Solutions Guide:

Bronson Company manufactures a variety of ballpoint pens. The company has just
received an offer from an outside supplier to provide the ink cartridge for the companys
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 suppliers offer were accepted, the direct labor and variable manufacturing
overhead costs of the Zippo pen line would be reduced by 10% and the direct materials
cost would be reduced by 20%. Under present operations, Bronson Company
manufactures all of its own pens from start to finish. The Zippo pens are sold through
wholesalers at $4 per box. Each box contains one dozen pens. Fixed manufacturing
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 present cost of
producing one dozen Zippo pens (one box) is given below: Direct
materials . . . . . . . . . . . . . . . . . $1.50 Direct labor . . . . . . . . . . . . . . . . . . . . 1.00
Manufacturing overhead . . . . . . . . . . 0.80* Total cost . . . . . . . . . . . . . . . . . . . . . . $3.30
*Includes both variable and fixed manufacturing overhead, based on production of
100,000 boxes of pens each year. Required: 1. Should Bronson Company accept the
outside suppliers offer? Show computations. 2. What is the maximum price that Bronson
Company should be willing to pay the outside supplier per dozen cartridges? Explain. 3.
Due to the bankruptcy of a competitor, Bronson Company expects to sell 150,000 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, how many boxes of cartridges should be purchased from the outside
supplier and how many should be made by Bronson? Show computations to support your
answer. 4. What qualitative factors should Bronson Company consider in determining
whether it should make or buy the ink cartridges?
1. The fixed overhead costs are common and will remain the same regardless of whether
the cartridges are produced internally or purchased outside. Hence, they are not
relevant. The variable manufacturing overhead cost per box of pens is $0.30, as
shown below:
Total manufacturing overhead cost per box of pens.............................
Less fixed manufacturing overhead ($50,000 100,000 boxes).........
Variable manufacturing overhead cost per box....................................

$0.80
0.50
$0.30

The total variable cost of producing one box of Zippo pens is:
Direct materials....................................................................................
Direct labor...........................................................................................
Variable manufacturing overhead.........................................................

$1.50
1.00
0.30

Total variable cost per box...................................................................

$2.80

If the cartridges for the Zippo pens are purchased from the outside supplier, then the
variable cost per box of Zippo pens would be:
Direct materials ($1.50 80%)............................................................
Direct labor ($1.00 90%)...................................................................
Variable manufacturing overhead ($0.30 90%)................................
Purchase of cartridges..........................................................................
Total variable cost per box...................................................................

$1.20
0.90
0.27
0.48
$2.85

The company should reject the outside suppliers offer. Producing the cartridges
internally costs $0.05 less per box of pens than purchasing them from the supplier.
Another approach to the solution is:
Cost avoided by purchasing the cartridges:
Direct materials ($1.50 20%).........................................................
Direct labor ($1.00 10%)...............................................................
Variable manufacturing overhead ($0.30 10%).............................
Total costs avoided............................................................................

$0.30
0.10
0.03
$0.43

Cost of purchasing the cartridges.........................................................

$0.48

Cost savings per box by making cartridges internally.........................

$0.05

Note that the avoidable cost of $0.43 above represents the cost of making one box of
cartridges internally.
2. The company would not want to pay any more than $0.43 per box, since it can make
the cartridges for this amount internally.
3. The company has three alternatives for obtaining the necessary cartridges. It can:
#1
#2
#3

Produce all cartridges internally.

Purchase all cartridges externally.
Produce the cartridges for 100,000 boxes internally and purchase the cartridges for
50,000 boxes externally.

The costs under the three alternatives are:

Alternative #1Produce all cartridges internally:
Variable costs (150,000 boxes $0.43 per box).....................................
Fixed costs of adding capacity................................................................
Total cost.................................................................................................
Alternative #2Purchase all cartridges externally:

$64,500
30,000
$94,500

Variable costs (150,000 boxes $0.48 per box).......................................

$72,000

Alternative #3Produce 100,000 boxes internally, and purchase 50,000

boxes externally:
Variable costs:
100,000 boxes $0.43 per box........................................................
50,000 boxes $0.48 per box..........................................................
Total cost..............................................................................................

$43,000
24,000
$67,000

Or, in terms of total cost per box of pens, the answer would be:
Alternative #1Produce all cartridges internally:
Variable costs (150,000 boxes $2.80 per box).....................................
Fixed costs of adding capacity................................................................
Total cost.................................................................................................

$420,000
30,000
$450,000

Alternative #2Purchase all cartridges externally:

Variable costs (150,000 boxes $2.85 per box).....................................

$427,500

Alternative #3Produce the cartridges for 100,000 boxes internally, and

purchase the cartridges for 50,000 boxes externally:
Variable costs:
100,000 boxes $2.80 per box.......................................................
50,000 boxes $2.85 per box.........................................................
Total cost..............................................................................................

$280,000
142,500
$422,500

Thus, the company should accept the outside suppliers offer, but only for the
cartridges for 50,000 boxes.
4. In addition to cost considerations, Bronson should take into account the following
factors:
a) The ability of the supplier to meet required delivery schedules.
b) The quality of the cartridges purchased from the supplier.
c) Alternative uses of the capacity that is used to make the cartridges.
d) The ability of the supplier to supply cartridges if volume increases in future years.
e) The problem of alternative sources of supply if the supplier proves undependable.