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Problem 11-23 Make or Buy Decision [LO11-3] Silven industries, which manufactures and sells a highly successful line of summer lotions and insect repellents, has decided to diversity 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 products line has been developed. However, Silven'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 $13 per box Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $96,000 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 120,000 boxes of Chap-Off, the Accounting Department has developed the following manufacturing cost per box The costs above relate to making both the lip baim and the tube that contains it. As an alternative to making the tubes for ChapOff, Silven has approached a supplier to discuss the possibility of buying the tubes. The purchase price of the supplier's empty tubes would be $2.30 per box of 24 tubes. If Silven Industries stops making the tubes and buys them from the outside supplier, its direct labor and variable manufacturing overhead costs per box of Chap-Off would be reduced by 10% and its direct materials costs would be reduced by 30%. Required: 1. If Siven buys its tubes from the outside supplier, how much of its own Chap-Off manufacturing costs per box will it be able to avoid? (Hint You need to separate the manufacturing overhead of $2.30 per box that is shown above into its variable and fixed components to derive the correct answer.) 2. What is the financial advantage (disadvantage) per box of Chap-Off if Silven buys its tubes from the outside supplier? 3. What is the financial advantage (disadvantage) in total (not per box) if Silven buy5 120,000 boxes of tubes from the outside supplier? 4. Should Sliven industries make or buy the tubes? 5. What is the maximum price that Silven should be willing to pay the outside supplier for a box of 24 tubes? 6. Instead of sales of 120,000 boxes of tubes, revised estimates show a sales volume of 149,000 boxes of tubes. At this higher sales volume, Siven would need to rent extra equipment at a cost of $49,000 per year to make the additional 29.000 boxes of tubes. Assuming that the outside supplier will not accept an order for less than 149,000 boxes of tubes, what is the financial advantage (disadvantage) in total (not per box) If Siven buys 149,000 boxes of tubes from the outside supplier? Given this new information, should Silven Industries make or buy the tubes? 7. Refer to the data in (6) above. Assume that the outside supplier will accept an order of any size for the tubes at a price of $2.30 per box. How many boxes of tubes should Silven make? How many boxes of tubes should it buy from the outside supplier? Problem 11-22 Special Order Decisions [LO11-4] Polaski Company manufactures and sells a single product calied a Ret. Operating at capacity, the company can produce and sel 34,000 Rets per year. Costs associated with this level of production and sales are given below: The Rets normally sell for $46 each. Fixed manufacturing overhead is $238,000 per year within the range of 29,000 through 34,000 Rets per year. Required: 1. Assume that due to a recession, Polaski Company expects to sell only 29,000 Rets through regular channels next year. A large retail chain has offered to purchase 5,000 Rets if Polaski is willing to accept a 16% discount off the regular price. There would be no sales commissions on this order, thus, variable selling expenses would be slashed by 75%. However, Polaski Company would have to purchose a special machine to engrave the retail chain's name on the 5,000 units. This machine would cost $10,000. Polaski Company has no assurance that the retail chain will purchase additional units in the future. What is the financlal advantage (disadvantage) of accepting the special order? (Round your intermediate calculations to 2 decimal places.) 2. Refer to the original data. Assume again that Polaski Company expects to sell only 29,000 Rets through regular channels next yeat. The U.S. Army would like to make a one-time-only purchase of 5,000 Rets. The Army would pay a fixed fee of $1.40 per Ret, and it would reimburse Polaski Company for all costs of production (variable and fixed) associated with the units. Because the army would pick up the Rets with its own trucks, there would be no variable selling expenses associated with this order. What is the financial advantage (disadvantage) of accepting the U.S. Army's special order? 3. Assume the same situation as described in (2) above, except that the company expects to sell 34,000 Rets through regulat channels next year. Thus, accepting the U.S. Army's order would require giving up regular sales of 5,000 Rets. Given this new information, what is the financial advantage (disadvantage) of accepting the U.S. Army's special order? \begin{tabular}{|l|l|l|} \hline 1. & Financial advantage \\ \hline 2. & Financial advantage \\ \hline 3. & Financial (disadvantage) \\ \hline \end{tabular}

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