Colgate Printing Co

question 13

Essay

Colgate Printing Co. (CPC) has the book binding contract for the Ralph Brown library. The library pays $25 per
book to CPC. CPC binds 1,000 books every year for the library. Ralph Brown library is considering the option of
binding the books in-house in the basement of the library complex. In order to do this, the library would have
to invest in a binding machine and other printing equipment at a cost of $100,000. The useful life of the machine
is 12 years, at the end of which time, the machine is estimated to have a salvage value of $12,000. The annual
operating and maintenance costs of the machine are estimated to be $10,000.
(a) Assuming an interest rate of 6%, what is the cost of binding per book for the in-house option?
(b) What annual volume of books in need of binding would make both the options (in-house versus
subcontracting) equivalent?

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Definitions:

Production Costs

Production Costs are the expenses directly tied to the creation of goods or services, including materials, labor, and overhead costs.

Nondiscriminating Firms

Businesses that offer the same terms, conditions, and prices to all customers without any form of prejudice or favoritism.

Taste-For-Discrimination Model

An economic model that explains how personal preferences and biases of employers, workers, or consumers can lead to discrimination in hiring, wages, and consumer purchases.

Higher Wages

Wages that are above the average or standard level, often resulting from increased demand for labor, higher productivity, or specialized skills.