Sunshine State Fruit Company sells premium-quality oranges and other citrus fruits by mail order. Protecting the fruit during shipping is important, so the company has designed and produces shipping boxes. The annual cost to make 80,000 boxes is
Therefore, the cost per box averages $2.60.
Suppose National Boxes Inc. submits a bid to supply Sunshine State with boxes for $2.10 per box. Sunshine State must give National the box design specifications, and the boxes will be made according to those specs.
1. How much, if any, would Sunshine State save by buying the boxes from National?
2. What subjective factors should affect Sunshine State’s decision whether to make or buy the boxes?
3. Suppose all the fixed costs represent depreciation on equipment that was purchased for $600,000 and is just about at the end of its 10-year life. New replacement equipment will cost $800,000 and is also expected to last 10 years. In this case, how much, if any, would Sunshine State save by buying the boxes from National?
