Slven Industrles, which manufactures and sells a hlghly successful line of summer lotions and Insect repellents, has decided to dlversify In order to stablize sales throughout the year. A natural area for the company to conslder Is the production of winter lotions and creams to prevent dry and chapped skin. After conslderable reerch, a winter products line has been developed. However, Slven's presldent has declded to Introduce only one of the new products for this coming winterlf the product is a success, further expansion in future years will be Initiated. The product selected (called Chap-Off) Is a lp balm that will be sold In a lipstick-type tube. The product will be 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 the product However, a $128,000 charge for fixed manufacturing overhead will be absorbed by the product under the company's absorption costing system. Using the estimated sales and production of 160,000 boxes of Chap-Off, the Accounting Department has developed the following manufacturing cost per box Direct material Direct Labor Manufacturing overhead Total cost $4.58 2.88 2.00 $9.38 The costs above relate to making both the lip balm and the tube that contalns it As an altemative to making the tubes for Chap-Off, Sliven has approached a supplier to discuss the possibllty of buying the tubes. The purchase price of the suppller's empty tubes would be $1.40 per box of 24 tubes. If Slven Industries stops making the tubes and buys them from the outside supplier, lts direct labor and variable manufacturing overhead costs per box of Chap-Off would be reduced by 10% and lts direct materials costs would be reduced by 20% Required: 1lf Silven buys its tubes from the outside supplier, how much of its own Chap-Off manufacturing costs per box will t be able to avoid? Hint You need to separate the manufacturing overhead of $2.00 per box that is shown above Into lts varlable and fixed components to derlve the correct answer.) 2. What Is the financlal advantage (dlsadvantage) 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 160,000 boxes of tubes from the outslde suppler? 4. Should Silven Industries make or buy the tubes? 5. What Is the maxlmum price that Silven should be willing to pay the outslde supplier for a box of 24 tubes? 6. Instead of sales of 160,000 boxes of tubes, revised estimates show a sales volume of 197,000 boxes of tubes. At this higher sales volume, Silven would need to rent extra equipment at a cost of $57,000 per year to make the addltional 37,000 boxes of tubes. Assuming that the outside supplier will not accept an order for less than 197000 boxes of tubes, what Is the financlal advantage (disadvantage) In total (not per box) If Siiven buys 197,000 boxes of tubes from the outside supplier? Glven this new Information, should Slven Industrles make or buy the tubes? 7. Refer to the data In (6) above. Assume that the outside supplier will accept an order of any size for the tubes at a price of $1.40 per box. How many boxes of tubes should Silven make? How many boxes of tubes should It buy from the outside supplier
