PROBLEM $13-23$ Make or Buy Decision LO$13-3$

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 $$8$ per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the

product. However, a $$90,000$ 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:

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{.}35$ 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:

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{.}40$ per box that is shown above into its variable and fixed components to

derive the correct answer.$)$

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

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

Should Silven Industries make or buy the tubes?

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

Instead of sales of $100,000$ boxes, revised estimates show a sales volume of $120,000$ boxes. At this higher sales volume, Silven would need

to rent extra equipment at a cost of $$40,000$ per year to make the additional $20,000$ boxes of tubes. Assuming that the outside supplier

will not accept an order for less than $120,000$ boxes, what is the financial advantage $($disadvantage$)$ in total $($not per box$)$ if Silven buys

$120,000$ boxes of tubes from the outside supplier? Given this new information, should Silven Industries make or buy the tubes?

Refer to the data in $(6)$ above. Assume that the outside supplier will accept an order of any size for the tubes at a price of $$1\mathrm{.}35$ per box.

How many boxes of tubes should Silven make? How many boxes of tubes should it buy from the outside supplier?

What qualitative factors should Silven Industries consider in determining whether they should make or buy the tubes?

$($CMA$,$ adapted$)$