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 $6.20 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $50,000 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 Direct labor Manufacturing overhead $2.50 1.00 1.40 Total cost $4.90 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 $1.00 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. (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

Answer 1

Solution 1a:
Total manufacturing overhead per unit at 100000 boxes = $1.40 per unit
Fixed manufacturing overhead per unit = $50,000 / 100000 = $0.50 per unit
Variable manufacturing overhead per unit = $1.40 - $1.50 = $0.90 per unit
total variable cost of producing one box of Chap-Off = $2.50 + $1 + $0.90 = $4.40

Solution 1b:
Reduction in Chap-Off manufacturing costs per box, if tubes purchased from outside vendor = (Direct labor cost per unit + Variable manufacturing overhead per unit) * 10% + Direct material cost per unit * 20%
= ($1 + $0.90)*10% + ($2.50*20%) = $0.69 per unit
Total variable cost of producing one box of Chap-Off, if purchased from outside supplier = $4.40 - $0.69 + $1.00 = $4.71 per box

Solution 1c:
As buying cost is higher than making cost, therefore silven industries should make the tubes.

Solution 2:
Maximum price that silven willing to pay outside supplier = Variable cost to make = $0.69 per box

Solution 3a:
Cost to make 112000 boxes = (112000*$4.40) + $46,000 = $538,800
Cost to buy 112000 boxes = 112000*$4.71 = $527,520
Financial advantage (Disadvantage) of buying = $538800 - $527520 = $11,280

Solution 3b:
As there is financial advantage, therefore silven should buy the boxes.

Solution 4:
If outside supplier can accept any quantity of order,  then silven should make 100000 boxes and buy 12000 boxes from outside supplier.
Hence 3rd option is correct.