Reference no: EM132908152

Question - Bronson Company manufactures a variety of ballpoint pens. The manufacture of the ball point pen consists of a pen body and an ink cartridge which are then assembled to prepare the final product. The company has just received an offer from an outside supplier to provide the ink cartridge for the company's Zippo pen line, at a price of $0.48 per dozen cartridges. The company is interested in this offer, since its own production of cartridges is at capacity.

Bronson Company estimates that if the supplier's offer were accepted, the direct labor and variable overhead costs of the Zippo pen line would by reduced by 10% and the direct materials cost would be reduced by 20%.

Under present operations, Bronson Company manufactures all of its own pens (i.e. body and cartridge) from start to finish. The Zippo pens are sold through wholesalers at $4 per box. Each box contains one dozen pens. Fixed overhead costs charged to the Zippo pen line total $50,000 each year. (The same equipment and facilities are used to produce several pen lines.) The expected cost of producing one dozen Zippo pens (one box) is given below:

Required -

1. Should Bronson Company accept the outside supplier's offer? Show computations.

2. What is the maximum price that Bronson Company would be willing to pay the outside supplier per dozen cartridges?

3. Due to the bankruptcy of a competitor, Bronson Company expects to sell 200,000 boxes of Zippo pens next year. As stated above, the company presently has enough capacity to produce the cartridges for only 100,000 boxes of Zippo pens annually. By incurring $30,000 in added fixed cost each year, the company could expand its production of cartridges to satisfy the anticipated demand for Zippo pens. The variable cost per unit to produce the additional cartridges would be the same as at present. Under these circumstances, should all 200,000 boxes of cartridges be purchased from the outside supplier, or should some or all of the 200,000 boxes of cartridges be made by Bronson? Show computations to support your answer. Assume that Bronson's pen body manufacture line is not constrained.