In: Accounting
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 4 tubes for $8.00 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $50,000 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 | $ | 3.40 | |
Direct labor | 2.00 | ||
Manufacturing overhead | 1.30 | ||
Total cost | $ | 6.70 | |
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 4 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%. |
Required: | |
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.) |
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 124,000 boxes. At this new volume, additional equipment must be acquired to manufacture the tubes at an annual rental of $26,000. Assume that the outside supplier will not accept an order for less than 124,000 boxes. |
a. |
Calculate the total relevant cost of making 124,000 boxes and total relevant cost of buying 124,000 boxes. (Do not round intermediate calculations.) |
Answer :
1 (a) total variable cost of producing one box of Chap-Off.
= Direct material + Direct labor + Variable manufacturing over head
= $ 3.40+ $ 2 + $ 0.80
= $ 6.20
Working note -1
Variable manufacturing overhead per unit
= Manufactring overhead per unit - Fixed cost per unit
= $ 1.30 - $ 50000/ 100000
= $ 1.30- $ 0.50
= $ 0.80
1(b) total variable cost of producing one box of Chap-Off if tube purchased from outside
= total variable cost of producing one box of Chap-Off - Avoidable manufacuring cost if tube buy from outside + purchase cost of tube
= $ 6.20 - $ 0.96 + $ 1.10
= $ 6.34
Working note -2
Avoidable manufacuring cost if tube buy from outside
= Direct material *20% + Direct material *10 % + Variable manufacturing oh *10 %
= $ 3.40*20% + $ 2*10% + $ 0.80*10%
= $ 0.68 + $ .20 + $ 0.08
= $ 0.96
2. Maximum purchase price acceptable to Silven Industries
= Avoidable manufacuring cost if tube buy from outside
= $ 0.96
3 (a) total relevant cost of making 124,000 boxes
= Avoidable manufacuring cost if tube buy from outside per box* number of box + annual rental of equipment
= $ 0.96*124000 + $ 26000
= $ 145040
(b) total relevant cost of buying 124,000 boxes
= $ 1.10* 124000 = $ 136400