Question

Silven Industries, which manufactures and sells a highly successful line of summer lotions and insect repelents, has decided to diversity in order to stabilite 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 of the product is a success further expansion in future years will be initiated The product selected called Chap-om is a p alm that will be sold in a lipstick-type tube. The product will be sold to wholesalers in boxes of 24 tubes for $14 per box Because of excess capacity, no additional fund manufacturing overhead costs will be incurred to produce the product. However, a $100.000 charge for foed mangcturing overhead wil be absorbed by the product under the company's absorption costing system Using the estimated sales and production of 130.000 boxes of Chap Off the Accounting Department has developed the following manufacturing cost per box pract labor Manufacturing overed Total cout The costs above relate to making both the lip balm and the tube that contains it. As anternative to making the tubes for Chapot Silven has approached a supplier to discuss the possibility of buying the tubes. The purchase price of the superseoty tubes would be $195 per box of 24 tubes Seven industries stops making the tubes and buy them from the outside Suecidirect Isbor and variable manufacturing overhead costs per box of Chao-Off would be reduced by and its drect materials costs would be reduced by 205 Reguired: 1. If Silven buys its tubes from the outside supplier how much of its own Chap-Off manufacturing casts per box will be able to avoid? Hint You need to separate the manufacturing overhead of 52.50 Der box that is shown above into its variable and fixed components to delive the correct answer 2. What the financial advantage disadvantage box of Chap O v en buy its tubes from the outdoor 3. What is the financ e disadvantage in total noter Sven buys 130.000 boxes of tubes from the outside 4 Should Silven Indust make or buy the tube 5 What is the maximum price that Silven thould be willing to pay the outside supplier for a box of 24 tube 6. Instead of sales of 130 000 boxes of tubes, revised estimates show a sales volume of 161.000 boxes of tubes Al this higher sales volume Silven would need to rent extra equipment at a cost of $51.000 per year to make the additional 31.000 boxes of tubes Assuming that the outside supplier will not accept an order for less than 161.000 boxos of tubes what is the financial advantage disadvantage in total noter boxif seven buy151.000 softues from the outside sole Given the w oman should Sevenind make or buy the tubes 7 Refer to the data b assume that the outside supperwaccept an order of any size for the best price of $195 per box How many boxes of tubes should Siven more How many bones of tubes should it buy from the outside supper?

Answer 1

Variable Manufacturing Overhead = 2.5*130,000-130,000 = $195,000

Per box = 195,000/130,000 = $1.5

1.Manufacturing Cost per box it will be able to avoid will be:

Direct Material Cost 5.80*20%	1.16
Direct Labor 4.20*10%	0.42
Variable Manufacturing Overheads 1.5*10%	0.15
Avoidable Cost	1.73

i.e. $1.73 per box

2. Financial Advantage/(Disadvantage) per box if buys from outside = $1.73-$1.95 = $(0.22) i.e. disadvantage

3. Total Financial Advantage/(Disadvantage) = (0.22)*130,000= $(28,600)

4.Silven Industries should make the tubes

5. Maximum Price for a box of 24 tubes = Avoidable Cost = $1.73 per box

6. Cost of buying from outside supplier = $1.95*161,000 = $313,950

Producing = $1.73*161,000 + 51,000 = $329,530

Financial Advantage of buying from outside supplier = $15,580

Silven should BUY the tubes.

7. Silven should make 130,000 boxes of tubes since economical

BUY 31,000 boxes of tubes, will not need to buy equipment