Problem $11-23($Algo$)$ Make or Buy Decision $[$LO$11-3]$

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 $$11$ per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $$80,000$ 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 $100,000$ boxes of Chap$-$Off, the Accounting Department has developed the following manufacturing cost per box:

Direct material $ $4\mathrm{.}60$

Direct labor $3\mathrm{.}00$

Manufacturing overhead $1\mathrm{.}90$

Total cost $ $9\mathrm{.}50$

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\mathrm{.}70$ 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 $25\%.$

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 $$1\mathrm{.}90$ per box that is shown above into its variable and fixed components to derive the correct answer.$)$

$2.$ What is the financial advantage $($disadvantage$)$ per box of Chap$-$Off if Silven buys its tubes from the outside supplier?

$3.$ What is the financial advantage $($disadvantage$)$ in total $($not per box$)$ if Silven buys $100,000$ boxes of tubes from the outside supplier?

$4.$ Should Silven Industries make or buy the tubes?

$5.$ What is the maximum price that Silven should be willing to pay the outside supplier for a box of $24$ tubes?

$6.$ Instead of sales of $100,000$ boxes of tubes, revised estimates show a sales volume of $125,000$ boxes of tubes. At this higher sales volume, Silven would need to rent extra equipment at a cost of $$45,000$ per year to make the additional $25,000$ boxes of tubes. Assuming that the outside supplier will not accept an order for less than $125,000$ boxes of tubes, what is the financial advantage $($disadvantage$)$ in total $($not per box$)$ if Silven buys $125,000$ boxes of tubes from the outside supplier? Given this new information, should Silven Industries make or buy the tubes?

$7.$ Refer to the data in Required $6.$ Assume that the outside supplier will accept an order of any size for the tubes at a price of $$1\mathrm{.}70$ per box. How many boxes of tubes should Silven make? How many boxes of tubes should it buy from the outside supplier?