Reference no: EM132507377

Curtis Corporation is beginning to manufacture Mighty Mint, a new mouthwash in a small spray container. The product will be sold to wholesalers and large drugstore chains in packages of 30 containers for $18 per package. Management allocates $200,000 of fixed manufacturing overhead costs to Mighty Mint.

The manufacturing costs per package of Mighty Mint for expected production of 100,000 packages is as follows:

Direct material $ 6.50

Direct labor $ 3.50

Overhead (fixed and variable) $ 3.00

Total $13.00

• The company has contacted a number of packaging suppliers to determine whether it is better to buy or manufacture the spray containers. The lowest quote for the containers is $1.75 per 30 units. It is estimated that purchasing the containers from a supplier would save 10% of direct materials, 20% of direct labor, and 15% of variable overhead. Curtis manufacturing space is highly constrained. By purchasing the spray containers, the company will not have to lease additional manufacturing space that is estimated to cost $15,000 per year. If the containers are purchased one supervisory position can be eliminated. Salary plus benefits for this position are $70,000 per year.

Required:

Question 1: Should Curtis make or buy the containers? What is the incremental cost (benefit) of buying the containers as opposed to making them?

Case Study:

• Primus is a firm of consultants that focuses on process reengineering and quality improvement initiatives. Northwood Industries has asked Primus to conduct a study aimed at improving on-time delivery. Normal practice is for Primus to bill for consultant time at standard rates plus actual travel costs and estimated overhead. However, Northwood has offered a flat $85,000 for the job. Currently, Primus has excess capacity in that it can take on the Northwood job without turning down other business and without hiring additional staff.

If normal practices were followed, the bill would be:

  Classification                          Hours                   Rate                Amount

Partner                                100                  $250                  $25,000

Senior Consultant                      200               $150                  $30,000

Staff Consultant                      200                  $ 80                  $16,000

Travel Costs                                                                        $15,000

Overhead at $20 per non-partner hour                                    $ 8,000

Total                                                                                  $94,000

• Overhead (computer costs, rent, utilities, paper, copying etc.) is determined at the start of the year by dividing estimated annual overhead costs ($1,600,000) by total estimated non-partner hours (80,000 hours). Approximately 10% of the total amount is variable costs.

All Primus employees receive a fixed wage (i.e., there is no compensation for overtime.). Annual compensation in the previous year amounted to the following:

Per Hour

Partners $ 260

Senior Consultant $ 95

Staff Consultant $ 45

Required:

Question 2: What will be the effect on company profit related to accepting the Northwood Industries job? What qualitative factors should be considered in the decision as to whether or not to accept the job