Question

A company makes cat food. Management is considering whether the hard cardboard box for packing a case of canned cat food should be made internally or purchased from another company. The costs of producing the cardboard boxes include:_________.

Variable cost per box $0.39
Total fixed costs of the factory $59,030 per year
Total boxes needed annually 21,962
Quote from the supplier, per box $0.22
How much will the company save (or lose) IN TOTAL if they accept the supplier's quote? If they lose money, put a negative sign in front of your answer. If they save money, just put in the number without any sign in front of it.

Answer 1

Total relevant cost of 21,962 * $0.39 = $8,565.18

making internally

Less: Total relevant 21,962 * 0.22 = $4,831.64

cost of purchasing

Savings in cost $3,733.54

Conclusion: Manufacturing the hard cardboard box internally will save cost of $3,733.54 as compared to cost of purchasing the same quantity of box needed from supplier.

Note: Fixed costs is not relevant cost as it is unavoidable.