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3-Make or Buy Analysis Silver Industries, which manufactures and sells a highly successful line of summer lotions and insect repellants, has decided to diversify in order to stabilize sales throughout the year. A natural area for the company to consider is the production of winter lotions and creams to prevent dry and chapped skin. After considerable research, a winter product lines has been developed. However, Silver's president has decided to introduce only one of the new products for this coming winter. If the product is a success, further expansion in future years will be initiated. The product selected (called Chap-Off) is a lip balm that will be sold in a lipstick-type tube. The product will be sold to wholesalers in boxes of 24 tubes for $8 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $90,000 charge for fixed manufacturing overhead will be absorbed by the product under the company's absorption costing system. Using the estimated sales and production of 100,000 boxes of Chap-Off, the accounting department has developed the following cost per box: Direct material $ 3.60 Direct labor 2.00 Manufacturing overhead 1.40 Total cost $7.40 The costs above included costs for producing both the lip balm and the tube. As an alternative to making the tubes, Silver has approached a supplier to discuss the possibility of purchasing the tubes for Chap-Off. The purchase price of the empty tubes from the supplier would be $1.35 per box of 24 tubes. If Silver accepts the purchase proposal, direct labor and variable manufacturing overhead costs per box of Chap-Off would be reduced by 10% and direct materials would be reduced by 25%. Required: 1. Should Silver Industries make or buy the tubes? 2. What would be the maximum purchase price acceptable to Silver Industries? 3. Instead of sales of 100,000 boxes, revised estimates show a sales volume of 120,000 boxes. At this new volume, additional equipment must be acquired to manufacture the tubes at an annual rental of $40,000. Assuming that the outside supplier will not accept and order for less than 120,000 boxes, should Silver Industries make or buy the tubes? 4. Show all computations to support your

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