 \\ Variable manufacturing overhead & 150,000 & 1.50 \\ Variable marketing overhead & 250,000 & 2.50 \\ Fixed plant overhead & 300,000 & 3.00 \\ Total & $3,050,000 & $30.50 \\ \hline \end{tabular}