Question

PROBLEM 12-23 Make or Buy Decision LO12 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 -3 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 prod uct 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 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the prod- uct. However, a $90,000 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 manufacturing cost per box $3.60 2.00 1.40 $7.00 Direct material Direct labor Manufacturing overhead Total cost . .. . The costs above relate to making both the lip balm and the tube that contains it. As an alterna- ve to making the tubes for Chap-Off, Silven has approached a supplier to discuss the possibility of buying the tubes. The purchase price of the supplier's empty tubes would be $1.35 per box of dustries stops making the tubes and buys them from the outside supplier, its direct labor and variable manufacturing overhead costs per box of Chap-Off would be reduced by 4 tubes. If Silven In 10% an Required: d its direct materials costs would be reduced by 25% ven buys its tubes from the outside supplier, how much of its own Chap-Off manufac ring costs per box will it be able to avoid? (Hint: You need to separate the manufacturing ead of $1.40 per box that is shown above into its variable and fixed components to deriv I. If Sil overh the correct answer.) from the outside supplier? bo at is the financial advantage (disadvantage) per box of Chap-Off if Silven buys its tubes What is the financial advantage (disadvantage) in total (not per box) if Silven buys 100,000 tubes from the outside supplier?

Answer 1

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