Silven Industries, which manufactures and sells a highlysuccessful line of summer lotions and insect repellents, hasdecided to diversify in order to stabilize sales throughout theyear. A natural area for the company to consider is the productionof winter lotions and creams to prevent dry and chapped skin.

After considerable research, a winter products line has beendeveloped. However, Silven’s president has decided to introduceonly one of the new products for this coming winter. If the productis a success, further expansion in future years will beinitiated.

The product selected (called Chap-Off) is a lip balm that willbe sold in a lipstick-type tube. The product will be sold towholesalers in boxes of 24 tubes for $11 per box. Because of excesscapacity, no additional fixed manufacturing overhead costs will beincurred to produce the product. However, a $99,000 charge forfixed manufacturing overhead will be absorbed by the product underthe company’s absorption costing system.

Using the estimated sales and production of 110,000 boxes ofChap-Off, the Accounting Department has developed the followingmanufacturing cost per box:

Direct material	$	5.10
Direct labor		3.40
Manufacturing overhead		2.30
Total cost	$	10.80

The costs above relate to making both the lip balm and the tubethat contains it. As an alternative to making the tubes forChap-Off, Silven has approached a supplier to discuss thepossibility of buying the tubes. The purchase price of thesupplier's empty tubes would be $1.70 per box of 24 tubes. IfSilven Industries stops making the tubes and buys them from theoutside supplier, its direct labor and variable manufacturingoverhead costs per box of Chap-Off would be reduced by 10% and itsdirect materials costs would be reduced by 20%.

Required:

1. If Silven buys its tubes from the outside supplier, how muchof its own Chap-Off manufacturing costs per box will it be able toavoid? (Hint: You need to separate the manufacturing overhead of$2.30 per box that is shown above into its variable and fixedcomponents to derive the correct answer.)

2. What is the financial advantage (disadvantage) per box ofChap-Off if Silven buys its tubes from the outside supplier?

3. What is the financial advantage (disadvantage) in total (notper box) if Silven buys 110,000 boxes of tubes from the outsidesupplier?

4. Should Silven Industries make or buy the tubes?

5. What is the maximum price that Silven should be willing topay the outside supplier for a box of 24 tubes?

6. Instead of sales of 110,000 boxes of tubes, revised estimatesshow a sales volume of 150,000 boxes of tubes. At this higher salesvolume, Silven would need to rent extra equipment at a cost of$60,000 per year to make the additional 40,000 boxes of tubes.Assuming that the outside supplier will not accept an order forless than 150,000 boxes of tubes, what is the financial advantage(disadvantage) in total (not per box) if Silven buys 150,000 boxesof 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 outsidesupplier will accept an order of any size for the tubes at a priceof $1.70 per box. How many boxes of tubes should Silven make? Howmany boxes of tubes should it buy from the outside supplier?