A jalapeno canning company is faced with a make/buy decision. Cardboard shipping cartons can be purchased for $0.60 each or made in-house. If manufactured, two machines will be required. Machine X will cost $20,000 and have a life of 6 years with a $2,000 salvage value. Machine Y will cost $11,000 and have a life of 4 years with no salvage value. The annual maintenance cost for machines X and Y are $6,000 and $5,000 per year, respectively. A total of 4 operators will be required for the two machines at a rate of $22.50 per hour per person. In a normal 8-hour day, the 4 operators and two machines can produce 1,000 cartons.

The variable cost per carton associated with the in-house option is closest to:

A. $0.0625
B. $0.10
C. $0.72
D. $0.81
E. $0.92

Correct option is C.

$0.72

Explanation:

The following information about in-house manufacturing is given:

Wage = $22.50 per hour per person

Production = 1000

Number of workers = 4

Total number of hours = 8

Variable cost is the cost which changes with the change in level of production. For example cost of labour.  

Total cost of labour = $22.50 x 4 x 8 =$720

Cost per carton is calculated as follows:

Total cost Cost per carton /Total production= $720/1000  

=$0.721  

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