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Problem 7-22 (60 minutes)
1. The fixed overhead costs are common and will remain the same
regardless of whether the cartridges are produced internally or
purchased outside. Hence, they are not relevant. The variable
manufacturing overhead cost per box of pens is $0.30, as shown below:
Total manufacturing overhead cost per box of pens ...
$0.80
Less fixed manufacturing overhead ($50,000 ÷
100,000 boxes) .....................................................
0.50
Variable manufacturing overhead cost per box ...........
$0.30
Direct materials .......................................................
$1.50
Direct labor .............................................................
1.00
Variable manufacturing overhead ..............................
0.30
Total variable cost per box ........................................
$2.80
If the cartridges for the Zippo pens are purchased from the outside
Direct materials ($1.50 × 80%) ................................
$1.20
Direct labor ($1.00 × 90%) ......................................
0.90
Variable manufacturing overhead ($0.30 × 90%) .......
0.27
Purchase of cartridges ..............................................
0.48
Total variable cost per box ........................................
$2.85
The company should reject the outside supplier’s offer. Producing the
cartridges internally costs $0.05 less per box of pens than purchasing
them from the supplier.
Another approach to the solution is:
Cost avoided by purchasing the cartridges:
Direct materials ($1.50 × 20%) ..............................
$0.30
Direct labor ($1.00 × 10%) ....................................
0.10
Variable manufacturing overhead ($0.30 × 10%) ....
0.03
Total costs avoided ................................................
$0.43
Cost of purchasing the cartridges ..............................
$0.48
Cost savings per box by making cartridges internally ..
$0.05
