Question

what are these two answers and how do you get them?

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 24 tubes for $8 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. 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 cost per b Direct materials Direct labor Manufacturing overhead $3.60 2.00 1.40 Total cost $7.00 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 $1.35 per box of 24 tubes. If Silven Industries accepts the purchase proposal, direct labor and variable manufacturing overhead costs per box of Chap-Off would be reduced by 10% and direct materials costs would be reduced by 25% Required 1-a. Calculate the total variable cost of producing one box of Chap-Off. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Total variable cost$ 8.35 per box 1-b. 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.) otal vanable cost per box

Answer 1

Solution 1a:

Fixed manufacturing overhead per box = $90,000 / 100000 = $0.90 per box

Total variable cost of producing one box of chap off = Direct material + direct labor + Variable manufacturing overhead

= $3.60 + $2 + ($1.40 - $0.90) = $6.10 per box

Solution 1b:

If tubes of chap off purchased from outside supplier then reduction in variable manufacturing cost = ($2 + $0.50)*10% + ($3.60*25%) = $1.15 per box

Purchase price of empty tube from outside supplier = $1.35 per box

Total variable cost of producing one box of chap off, if tubes for chap off purchased from outside supplier = Variable cost calculated in part a + Purchase cost of tube - Reduction in variable cost

= $6.10 + $1.35 - $1.15 = $6.30 per box.