Question 7-6 & 7-7

Curtis Corporation is beginning Production of Mighty Mint, a new mouthwash in a small spray container. The product will be sold to wholesalers and large drugstore chains in packages of 30 containers for $20 per package. Management allocates $225,000 of fixed manufacturing overhead costs to Mighty Mint. The manufacturing cost per package of 30 containers for expected production of 100,000 packages is as follows: The company has contacted a number of packaging suppliers to determine whether it is better to buy or manufacture the spray containers. The lowest quote for the containers is $1.90 per 30 units. It is estimated that purchasing the containers from a supplier will save 10 percent of direct materials, 20 percent of direct labor, and 15 percent of variable overhead. Curtis's manufacturing space is highly constrained. By purchasing the spray containers, the company will not have to lease additional manufacturing space, which is estimated to cost $17,000 per year. If the containers are purchased, one supervisory position can be eliminated Salary plus benefits for this position are $72,000 per year. Should Curtis make or buy the containers? What is the incremental cost (benefit) of buying the containers as opposed to making them? Mulan Carpet produced 1, 200 yards of its economy-grade carpet. In the coloring process, there was a pigment defect, and the resulting color appeared to be faded. The carpet normally sells for $15 per yard: $7 of variable cost per yard and $6 of fixed cost per yard have been assigned to the carpet. The company realizes that it cannot sell the carpet for $15 per yard through its normal channels, unless the coloring process is repeated. The incremental cost of the process is $2 per yard. However, Practical Home Solutions is willing to buy the carpet in its current faded condition for $9 per yard. Should Mulan repeat the coloring process or sell the carpet to Practical Home Solutions? Suppose Practical Home Solutions is willing to buy the carpet for $14 per yard if Mulan's brand is associated with the carpet by means of a tag indicating the carpet was produced by Mulan (a highly-regarded producer). Would you accept Practical Home Solutions' offer if you were the president of Mulan