Question
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
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 $7 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $84,000 charge for fixed manufacturing overhead will be absorbed by the product under the companys absorption costing system. |
Using the estimated sales and production of 140,000 boxes of Chap-Off, the Accounting Department has developed the following cost per box: |
Direct materials | $ | 3.40 | |
Direct labor | 1.70 | ||
Manufacturing overhead | 1.10 | ||
Total cost | $ | 6.20 | |
The costs above include costs for producing both the lip balm and the tube that contains it. As an alternative to making the tubes, Silven has approached a supplier to discuss the possibility of purchasing the tubes for Chap-Off. The purchase price of the empty tubes from the supplier would be $1.35 per box of 24 tubes. If Silven Industries accepts the purchase proposal, direct labor and variable manufacturing overhead costs per box of Chap-Off would be reduced by 10% and direct materials costs would be reduced by 25%. |
Required: | |
1a. | Calculate the total variable cost of producing one box of Chap-Off. (Do not round intermediate calculations. Round your answer to 2 decimal places.) |
1b. | Assume that the tubes for the Chap-Off are purchased from the outside supplier, calculate the total variable cost of producing one box of Chap-Off. (Do not round intermediate calculations. Round your answer to 2 decimal places.) |
1c. | Should Silven Industries make or buy the tubes? | ||||
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2. | What would be the maximum purchase price acceptable to Silven Industries? (Do not round intermediate calculations. Round your answer to 2 decimal places.) |
3. | Instead of sales of 140,000 boxes, revised estimates show a sales volume of 170,000 boxes. At this new volume, additional equipment must be acquired to manufacture the tubes at an annual rental of $52,000. Assume that the outside supplier will not accept an order for less than 170,000 boxes. |
a. | Calculate the total relevant cost of making 170,000 boxes and total relevant cost of buying 170,000 boxes. (Do not round intermediate calculations.) |
b. | Based on the above calculations, should Silven Industries make or buy the boxes? | ||||
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4. | Refer to the data in (3) above. Assume that the outside supplier will accept an order of any size for the tubes at $1.35 per box. Which of these is the best alternative? | ||||||||
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