Problem 13-23 (Algo) Make or Buy Decision [LO13-3] Siven industries, which manufactures and sells a highly successful line of summer lotions and insect repellents, has decided to diversify in order to stablize sales throughout the year. A natural area for the compary to consider is the production of winter lotions and cteams to prewert dry and chapped skin. After considerable research, a winter products tine has been developed. Howevec, Siven'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 initioted. 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 bowes of 24 tubes for $11 per box, Decause of excess capacity, no additional fixed manufacturing overhoad costs will be incurred to produce the product. However, a $94,500 charge for faxd manufactiring overhead will be absorbed by the product under the company's abserption costing system. Using the estimated sales and production of 105.000 boxes of Chap-Otf, the Accounting Department has developed the following manufacturing cost per box: The costs above relete to making both the lip beim and the tube that contains it. As an alternatve to making the tubes for Chap-Of. Siven has spprosched a supplier to discuss the possiblity of birying the tubes. The purchase price of the supplier's empty tubes. would be \$2.00 per box of 24 hubes. IS Siven Indistries stops making the tubes and buys them from the outside supplier, its direct isbor and variable manufacturing overheed costs per box of Chap. Of would be reduced by 10x and its direct materials costs would be reduced by 30%. Pequired: 1. If Siven buy is tubes from the outside suppler, how much of its own Chap-Off manufocturing costs per box will it be able to avoid? 6.int: You need to separate the manuacturing ovethead of $200 per box that is shown above into its variable arsd fixed components. to derive the cortect answer) 2. What is the financial advantege (disadvantage) per box of chap-Orf if Siven buys its tubes from the outside supplien? 3 What is the financial advantage (disdyantage) in total (not per box) if Siven burs 105.000 boxes of tubes from the outside supplier? 4. Should Silven indutuies make of buy the tubes? 6. Whet is the maximum price that Stven should be wiling to pay the outside supplier for a box of 24 tubes? 6. Instead of sales of 105,000 boxes of tubes, revised estimates show a soles volume of 131,000 boxes of tubes. At this higher sales volume, Stven vould need to rent extra equprent at a cost of 546,000 per year to make the additional 26,000 bowes of tubers. Assuming that the outside supplier wil not sccept an order for less than 131,0oo boves of tubes, what is the financial advantage (disadvantage) in totat (not per box) if Stven buys 131,000 boxes of tubes from the eutside supplier? Given this new information, should Seven indictries male or buy the tubes? 7. Refer to the data in Required 6. Assume that the outule suppler will accept an order of any size for the tubes at a pice of 52.00 per bex. How many boxes of tubes should Siven make? How many boues of tubes should it buy from the ouside supplier