Question

(b) How many units would the company have to sell to attain target profits of $150,000 after tax when tax rate is 40%? 2. International Paper Corporation manufactures 10,000 rolls of paper each period. The paper is used as an input for producing several other products that International Paper manufactures. The full manufacturing costs for a batch of 50 rolls of paper are as follows: Direct materials $135 Direct labor 100 Variable manufacturing overhead 100 Average fixed manufacturing overhead 188 Total $523 The fixed manufacturing overhead is comprised of depreciation expenses related to prior investments in facilities and equipment that are used in the manufacturing of the paper. These assets have no other use than for the manufacturing of the paper. An outside supplier has offered to sell International Paper the 10,000 rolls of paper necessary to meet production needs this period for a lump-sum of $72,500. What should International Paper Corporation do if it wants to maximize its profit for the period?

Answer 1

	Cost of Machinery	Cost of Buying	Increase/ Decrease in Income
Direct material	135 x 200 = 27,000	0	27,000
Direct labor	100 x 200 = 20,000	0	20,000
Variable manufacturing overhead	100 x 200 = 20,000	0	20,000
Fixed manufacturing overhead	188 x 200 = 37,600	37,600	0
Outside supplier's price	0	72,500	-72,500
Total	$104,600	$110,100	-$5,500

Cost of making is $5,500 less than cost of buying from outside supplies. Hence, paper roll should be made.

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