Natural Way Corporation $($NWC$)$ manufactures a highly successful line of summer lotions and insect

repellents. NWC sells their products to wholesalers. NWC has decided to diversify in order to stabilize

its sales throughout the year. NWC is contemplating the production of winter lotions and creams to

prevent dry and chapped skin.

After considerable research, NWC has developed a winter products line. However, because of the

conservative nature of company management, the president has decided to introduce only one of the

new products for this coming winter. If the product is a success, there will be further expansion in

future years.

The product selected is a lip moisturizer to be sold in a lipstick$-$type tube. NWC will sell the product to

wholesalers in boxes of $24$ tubes for $$16\mathrm{.}00$ per box. Because of available capacity, the company will

incur no additional fixed charges to produce the product. However, to allocate a fair share of the

company's present fixed costs to the new product, the product will absorb a $$150,000$ fixed charge.

Using the estimated sales and production of $100,000$ boxes of lip balm as the standard volume, the

accounting department has developed the following costs per box of $24$ tubes:

Direct labour

$$4$

Direct materials

$$6$

Total overhead

$$3$

NWC has approached a cosmetics manufacturer to discuss the possibility of purchasing the tubes for

the new product. The purchase price of the empty tubes from the cosmetics manufacturer would be

$$1\mathrm{.}90$ per $24$ tubes. If NWC accepts the purchase proposal, it is estimated that direct labour and

variable overhead costs would be reduced by $10\%$ and direct materials costs would be reduced by

$20\%.$

Answer The Following $($Show all your calculations$)$

Should NWC make or buy the tubes?

What would be the maximum purchase price acceptable to NWC for the tubes? Support your

answer with an appropriate explanation.

Instead of sales of $100,000$ boxes, revised estimates show a sales volume of $125,000$ boxes. At

this new volume, NWC must acquire additional equipment, at an annual rental charge of $$10,000,$ to

manufacture the tubes. However, this incremental cost would be the only additional fixed cost, even if

sales increased to $300,000$ boxes. $($The $300,000$ level is the goal for the third year of production.$)$

Given these circumstances, should NWC make or buy the tubes?

Assume NWC has the option of making and buying at the same time. What would be your answer

to the prior question $(3)$ if this alternative was considered? $($Hint: Purchase all the tubes, Produce all

the tubes, Produce $100,000$ boxes and Purchase $25,000$ boxes$).$

What qualitative factors should NWC consider in determining whether it should make or buy the lip

balm tubes?