The Modern Packing Corporation (MPC) specializes in the manufacture of 1-liter plastic bottles. The plastic molding machines are capable of producing 100 bottles per hour. The firm estimates that the variable cost of producing a plastic bottle is 25 cents. The bottles are sold for 55 cents each.
Management has been approached by a local toy company that would like MPC to produce a molded plastic toy. The toy company wants 100,000 units of the toy, and is willing to pay $3.00 per unit. The unit variable cost to manufacture the toy will be $2.40. In addition, MPC would have to incur a cost of $20,000 to construct the mold required exclusively for this order. Because the toy uses more plastic and is of a more intricate shape than a bottle, a molding machine can produce only 40 units per hour.
MPC’s fixed costs, excluding the costs to construct the toy mold, during the same period will be $200,000. Assume that MPC has a total capacity of 10,000 machine hours available during the period in which the toy company wants delivery of the toys.
MPC has located a firm that has just entered the molded plastic business. This firm has considerable excess capacity and more efficient molding machines, and is willing to subcontract the toy job, or any portion of it, for $2.80 per unit. It will construct its own toy mold. Suppose the demand for its bottles is 900,000 units, and the toy company will accept any quantity of the special toy order. How many bottles and toys should MPC manufacture? How many toys should it subcontract out?