ROBLEM 12-24 Make or Buy Decision ILO2 stion Company, a manufacturer of several types of ballpoint pens from an outside supplier to provide the ink cartridge for the company's Zappo p price of 50.48 per dozen cartridges. Th , has just received an offer duction of cartridges is at capacity e company is interested in this offer, since its own pro- Bastion Company estimat variable manufacturing overhead costs of the Zappo pen line would be reduced by the direct materials cost would be reduced by 20% es that if the supplier's offer were accepted, the direct labour and 10% and Under current operations, Bastion Company manufactures all of its own pe to finish. The Zapp dozen pens. Fixed manufacturing overhead costs charged to the Zappo each year. (The same equipment and facilities are used to produce several pen li ent cost of producing one dozen Zappo pens (one box) is given below ns from start o pens are sold through wholesalers at $4 per box. Each box contains one line total $50.000 lines.) The pres pen Direct materials Direct labour Manufacturing overhead Total cost. 150 100 0.80* 3.30 Includes both variable and fixed manufacturing overhead, based on production of 100,000 boxes of pens each year Required 1. Should Bastion Company accept the outside suppliers offer? Show computation 2. What is the maximum price that Bastion Company should be willing to pay the outside supplier per dozen cartridges? Explain 3. Due to the bankruptcy of a competitor, Bastion Company expects to sell 150,000 boxes of Zappo pens next year. As stated above, the company has enough capacity to produce the cartridges for only 100,000 boxes of Zappo pens annually. By incurring 30,000 in added fixed cost each year, the company could expand its production of cartridges to satisfy the anticipated demand for Zappo pens. The variable cost per unit to produce the additional cartridges would be the same as at present. Under these circumstances, how many boxes of cartridges should be purchased from the outside supplier and how many should be made by Bastion? Show computations to support your answer What qualitative factors should Bastion Company consider in determining whether it should make or buy the ink cartridges? 4