Chapter 8, Problem 8.46BE

Determine maximum outsourcing price (Learning Objective 6)

Henderson Containers manufactures a variety of boxes used for packaging. Sales of its Model A20 box have increased significantly to a total of 400,000 A20 boxes. Henderson has enough existing production capacity to make all of the boxes it needs. The variable cost of making each A20 box is $0.74. By outsourcing the manufacture of these A20 boxes, Henderson can reduce its current fixed costs by $72,000. There is no alternative use for the factory space freed up through outsourcing, so it will just remain idle.

What is the maximum Henderson will pay per Model A20 box to outsource production of this box?