Reference no: EM132522104

Happy Pet Co. produces pet treatments for ticks and fleas for dogs and cats which they sell to wholesalers. Because tick treatment sales are seasonal, that is they are higher in "tick season", Happy Pet Co. has decided to diversify to stabilise sales throughout the year. As pet grooming is increasing in popularity the company is considering production of a pet grooming range including shampoo and brushes.

Happy Pet's management has enough available capacity to produce one of the new products and has decided to investigate the introduction of a shampoo range first. The shampoo can be sold to wholesalers for $18.00 per box, each box would contain 24 bottles of shampoo.

The following costs per box of 24 bottles of shampoo have been estimated by the management accountant, based on estimated sales and production of 100,000 boxes: Direct labour $4.00; Direct materials $6.00; Total overhead $3.00. A total cost of $13.00 per box. A fixed charge of $200,000 will be assigned to allocate a fair share of the company's fixed costs to the product. The remaining overhead costs are variable.

Happy Pet has found they can purchase empty bottles for the shampoo for $1.80 per 24 bottles. If they purchase the bottles from the supplier, instead of making them, it is estimated to reduce direct materials costs by 20% and reduce direct labour costs and variable overhead costs by 10%.

Required:

Question 1. Should Happy Pet Co. make or buy the bottles? Why? Show calculations to support your answer.

Question 2. What would be the maximum purchase price Happy Pet would be willing to pay for the bottles? Why?

Question 3. Revised estimates show sales of 125,000 boxes, instead of the original estimate of 100,000. At this volume, additional equipment with an annual rental of $20,000 is required, this would be the only additional fixed cost required. At the sales volume of 125,000 boxes should Happy Pet make or buy the bottles? Why?