QUESTION 2

Sunshine State Farm sells premium quality oranges and other citrus fruits by mail-order. Protecting the fruit during shipping is important, so the company has designed and produces shipping boxes. The annual cost of 80,000 boxes is:

	$
Materials	120,000
Labour	20,000
Overhead: Variable Fixed	16,000 60,000
Total	216,000

Therefore, the cost per box averages $2.70

Suppose Fresh Co. submits a bid to supply Sunshine State Farm with boxes for $2.40 per box. Sunshine State Farm must give Fresh Co. the box design specifications, and the boxes will be made according to those specs.

Required:

1. How much, if any, would Sunshine State Farm save by buying the boxes from Fresh Co.(5 marks)
2. What subjective factors should affect Sunshine States decision whether to make or buy the boxes? (4 marks)
3. Suppose all the fixed costs represent depreciation on equipment that was purchased for $600,000 and is just about at the end of its 10 year life. New replacement equipment will cost $1million and is also expected to last 10 years. In this case, how much, if any, would Sunshine State Farm save by buying the boxes from Fresh Co.? (6 marks)