Silven Industries, which manufactures and sells 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, Silven developed a new lip balm called Chap$-$Off that is sold to wholesalers in boxes of

$24$ tubes for $$10$ per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be

incurred to produce Chap$-$Off. However, a $$80,500$ charge for fixed manufacturing overhead will be absorbed by the

product under the company$$s absorption costing system.

Using estimated sales and production of $115,000$ boxes of Chap$-$Off, the Accounting Department developed the

following manufacturing cost per box:

Direct material $

$4\mathrm{.}20$

Direct labor $2\mathrm{.}60$

Manufacturing overhead$1\mathrm{.}70$

Total cost $

$8\mathrm{.}50$

The costs above include the lip balm and the tube containing it$.$ As an alternative to making the tubes for Chap$-$Off,

Silven is considering buying them from an outside supplier for $$1\mathrm{.}90$ 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 decrease by $15\%$ and its direct materials costs would drop by $30\%.$

Required:

$1.$ If Silven buys its tubes from the outside supplier, how much of its own Chap$-$Off manufacturing costs per box

will it avoid? $($Hint: You need to separate the manufacturing overhead of $$1\mathrm{.}70$ per box shown above into its

variable and fixed components.$)$

$2.$ 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 $115,000$ boxes of tubes

from the outside supplier?

$4.$ Should Silven Industries make or buy the tubes?

$5.$ What is the maximum price Silven should be willing to pay the outside supplier for a box of $24$ tubes?

$6.$ Instead of sales of $115,000$ boxes of tubes, revised estimates show a sales volume of $138,000$ boxes of

tubes. At this higher sales volume, Silven would need to rent extra equipment at a cost of $$43,000$ per year

to make the additional $23,000$ boxes of tubes. Assuming the outside supplier will not accept an order for less

than $138,000$ boxes of tubes, what is the financial advantage $($disadvantage$)$ in total $($not per box$)$ if Silven

buys $138,000$ 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 the outside supplier will accept an order of any size for the tubes at

a price of $$1\mathrm{.}90$ per box. How many boxes of tubes should Silven make? How many boxes of tubes should it buy from the outside supplier?