Question: Make-or-Buy Decision. 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 drugstores chains, in packages of 30 containers for $20 per package. Management allocates $225,000 of fixed manufacturing overhead costs to Mighty Mint. The manufacturing cost per package of 30 containers for expected production of 100,000 packages is as follows:
Direct materials $7.50
|
| Direct labor 4.00 |
| Overhead (fixed and variable) 3.50 |
| Total $15.00 |
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 $1.85 per 30 units. It is estimated that purchasing the containers from a supplier will save 10 percent of direct materials, 20 percent of direct labor, and 15 percent of variable overhead. Curtis's manufacturing additional manufacturing space, which is estimated to cost $17,000 per year. If the containers are purchased, one supervisory position can be eliminated. Salary plus benefits for this position are $72,000 per year.
Required:
Should Curtis make or buy the containers? What is the incremental cost (benefit) of buying the containers as opposed to making them? Explain your thoughts?