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 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, Silven’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 (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 6 tubes for $7.20 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $100,000 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 100,000 boxes of Chap-Off, the Accounting Department has developed the following cost per box:

Direct materials	$	3.60
Direct labor		1.00
Manufacturing overhead		1.40
Total cost	$	6.00

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 $1.10 per box of 6 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 20%.

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?

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 100,000 boxes, revised estimates show a sales volume of 120,000 boxes. At this new volume, additional equipment must be acquired to manufacture the tubes at an annual rental of $40,000. Assume that the outside supplier will not accept an order for less than 120,000 boxes.

a. Calculate the total relevant cost of making 120,000 boxes and total relevant cost of buying 120,000 boxes. (Do not round intermediate calculations.)

b. Based on the above calculations, should Silven Industries make or buy the boxes?

4. Refer to the data in (3) above. Assume that the outside supplier will accept an order of any size for the tubes at $1.10 per box. Which of these is the best alternative?

	Make all 120,000 boxes
	Buy all 120,000 boxes
	Make 100,000 boxes and buy 20,000 boxes
	Make 40,000 boxes and buy 40,000 boxes

Answer 1

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1a. Total variable cost of producing one box of Chap-Off
Break up of Manufacturing cost:
Fixed Manufacturing Overhead	$100000/100000 boxes	$       1.00	per Box
Total Manufacturing Overhead		$       1.40	per Box
Variable Manufacturing overhead	1.4-1	$       0.40	per Box
Variable Cost:
Direct Material	$                                  3.60
Direct Labor	$                                  1.00
Variable Overhead	$                                  0.40
Total Variable cost per unit	$                                    5.0
1b. The Chap-Off are purchased from the outside supplier
Direct Material	3.6-20%	$       2.88
Direct Labor	1-10%	$       0.90
Variable Overhead	0.4-10%	$       0.36
Purchasing Price		$       1.10
Total Variable cost per unit		$       5.24
1c. Silven should make the tubes as cost is $5 which is less than $5.24 in buying
2. The maximum Purchase price
Total Variable Cost in case of making in house	$                                    5.0
Less:Toatal Variable Cost in case of buying from outside	$                                  4.14
(without purchasing cost)
Maximum Pruchase price acceptable to Silven	$                                  0.86
To make purchasing the tubes attractive, however, the purchase price should be less than $0.86 per box.
3a. The total relevant cost of making 120,000 boxes and total relevant cost of buying 120,000 boxes.
Cost of making 120,000 boxes:
120000*$5 per box	$                           600,000
Add: Rental cost of equipment	$                             40,000
Total Cost	$                           640,000
Cost of buying 120,000 boxes:
120000*$5.24 per box	$                           628,800
3b. Should buy the boxes as it will save cost of $11200
Part 4
Maximum Cost which is best alternative in part 3	$                           628,800
(Meaning in Part4 cost should be less than this)
Making 120000	$                           640,000
Buying 120000	$                           628,800
Make 100,000 boxes and buy 20,000 boxes
100000*5	$                           500,000
20000*5.24	$                           104,800
Total	$                           604,800
Best alternative is Making 100000 and buying 20000 since it has cost of $604800.
Making 40000 and buying 40000 is not suggested as needed are 120000.