Question

Silven Industries, which manufactures and sells a highly successful line of summer lotions and insect repellents, 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 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 14 tubes for $9.10 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $120,000 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 materials	$	4.10
Direct labor		2.00
Manufacturing overhead		1.80
Total cost	$	7.90

The costs above include costs for producing both the lip balm and the tube that contains it. As an alternative to making the tubes, Silven 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 $1.30 per box of 14 tubes. If Silven Industries accepts the purchase proposal, direct labor and variable manufacturing overhead costs per box of Chap-Off would be reduced by 10% and direct materials costs would be reduced by 20%.

  

Required:

1a.

Calculate the total variable cost of producing one box of Chap-Off? (Round your intermediate calculations and final answer to 2 decimal places.)

Assume that the tubes for the Chap-Off are purchased from the outside supplier, calculate the total variable cost of producing one box of Chap-Off? (Round your intermediate calculations and final answer to 2 decimal places.)

1c.

Should Silven Industries make or buy the tubes?

Make

Buy

2.

What would be the maximum purchase price acceptable to Silven Industries? (Round your intermediate calculations and final answer to 2 decimal places.)

     

3.	Instead of sales of 100,000 boxes, revised estimates show a sales volume of 122,000 boxes. At this new volume, additional equipment must be acquired to manufacture the tubes at an annual rental of $50,000. Assume that the outside supplier will not accept an order for less than 122,000 boxes.

a.

Calculate the total relevant cost of making 122,000 boxes and total relevant cost of buying 122,000 boxes. (Round intermediate calculations to 2 decimal places.)

b.

Based on the above calculations, should Silven Industries make or buy the boxes?

	Make
	Buy

  

4.

Refer to the data in (3) above. Assume that the outside supplier will accept an order of any size for the tubes at $1.30 per box. Which of these is the best alternative?

	Make all 122,000 boxes
	Buy all 122,000 boxes
	Make 100,000 boxes and buy 22,000 boxes
	Make 50,000 boxes and buy 50,000 boxes

Answer 1

1a. Total Variable Cost of producing one box of chap-off :

Direct Material $4.10

Direcr labor 2.00

Manufacturing Overhead (Assuming Variable) 1.80

Total variable Cost per box = $7.9

-Assuming the tubes are purchased from outside supplier, Total Variable Cost of producing one box of chap-off is as follows:

Direct Material 3.28

Labor 1.8

Manufacturing Overheads 1.62

Purchase cost of tubes 1.30

Total Variable Cost of producing = $8

1c. Silver Industries should make tubes, because of cost saving of 8-7.9 = $0.1 per box

2. Maximum purchase price acceptable to Silver industries = 7.9-6.7 = $1.2 per box

3a. Total Relevant cost of making 122,000 boxes:

Direct Material per box $4.10

Direct Labor 2.00

Manufacturing Overheads 1.8

Variable Cost = $7.9

Total Variable Cost of 122,000 boxes = 963,800

+ Avoidable Fixed Costs $50,000

Total Relevant Cost of Making = $1013,800

3b. Total Relevant cost of buying 122,000 boxes:

Direct Material per box $3.28

Direct Labor 1.8

Manufacturing Overheads 1.62

Purchase Cost $1.3

Variable Cost = $8

Total Relevant Cost of 122,000 boxes = 976,000

3c. Silver Industries will buy the boxes, because of cost savings of 37,800

4. Best alternative is to Make 100,000 boxes and buy 22,000 boxes