Sunshine State Fruit Company sells premium quality oranges and other citrus fruits by mail order. Protecting fruit during shipping is significant, so comapany has developed and makes shipping boxes. Annual cost to make 80,000 boxes is:
Materials $120,000
Labor 20,000
Indirect manufacturings costs:
variable 16,000
fixed 60000
total 216,000
Hence, the cost per box averages $2.70
Assume Weyerhaeuser submits bid to supply Sunshine State with boxes for $2.40 per box. Sunshine State should give Weyerhaeuser box design specifications, and boxes will be made according to those specs.
1. How much, if any, would Sunshine State save by purchasing boxes from Weyerhaeuser?
2. What subjective factors must affect Sunshine State's decision whether to make or purchase boxes?
3. Assume all fixed cost represent depreciation on equipment which was bought for $600,000 and is just about at the end of its ten-year life. New replacement equipment will cost $1 million and is also expected to last ten years. In this case, how much, if any, would Sunshine State save by purchasing boxes from Wyerhaeuser?