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:

Total Cost Unit Cost

Direct materials $$2,000,000$ $ $20\mathrm{.}00$

Direct labor $350,0003\mathrm{.}50$

Variable manufacturing overhead $150,0001\mathrm{.}50$

Variable marketing overhead $250,0002\mathrm{.}50$

Fixed plant overhead $300,0003\mathrm{.}00$

Total $$3,050,000$ $$30\mathrm{.}50$

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?

By how much?

$fill in the blank $4$

$4.$ 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?

By how much?

$fill in the blank $6$