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 24 tubes for $12 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $110,000 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 110,000 boxes of Chap-off, the Accounting Department has developed the following manufacturing cost per box Direct material Direct labor Manufacturing overhead Total cost $ 5.00 3.40 2.10 $10.50 The costs above relate to making both the lip balm and the tube that contains it. As an alternative 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 $1.65 per box of 24 tubes. If Silven Industries 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 10% and its direct materials costs would be reduced by 20% Required: 1. If Silven buys its tubes from the outside supplier, how much of its own Chap Off manufacturing costs per box will it be able to avoid? (Hint: You need to separate the manufacturing overhead of $2.10 per box that is shown above into its variable and fixed components to

Answer 1

Solution 1:
Computation of variable Manufacturing Overhead per unit
Total Manufacturing overhead per unit		2.10
Less: Fixed manufacturing overhead per unit
Total fixed overhead	110000
/ number of Boxes	110000	1.00
Variable manufacturing overhead per unit		1.10
Avoidable manufacturing costs per box of Chap-off
	Existing	Reduction %	Avoidable cost
Direct materials	5.00	20%	1.00
Direct labor	3.40	10%	0.34
Variable manufacturing overhead	1.10	10%	0.11
Avoidable manufacturing costs per box of Chap-off	1.45

Solution 2:
Avoidable manufacturing costs per box of Chap-off	1.45
Purchase price of the supplier's empty tubes	1.65
Financial advantage (Disadvantage)	-0.2
Solution 3:
Number of Boxes	110000
Financial advantage (Disadvantage) per box	-0.2
Financial advantage (Disadvantage) in Total	-22000
Solution 4:
Should Silven Industries make or Buy the Tubes =	Make
Solution 5:
Maximum Price = Avoidable costs per box of Chap-off	1.45

Solution 6:
For Revised volume of Boxes of Tubes:	Cost to Make	Cost to Buy
Number of Boxes	137000	137000
*Cost per box of Tube	1.45	1.65
Normal Costs	198650	226050
Add: Annual Rent on Extra Equipment	47000	0
Total Relevent costs to make or buy	245650	226050
Financial advantage (Disadvantage) if buy:	Advantage
(Cost to make - Cost to buy)	19600
make or Buy the boxes of Tubes?	Buy

Solution 7:
Number of Boxes of tubes manufactured by Silven	110000
Number of Boxes of tubes purchased from outside	27000