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 salesthroughout 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 thiscoming 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 $8.9per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $86,860 charge for fixedmanufacturing overhead will be absorbed by the product under the company's absorption costing system.

Using the estimated sales and production of 101,000 boxes of Chap-Off, the Accounting Department has developed the following cost per box:


Direct materials $4.1
Direct labor 2.0
Manufacturing overhead 2.3
Total cost
$8.4


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 todiscuss the possibility of purchasing the tubes for Chap-Off. The purchase price of the empty tubes from the supplier would be $1.33 per box of 24 tubes. If SilvenIndustries accepts the purchase proposal, direct labor and variable manufacturing overhead costs per box of Chap-Off would be reduced by 6% and direct materials costswould be reduced by 27%.



Requirement 1:
(a)
Calculate the total variable cost of one box of Chap-Off if the company manufactures all of its own tubes from start to finish. (Do not round intermediatecalculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)



Total variable cost per box $


(b)
Calculate the total variable cost of one box of Chap-Off if the tubes are purchased from the outside supplier. (Do not round intermediate calculations. Round youranswer to 2 decimal places. Omit the "$" sign in your response.)



Total variable cost per box $


(c) Should Silven Industries accept/reject the outside supplier's offer?

(Click to select)AcceptReject

Requirement 2:
What is the maximum price that Silven Industries should be willing to pay the outside supplier per box of 24 tubes? (Do not round intermediate calculations. Round youranswer to 2 decimal places. Omit the "$" sign in your response.)



Maximum price $ per box

Requirement 3:
Instead of sales of 101,000 boxes, revised estimates show a sales volume of 131,000 boxes. At this new volume, additional equipment must be acquired to manufacture thetubes at an annual rental of $59,000. Calculate the cost under the three alternatives. (Round your total variable cost per box to 2 decimal places. Round your answersto the nearest dollar amount. Omit the "$" sign in your response.)



(a) Total variable cost to produce 131,000 boxes of Chap-off, if all tubes required are produced internally:


Total variable cost $

(b) Total variable cost to produce 131,000 boxes of Chap-off, if all tubes required are purchased externally:


Total variable cost $


(c) What is the total variable cost of producing 131,000 boxes of Chap-Off , if 101,000 Chap-Off boxes are produced with tubes manufactured internally and tubes forremaining 30,000 Chap-Off boxes are purchased externally?


Total variable cost $

Answer 1

(a) Current scenario :-
Total Production under Absorption costing = 100,000 boxes
Fixed OH charged to 100,000 boxes = $90,000
So Fixed OH per box = $90,000/100,000 = $0.90 per Box.
As Total Mfg OH per box is $1.40, remaining ($1.40-$0.90) = $0.50 per box is Var Mfg OH.

So Var cost per Box is calualted as below :-
Direct material $3.60
Direct labor $2.00
Var Mfg overhead $0.50
-------------------------------
Total Var cost per box $6.10 ..............................Ans (a)

b. If the cartridges are purchased from the outside supplier:-
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 25%.

So New Var cost per Box is calualted as below :-
Direct material $3.60*0.75 = $2.70
Direct labor $2.00*0.90 = $1.80
Var Mfg overhead $0.50*0.90 = $0.45
------------------------------------------------
New Var cost per box $4.95 ..............................Ans (b)

(c) Fixed costs are sunk costs & will be incurred irrespective of Make or Buy. Thus they are not relevant in decision making.
So we see the differential Var cost between Make or buy decision.
From a & b, we see that differential var cost = $6.10 - $4.95 = $1.15
Thus by buying the Tube, Savingis only $1.15 while tube buying will cost $1.35. Thus there is a Loss of $1.35-$1.15 = $0.20 per box.

SO it is not advisable to Buy the tube option. Better Make the tube ourselves.