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 $7 per box. Because of excesscapacity, no additional fixed manufacturing overhead costs will beincurred to produce the product. However, a $55,000 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 followingcost per box:
| | | |
| Direct materials | $ | 3.20 | |
| Direct labor | | 1.70 | |
| Manufacturing overhead | | 1.10 | |
| Total cost | $ | 6.00 | |
|
The costs above include costs for producing both the lip balmand the tube that contains it. As an alternative to making thetubes, Silven has approached a supplier to discuss the possibilityof purchasing the tubes for Chap-Off. The purchase price of theempty tubes from the supplier would be $1.25 per box of 24 tubes.If Silven Industries accepts the purchase proposal, direct laborand variable manufacturing overhead costs per box of Chap-Off wouldbe reduced by 10% and direct materials costs would be reduced by25%.
Required:
1a. Calculate the total variable cost of producing one box ofChap-Off? (Do not round intermediate calculations. Roundyour answer to 2 decimal places.)
1b. Assume that the tubes for the Chap-Off are purchased fromthe outside supplier, calculate the total variable cost ofproducing one box of Chap-Off? (Do not round intermediatecalculations. Round your answer to 2 decimal places.)
1c. Should Silven Industries make or buy the tubes?
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2. What would be the maximum purchase price acceptable to SilvenIndustries? (Do not round intermediate calculations. Roundyour answer to 2 decimal places.)
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3. Instead of sales of 110,000 boxes, revised estimates show asales volume of 130,000 boxes. At this new volume, additionalequipment must be acquired to manufacture the tubes at an annualrental of $46,000. Assume that the outside supplier will not acceptan order for less than 130,000 boxes.
a. Calculate the total relevant cost of making 130,000 boxes andtotal relevant cost of buying 130,000 boxes. (Do not roundintermediate calculations.)
b. Based on the above calculations, should Silven Industriesmake or buy the boxes?
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4. Refer to the data in (3) above. Assume that the outsidesupplier will accept an order of any size for the tubes at $1.25per box. Which of these is the best alternative?
| Make all 130,000 boxes |
| Buy all 130,000 boxes |
| X | Make 110,000 boxes and buy 20,000 boxes |
| Make 65,000 boxes and buy 65,000 boxes |
