Solution Exhibit 21.16 Annual relevant costs of purchasing from Papyrus and Suffolk Leaves Incremental costs of purchasing from Papyrus Incremental costs of purchasing from Suffolk Purchase costs £100 per box × 100,000 boxes £95 per box × 100,000 boxes Required return on investment 15% per year × £100 × a boxes of average stock per year 15% per year × £95 × a boxes of average stock per year Overtime and subcontracting costs No overtime necessary Overtime due to late deliveries (£30,000 × 10 jobs) Costs of poor quality and smudging Total relevant costs £10,000,000 3,000 0 0 £10,003,000 £ 9,500,000 2,850 300,000 b Difference in favour of Papyrus £44,850 a Order quantity ÷ 2 = 400 ÷ 2 = 200. b The relevant costs of poor quality and smudging per job are Additional costs of printing paper (£110 per box × 400 boxes) £44,000 Additional other direct materials (ink and soon Additional variable printing overhead 3,000 Total relevant costs of poor quality per job £49,000 Relevant costs of poor quality for five jobs during the year (£49,000 × 5) £245,000
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