The LuminaSkin Solutions, which produces and sells to wholesalers a highly successful line of summer lotions and insect repellents, has decided to diversify 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, the company developed a winter product line.

However, because of the conservative nature of the company management, the company'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 initiated.

The product selected is a lip balm that will be sold in a lipstick$-$type tube. The product will be manufactured in boxes for R$30$ per box. Because of the available capacity, no additional fixed cost will be absorbed by the product.

A new machine of R$150,000$ will be installed to produce the new product. It has an estimated life of $5$ years but can get R$30,000$ as salvage value if sold at the end of $4$th year.

The accounting department has estimated the following four yearly demands for the product.

Year

$1$

$2$

$3$

$4$

Quantity demand

$10,000$

$12,500$

$15,000$

$16,000$

LuminaSkin Solutions has approached a cosmetic manufacturer to discuss the possibility of purchasing the ready material to be placed in the empty lipstick$-$type tubes. The purchase price of the material from the cosmetic manufacturer would be R$26$ per box. It is also estimated that the cost of the empty tubes and filling cost would be R$8$ per box. The company expects a $12\%$ return from this venture.

Task:

Should the LuminaSkin Solutions make or buy the tubes? Show calculations to support your answer. $(25$ Marks$)$