10. value: 3.00 points Silven Industries, which manufactures and sells a highly successful line of summer lotions and insect repellents, has decided to diversify in
10.
value: 3.00 points
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, Silvens 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 8 tubes for $6.10 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 companys 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 | $ | 2.80 | |
Direct labor | 1.00 | ||
Manufacturing overhead | 1.00 | ||
Total cost | $ | 4.80 | |
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 $0.80 per box of 8 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.) |
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.) |
1c. | Should Silven Industries make or buy the tubes? | ||||
|
2. | What would be the maximum purchase price acceptable to Silven Industries? (Do not round intermediate calculations. Round your answer to 2 decimal places.) |
3. | Instead of sales of 100,000 boxes, revised estimates show a sales volume of 123,000 boxes. At this new volume, additional equipment must be acquired to manufacture the tubes at an annual rental of $20,000. Assume that the outside supplier will not accept an order for less than 123,000 boxes. |
a. | Calculate the total relevant cost of making 123,000 boxes and total relevant cost of buying 123,000 boxes. (Do not round intermediate calculations.) |
b. | Based on the above calculations, should Silven Industries make or buy the boxes? | ||||
|
4. | Refer to the data in (3) above. Assume that the outside supplier will accept an order of any size for the tubes at $0.80 per box. Which of these is the best alternative? | ||||||||
|
Step by Step Solution
There are 3 Steps involved in it
Step: 1
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started