Question 1:

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, Silvens 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 $9 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $139,500 charge for fixed manufacturing overhead will be absorbed by the product under the companys absorption costing system.

Using the estimated sales and production of 155,000 boxes of Chap-Off, the Accounting Department has developed the following manufacturing cost per box:

Direct material	$	4.30
Direct labor		2.60
Manufacturing overhead		1.90
Total cost	$	8.80

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 $1.35 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 20%.

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 $1.90 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 155,000 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 155,000 boxes of tubes, revised estimates show a sales volume of 191,000 boxes of tubes. At this higher sales volume, Silven would need to rent extra equipment at a cost of $56,000 per year to make the additional 36,000 boxes of tubes. Assuming that the outside supplier will not accept an order for less than 191,000 boxes of tubes, what is the financial advantage (disadvantage) in total (not per box) if Silven buys 191,000 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 $1.35 per box. How many boxes of tubes should Silven make? How many boxes of tubes should it buy from the outside supplier?

Question 2:

The Walton Toy Company manufactures a line of dolls and a sewing kit. Demand for the companys products is increasing, and management requests assistance from you in determining an economical sales and production mix for the coming year. The company has provided the following data:

Product	Demand Next year (units)	Selling Price per Unit		Direct Materials		Direct Labor
Debbie	55,000	$	27.00	$	4.80	$	5.00
Trish	47,000	$	6.00	$	1.60	$	1.50
Sarah	40,000	$	40.00	$	7.19	$	8.00
Mike	35,000	$	15.00	$	2.50	$	6.00
Sewing kit	330,000	$	8.50	$	3.70	$	1.00

The following additional information is available:

1. The companys plant has a capacity of 110,050 direct labor-hours per year on a single-shift basis. The companys present employees and equipment can produce all five products.

2. The direct labor rate of $10 per hour is expected to remain unchanged during the coming year.

3. Fixed manufacturing costs total $570,000 per year. Variable overhead costs are $4 per direct labor-hour.

4. All of the companys nonmanufacturing costs are fixed.

5. The companys finished goods inventory is negligible and can be ignored.

Required:

1. How many direct labor hours are used to manufacture one unit of each of the companys five products?

2. How much variable overhead cost is incurred to manufacture one unit of each of the companys five products?

3. What is the contribution margin per direct labor-hour for each of the companys five products?

4. Assuming that direct labor-hours is the companys constraining resource, what is the highest total contribution margin that the company can earn if it makes optimal use of its constrained resource?

5. Assuming that the company has made optimal use of its 110,050 direct labor-hours, what is the highest direct labor rate per hour that Walton Toy Company would be willing to pay for additional capacity (that is, for added direct labor time)?

Question 3

The postal service of St. Vincent, an island in the West Indies, obtains a significant portion of its revenues from sales of special souvenir sheets to stamp collectors. The postal service purchases the souvenir sheets from a supplier for $2.50 each. St. Vincent has been selling the souvenir sheets for $14.00 each and ordinarily sells about 114,000 units. To test the market, the postal service recently priced a new souvenir sheet at $12.60 and sales increased to 129,960 units.

Required:

1. What total contribution margin did the postal service earn when it sold 114,000 sheets at a price of $14.00 each?

2. By what percentage did the St. Vincent post office decrease its selling price? By what percentage did unit sales increase?

3. What total contribution margin did the postal service earn when it sold 129,960 sheets at a price of $12.60 each?

4. What was the postal services increase (decrease) in total contribution margin going from the higher price of $14.00 to the lower price of $12.60?

5. How many sheets would the postal service have to sell at the lower price of $12.60 to equal the total contribution margin earned at the higher price of $14.00? (Round your answer to the nearest whole number.)

6. What percentage increase in the number of sheets sold at $12.60 must be achieved to equal the total contribution margin earned at the higher price of $14.00? (Round your intermediate calculations to the nearest whole number. Round final answer to 1 decimal place.)