Ortez Company buys strawberries and produces strawberry jam. The variable cost of a case of strawberry jam is as
Materials (strawberries and jars) $10.00
Inspection and rework costs 4.00
All other variable costs 8.00
Total variable cost per case $22.00
In addition, the company has $1,000,000 of fixed costs per year.
The company inspects the product at various stages. The cost of inspecting the product and replacing jam and/or jars averages $4.00 per case, shown as in the inspection and rework costs.
Management is considering purchasing high-quality strawberries. This would increase materials costs to $12.00 per case, while decreasing inspection and rework costs to $2.00 per case. All other costs would remain at $8.00 per case for variable costs and $1,000,000 for fixed costs whether or not the high-quality strawberries were purchased. Ortez's jam sells for $40 per case. If the high-quality strawberries were purchased, the company could sell 100,000 cases of jam this year at $40 per case. If the company continued to use the current low-quality berries, it could sell 80,000 cases of jam this year at $40 per case.
Should Ortez purchase the high-quality strawberries?