Question

BEP. The Russell Stover Candy Company must decide to produce chocolate covered cherries in house or outsource the production to Private Chocolate Candy Company. Russell Stover’s forecast demand for the product is 263,000 boxes. They currently manufacture them in house at a fixed annual cost (machine setup, maintenance, and so on) of $160,000 and variable cost of $5 per box. The Private Chocolate Candy Company has supplied the following details on their proposed bid to take over the chocolate covered cherry production for an annual fixed cost of $240,000 and variable cost of $3 per box.

Breakeven Point (units)

Cost saving, dollars as a result of your decision (Make Vs Buy)

Answer 1

In case of Make:

Total cost incurred= fixed cost + total variable cost (for 263,000 boxes)

                                = 160000 + 5 * 263000 = $ 1475,000

In case of Buy:

Total cost incurred= fixed cost + total variable cost (for 263,000 boxes)

                                = 240000 + 3 * 263000 = $ 503,003

• Very clear from calculation that Buy proposal from Chocolate Candy Company will cost less to Russell Stover Candy = $ 503,003. Hence, it should BUY

Breakeven points (units):

Break-even sales volume = (Total fixed cost / total units) + variable cost/ unit

In make case:

Hence, BEP (units) = (160000/ 236000) + 5 = 5.677 equalized to 6 units

In Buy case:

Hence, BEP (units)= (240000/263000) + 3 = 5.91 equalized to 6 units