Question

Hamilton Containers manufactures a variety of boxes used for packaging. Sales of its Model A20 box have increased significantly to a total of 430,000 A20 boxes. Hamilton has enough existing production capacity to make all of the boxes it needs. The variable cost of making each A20 box is $0.80. By outsourcing the manufacture of these A20 boxes, Hamilton can reduce its current fixed costs by $103,200. There is no alternative use for the factory space freed up through outsourcing, so it will just remain idle What is the maximum Hamiton will pay per Model A20 box to outsource production of this box? Begin by identifying the basic formula that is used to determine the indifferent outsourcing cost per unit. Cost if making A20 boxes = Cost if outsourcing A20 boxes Variable costs Fixed costs = Variable costsFixed costs Using the basic formula you determined above solve for the indifferent outsourcing cost per unit. The maximum Hamilton will pay to outsource production of its A20 boxes is $_____

Answer 1

Answer: $1.04 per box

Step-by-step explanation

The total sales of A20 box = 430,000 boxes

Variable cost per unit = $0.80

if it outsources the production, then it can reduce fixed costs by $103,200

currently the costs of producing the 430,000 boxes = (430,000 x $0.80) + $103,200 = $344,000 + $103,200 = $447,200

so it should be able to pay up to $447,200 / 430,000 boxes = $1.04 per box, although it would be best to pay less.