TheSplishOutdoors Corporation, which produces a highly successful line of summer lotions and insect repellents and sells them to wholesalers, has decided to diversify in order to stabilize its 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 has developed a winter products line. However, because of the conservative nature of company management, the president has decided to introduce only one of the new products for this coming winter. If the product is a success, there will be further expansion in future years.

The product selected is a lip balm to be sold in a lipstick-type tube. The company will sell the product to wholesalers in boxes of25.00tubes for $20.00per box. Because of available capacity, the company will incur no additional fixed charges to produce the product. However, to allocate a fair share of the company's present fixed costs to the new product, the product will absorb a $145,000fixed charge.

Using the estimated sales and production of100,000boxes of lip balm as the standard volume, the accounting department has developed the following costs per box of25.00tubes:

Direct labour

$4.00

Direct materials

5.95Total overhead

3.05Total

$13.00

SplishOutdoors has approached a cosmetics manufacturer to discuss the possibility of purchasing the tubes for the new product. The purchase price of the empty tubes from the cosmetics manufacturer would be $2.00per25.00tubes. IfSplishOutdoors accepts the purchase proposal, it is estimated that direct labour and variable overhead costs would be reduced by10% and direct materials costs would be reduced by20%.

ShouldSplishOutdoors make or buy the tubes?(Round answers to 2 decimal places, e.g. 15.25. If an amount reduces the net income then enter with a negative sign preceding the number e.g. -15,000 or parenthesis, e.g. (15,000).)

Make

(Per Box)

Buy

(Per Box)

Net Income

Increase(Decrease)

select an item

Purchase price

Variable overheads

Total cost

Direct labour

Direct materials

$

enter a dollar amount

$

enter a dollar amount

$

enter a dollar amount

select an item

Direct labour

Direct materials

Purchase price

Total cost

Variable overheads

enter a dollar amount

enter a dollar amount

enter a dollar amount

select an item

Total cost

Variable overheads

Purchase price

Direct materials

Direct labour

enter a dollar amount

enter a dollar amount

enter a dollar amount

select an item

Direct labour

Direct materials

Total cost

Purchase price

Variable overheads

enter a dollar amount

enter a dollar amount

enter a dollar amount

select a closing name for this statement

Variable overheads

Total cost

Direct labour

Direct materials

Purchase price

$

enter a total amount

$

enter a total amount

$

enter a total amount

Splishshould

select an option

make

buy

the tubes.

What would be the maximum purchase price acceptable toSplishOutdoors for the tubes?(Round answer to 2 decimal places, e.g. 15.25.)

Maximum purchase price

$

enter the maximum purchase price per box in dollars rounded to 2 decimal places

per box

Instead of sales of100,000boxes, revised estimates show a sales volume of130,000boxes. At this new volume, the company must acquire additional equipment, at an annual rental charge of $11,000, to manufacture the tubes. However, this incremental cost would be the only additional fixed cost, even if sales increased to300,000boxes. (The300,000level is the goal for the third year of production.) Under these circumstances, shouldSplishOutdoors make or buy the tubes? Show relevant costs only.

Alternative 1:Purchase all the tubes

$

enter a dollar amount

Alternative 2:

Produce all the tubes

$

enter a dollar amount

Plus:rent on new machine

enter a dollar amount

Total annual cost

$

enter a total amount

SplishOutdoors should

select an option

buy

make

the tubes.

The company has the option of making and buying at the same time. What would be your answer to part (c) if this alternative was considered?

Alternative 1:Purchase all the tubes

$

enter a dollar amount

Alternative 2:

Produce all the tubes

$

enter a dollar amount

Plus:rent on new machine

enter a dollar amount

Total annual cost

$

enter a total amount

Alternative 3:

Produce 100,000 boxes

$

enter a dollar amount

Purchase30,000boxes

enter a dollar amount

Total annual cost

$

enter a total amount

SplishOutdoors should consider

select an alternative

Alternative 2

Alternative 1

Alternative 3

as it is least expensive.