Question

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 Anatural 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 the product is a success further expansion in future years will be initiated The product selected (called Chap-On) is a lip balm that will be sold in a lipstick-type tube. The product will be sold to wholesalers in boxes of 6 tubes for $5 40 per box Because of excess capacity, no additional foced manufacturing overhead costs will be incurred to produce the product. However, a $90 000 charge for fored 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 $200 Direct materials Direct labor Manufacturing overhead 100 120 Total cost $420 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 50 80 per box of 6 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 (Do not round intermediate calculations. Round your answer to 2 decimal places.) Total variable cost per box 1b. 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 (Do not round intermediate calculations. Round your answer to 2 decimal places.) Total variable cost per box tc. Should Silven Industries make or buy the tubes? Make Buy

Answer 1

ques 1 The $90000 in fixed overhead cost charged to the new product is a common cost thar will be the same whether the tubes are produced internally or purchased from the outside.hence not relevant Total manufacturing overhead cost per box of chap-off Less:fixed portion(90000/100000) Variable overhead cost per box the total variable cost pf producing one box of chap off Direct material Direct Labor Variable manufacturing overhead total variable cost per box 1 0.3 3.3 If tubes for the chap off are purchased from outside supplier Direct materials($2*80%) Direct Labor(1*90%) Variable manufacturing overhead(0.30*90%) cost of tube from outside total variable cost per box 1.6 0.9 0.27 0.8 3.57 therefore the company should reject the outside supplier offer a savings of $0.20 per box of chap-off will be realised producing tubes internally Cost avoided by purchasing tubes Direct materials($2*20%) Direct Labor(1*10%) Variable manufacturing overhead(0.3*10%) total cost avoided(Maximum Price willing to be paid) 0.41 0.1 0.03 0.53 at a volume of 121,000 boxes the company should buy the boxes $ cost of making 121000 boxes 121000boxes*3.3 Rental cost of equipment Total variable cost (making) $ $ 399,300 42,000 441,300 cost of buying 120000 boxes 121000boxes*3.57 $ 431,970 ques 4 company should buy the 121,000 boxes from outside suppliers