O'Leary Industries manufactures and sells a highly successful line of summer lotions and insect repellants. O'Leary's CEO, has decided that, to increase sales throughout the year, the company should move into the development and production of lotions and creams designed to prevent dry and chapped skin in the winter After considerable research, a winter products line has been developed. However, O'Leary's sales manager and production manager, have decided to introduce only one of the new products for the next winter. If the product is a success, more winter products will be manufactured and sold in the following years. The product selected by the three managers to start the new product line is called Chap-Off, 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 O'Leary has excess capacity, no additional fixed manufacturing overhead will be incurred to produce Using estimated sales and production of 100,000 boxes of Chap-Off, the Accounting Department has developed the costs presented in Table 1. The $60,000 charge for fixed manufacturing overhead will be allocated to the product under the company's absorption costing system. Table 1 Costs of Manufacturing One Box of Chap-Off material per box:24 empty lip balm tubes Direct material per box: lip balm to fill24 tubes S2.00 overhead per box S50,000 Allocated fixed manufacturing overhead: Wright Manufacturing has made a proposal to manufacture the empty Chap-Off tubes for O'Leary Wright quoted a purchase price of S1.35 per box of 24 empty lip balm tubes. If Wright Manufacturing's proposal is accepted, O'Leary's direct labor and variable manufacturing over head costs per box of Chap-Off will be reduced by 10%. The direct materials cost per box for the lip balm itself will not Requirements: Using the information presented above, perform the following calculations. 1. Use the cost estimates provided by O'Leary's Accounting Department to calculate the estimated total variable cost for one box of 24 filled Chap-Off tubes. If no calculation is needed for a line item, enter"0" in the appropriate column for that cost. Use the information presented in the case to calculate the estimated total variable cost for one box of Chap- Off if O'Leary's management accepts Wright Manufacturing's proposal. If no calculation is needed for a line item, enter "0" in the appropriate column for that cost Using the information you calculated in Part 1 and Part 2 as well as information provided in the case, compare the relevant costs per box that O'Leary's management should use to decide if the company should make or buy the empty lip balm tubes. If you do not identify four costs as relevant, write "Not Needed" in the unused row(s) Create a segment margin income statement assuming the empty lip balm tubes are manufactured. If no calculation is needed for a line item, enter "0" in the appropriate column for that cost Create a segment margin income statement assuming the empty lip balm tubes are purchased. If no calculation is needed for a line item, enter "0" in the appropriate column for that cost. Calculate the dollar difference between the net operating incomes calculated in Part 4 & in Part 5. What is the difference between the two net operating incomes per box? 2. 3. 4. 5. 6. O'Leary Industries manufactures and sells a highly successful line of summer lotions and insect repellants. O'Leary's CEO, has decided that, to increase sales throughout the year, the company should move into the development and production of lotions and creams designed to prevent dry and chapped skin in the winter After considerable research, a winter products line has been developed. However, O'Leary's sales manager and production manager, have decided to introduce only one of the new products for the next winter. If the product is a success, more winter products will be manufactured and sold in the following years. The product selected by the three managers to start the new product line is called Chap-Off, 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 O'Leary has excess capacity, no additional fixed manufacturing overhead will be incurred to produce Using estimated sales and production of 100,000 boxes of Chap-Off, the Accounting Department has developed the costs presented in Table 1. The $60,000 charge for fixed manufacturing overhead will be allocated to the product under the company's absorption costing system. Table 1 Costs of Manufacturing One Box of Chap-Off material per box:24 empty lip balm tubes Direct material per box: lip balm to fill24 tubes S2.00 overhead per box S50,000 Allocated fixed manufacturing overhead: Wright Manufacturing has made a proposal to manufacture the empty Chap-Off tubes for O'Leary Wright quoted a purchase price of S1.35 per box of 24 empty lip balm tubes. If Wright Manufacturing's proposal is accepted, O'Leary's direct labor and variable manufacturing over head costs per box of Chap-Off will be reduced by 10%. The direct materials cost per box for the lip balm itself will not Requirements: Using the information presented above, perform the following calculations. 1. Use the cost estimates provided by O'Leary's Accounting Department to calculate the estimated total variable cost for one box of 24 filled Chap-Off tubes. If no calculation is needed for a line item, enter"0" in the appropriate column for that cost. Use the information presented in the case to calculate the estimated total variable cost for one box of Chap- Off if O'Leary's management accepts Wright Manufacturing's proposal. If no calculation is needed for a line item, enter "0" in the appropriate column for that cost Using the information you calculated in Part 1 and Part 2 as well as information provided in the case, compare the relevant costs per box that O'Leary's management should use to decide if the company should make or buy the empty lip balm tubes. If you do not identify four costs as relevant, write "Not Needed" in the unused row(s) Create a segment margin income statement assuming the empty lip balm tubes are manufactured. If no calculation is needed for a line item, enter "0" in the appropriate column for that cost Create a segment margin income statement assuming the empty lip balm tubes are purchased. If no calculation is needed for a line item, enter "0" in the appropriate column for that cost. Calculate the dollar difference between the net operating incomes calculated in Part 4 & in Part 5. What is the difference between the two net operating incomes per box? 2. 3. 4. 5. 6
