Question

I have completed the first 5 parts just need 6&7

Need to complete it by noon pacific time

Thanks

Problem 6-23 (Algo) Make or Buy Decision [LO6-3]

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 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 $80,500 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 115,000 boxes of Chap-Off, the Accounting Department has developed the following manufacturing cost per box:

Direct material	$	4.20
Direct labor		2.60
Manufacturing overhead		1.70
Total cost	$	8.50

The costs above relate to making both the lip balm and the tube that contains it. As an alternative to making the tubes for Chap-Off, Silven has approached a supplier to discuss the possibility of buying the tubes. The purchase price of the supplier's empty tubes would be $1.90 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 be reduced by 15% and its direct materials costs would be reduced 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 be able to avoid? (Hint: You need to separate the manufacturing overhead of $1.70 per box that is shown above into its variable and fixed components to derive the correct answer.)

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 that 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 that 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 (6) above. Assume that the outside supplier will accept an order of any size for the tubes at a price of $1.90 per box. How many boxes of tubes should Silven make? How many boxes of tubes should it buy from the outside supplier?

Answer 1

Answer 6

Cost Benefit Analysis between Purchase and Manufacture

PARTICULARS	Cost of Manufacturing (per box)	Cost of Purchasing (per box)
Direct Material	4.20	2.94
Direct Labour	2.60	2.21
Variable Prod. Overhead	1.00	0.85
Purchase Cost		1.90
Total Variable Cost (per box)	7.80	7.90
Total Production boxes	138000	138000
Total Variable Cost	1076400	1090200
Additional Machinery Rent	43000
Total Cost	1119400	1090200
Financial Advantage in Purchasing	29200

Answer 7

As Silven's cost of manufaturing upto 115000 units is $7.80 per box and for the next 23000 units is $9.67 AND its cost of purchasing $7.90 per box, Silven has advnatage of $0.10 in manufacturing upto 115000 units and a disadvantage of producing post that level.

Therefor Silven should produce upto its capacity of 115000 units and purchase the rest.

The arrangement suggested is illustrated below :-

	Units	Rate	Total
Production	115000	7.8	897000
Purchase	23000	7.9	181700
Total Cost			1078700

Therefore it should buy 23000 units from outside supplier