Reichert Pty Ltd (Reichert) produces and sells to wholesalers a highly successful line of summer lotion and insect repellents. Reichert has decided to diversify to stabilise sales throughout the year. A natural area for Reichert 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, because of the conservative nature of the entity's managers, Reichert's CEO has decided to introduce only one of the new products for this coming winter. If the product is a success, further expansion will be initiated in future years. The product selected is a lip balm to 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 available capacity, no additional fixed charges will be incurred to produce the product. However, a $200000 fixed charge will be assigned to allocate a fair share of the entity's fixed costs to the new product. The remaining overhead costs are variable. Using estimated sales and production of 100000 boxes of lip balm as the standard volume, the: accounting department has developed the following costs per box of 24 tubes. Reichert approached Stengles, a cosmetics manufacturer, to discuss the possibility of purchasing the tubes for the new product. The purchase price of the empty tubes from Stengles would be $1.80 per 24 tubes. If Reichert accepts the purchase proposal, it is estimated that direct labour and variable overhead costs [outlined above] would be reduced by 10 per cent and direct materials costs would be reduced by 20 per cent. A. Conduct a quantitative analysis to help decide if Reichert should make or buy the tubes? 3 marks B. Instead of sales of 100000 boxes, revised estimates show sales volume at 125000 boxes. At this new volume, additional equipment at an annual rental of $20000 must be acquired to manufacture the tubes. However, this incremental cost would be the only additional fixed cost required, even if sales increased to 300000 boxes. (The 300000 level is the goal for the third year of production.) I. At an estimated volume of 125000 boxes, should Reichert make or buy the tubes? Show calculations to support your answer. 2 marks II. What other information might we need to assess the decision at an estimated volume of 300000 boxes? 2 marks C. Identify and briefly explain TWO key qualitative factors should Reichert managers consider in determining whether they should make or buy the lip balm tubes [in either of the scenarios abovel? Link each factor to the specific circumstances of Reichert. 4 marks Reichert Pty Ltd (Reichert) produces and sells to wholesalers a highly successful line of summer lotion and insect repellents. Reichert has decided to diversify to stabilise sales throughout the year. A natural area for Reichert 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, because of the conservative nature of the entity's managers, Reichert's CEO has decided to introduce only one of the new products for this coming winter. If the product is a success, further expansion will be initiated in future years. The product selected is a lip balm to 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 available capacity, no additional fixed charges will be incurred to produce the product. However, a $200000 fixed charge will be assigned to allocate a fair share of the entity's fixed costs to the new product. The remaining overhead costs are variable. Using estimated sales and production of 100000 boxes of lip balm as the standard volume, the: accounting department has developed the following costs per box of 24 tubes. Reichert approached Stengles, a cosmetics manufacturer, to discuss the possibility of purchasing the tubes for the new product. The purchase price of the empty tubes from Stengles would be $1.80 per 24 tubes. If Reichert accepts the purchase proposal, it is estimated that direct labour and variable overhead costs [outlined above] would be reduced by 10 per cent and direct materials costs would be reduced by 20 per cent. A. Conduct a quantitative analysis to help decide if Reichert should make or buy the tubes? 3 marks B. Instead of sales of 100000 boxes, revised estimates show sales volume at 125000 boxes. At this new volume, additional equipment at an annual rental of $20000 must be acquired to manufacture the tubes. However, this incremental cost would be the only additional fixed cost required, even if sales increased to 300000 boxes. (The 300000 level is the goal for the third year of production.) I. At an estimated volume of 125000 boxes, should Reichert make or buy the tubes? Show calculations to support your answer. 2 marks II. What other information might we need to assess the decision at an estimated volume of 300000 boxes? 2 marks C. Identify and briefly explain TWO key qualitative factors should Reichert managers consider in determining whether they should make or buy the lip balm tubes [in either of the scenarios abovel? Link each factor to the specific circumstances of Reichert. 4 marks
