PROBLEM 12-23 Make or Buy Decision LO12-3 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-Ofn 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 s9o,000 charge for fixed g 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-Of, the Accounting Department has developed the following manufacturing cost per box: Direct material$3.60 Direct labor 2.00 Manufacturing overhead 140 Total cost Costs and Benefits: $7.00 costs above relate to making both the lip balm and the tube that contains it. As an alternative to making the tubes for Chap-Of. Silven has approached a supplier to discuss the possibility of buying the tubes. The purchase price of the supplier's empy tubes would be S1.35 per box of 2 tubes and buys them from the outside supplier, its direct labor and variable manufacturing materials costs would be reduced by 25% overhead costs per box of Chap-Off would be reduced by 10% and its direct cision Analysis e Total Cost and ferential Cost utside supplier how much of its own Chap-Off manufacturing costs per box will it be able to avoid? (Hint: You need to separate I. If Silven buys its tubes from the su the manufacturing overhead of $1 4 2. What is the financial advantage (disadvantage) per box of Chap-Off if Silven buys its tubes from the outside supplier 0 per hox that is shown above into its variable and fixed components to derive the correct answer.) financial advantage (disadvantage) in total (not per box it Silven buys 100000 boxes of tubes from the outside supplier? Previous Highlight Next Highlight