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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

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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 Ine 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 inItlated.
The product selected (called Chap-Off) is a IIp balm that will be sold In a llpstick-type tube. The product will be sold to wholesalers in
boxes of 24 tubes for $11 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to
produce the product. However, a $94,500 charge for fixed manufacturing overhead will be absorbed by the product under the
company's absorptlon costing system.
Using the estimated sales and production of 105,000 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 possibllity of buying the tubes. The purchase price of the supplier's empty tubes
would be $2.00 per box of 24 tubes. If Silven Industrles stops making the tubes and buys them from the outside supplier, Its direct
labor and varlable manufacturing overhead costs per box of Chap-Off would be reduced by 10% and its direct materlals costs would be
reduced by 30%
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 avold?
(Hint: You need to separate the manufacturing overhead of $2.00 per box that is shown above into its varlable and fixed components
to derlve 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 105,000 boxes of tubes from the outside supplier?
Should Silven Industrles 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?
Instead of sales of 105,000 boxes of tubes, revised estimates show a sales volume of 131,000 boxes of tubes. At this higher sales
volume, Silven would need to rent extra equipment at a cost of $46,000 per year to make the additional 26,000 boxes of tubes.
Assuming that the outside supplier will not accept an order for less than 131,000 boxes of tubes, what Is the financlal advantage
(disadvantage) In total (not per box) If Silven buys 131,000 boxes of tubes from the outside supplier? Given this new Information, should
Silven Industrles make or buy the tubes?
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 $2.00 per
box. How many boxes of tubes should Silven make? How many boxes of tubes should it buy from the outside supplier?
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