A packaging company has been offered a contract to create gift boxes for handbags. The company needs to buy a special machine to make the boxes. The machine costs $3,000, and each box costs $2 for labor and materials. The handbag maker has agreed to buy each box for $5.
Under what conditions should the packaging company accept the contract? How many boxes does the handbag maker need to order for the packaging company to break even? How many boxes does the handbag maker need to order for the packaging company to make money?
The packaging company should accept the contract if they can make a profit from selling the gift boxes to the handbag maker.
To break even, the packaging company needs to cover the initial cost of the machine ($3,000) and the cost of materials and labor for each box ($2). This means that the packaging company needs to sell enough boxes to cover the total cost per box, which is $3,000 (machine cost) + $2 (material and labor cost) = $5 per box.
So, the packaging company needs the handbag maker to order 3,000 boxes ($3,000 / $5) in order to break even.
To make money, the packaging company needs to sell boxes at a price higher than the cost of producing them. In this case, the handbag maker is willing to buy each box for $5.
Therefore, for the packaging company to make money, they need the handbag maker to order more than 3,000 boxes. The more boxes the handbag maker orders, the more profit the packaging company will make.