11-3 Week n Problems Problem 12-23 Make or Buy Decision [L012-3] Silven Industries, which manufactures and sells a highly successful line of summer lotions and insect repellents, has decided t diversify in order to stabilize sales throughout the year. A natural area for the company to consider is the production of winter 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 one of the new products for this coming winter If the product is a success, further expansion in future years will be initieted The product selected (called Chap-Off) is a ip balm that will be sold in a lipstick-type tube. The product will be sold to wholesa boxes of 24 tubes for $8 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurre produce the product. However, a $135,000 charge for fixed manufacturing overhead will be absorbed by the product under th company's absorption costing system. Using the estimated sales and production of 135,000 boxes of Chap-Off, the Accounting Department has developed the follow manufacturing cost per box Direct material Direct labor Manufacturing overhead1.28 Total cost $3.58 1.60 $6.88 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 Silven has approsched a supplier to discuss the possiblity of buying the tubes. The purchase price of the suppliers empty tube would be $1.50 per box of 24 tubes If Silven Industries stops making the tubes and buys them from the outside supplier, its dire labor and vanable manufacturing overhead costs per box of ChapO" would be reduced by t0% and its direct matenals costs w reduced by 30%.