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 6 tubes for $5.40 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $90,000 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 | $ | 2.00 | |
Direct labor | 1.00 | ||
Manufacturing overhead | 1.20 | ||
Total cost | $ | 4.20 | |
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 $0.80 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%. |
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.) |
1c. | Should Silven Industries make or buy the tubes? | ||||
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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 121,000 boxes. At this new volume, additional equipment must be acquired to manufacture the tubes at an annual rental of $42,000. Assume that the outside supplier will not accept an order for less than 121,000 boxes. |
a. |
Calculate the total relevant cost of making 121,000 boxes and total relevant cost of buying 121,000 boxes. (Do not round intermediate calculations.) |
b. | Based on the above calculations, should Silven Industries make or buy the boxes? | ||||
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4. |
Refer to the data in (3) above. Assume that the outside supplier will accept an order of any size for the tubes at $0.80 per box. Which of these is the best alternative? |
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Solution 1a: | ||
Computation of variable Manufacturing Overhead per unit | ||
Total Manufacturing overhead per unit | 1.20 | |
Less: Fixed manufacturing overhead per unit | ||
Total fixed overhead | 90000 | |
/ number of Boxes | 100000 | 0.90 |
Variable manufacturing overhead per unit | 0.30 | |
Total variable cost of producing one box of Chap-Off | ||
Direct materials | 2.00 | |
Direct labor | 1.00 | |
Variable manufacturing overhead | 0.30 | |
Total variable cost of producing one box of Chap-Off | 3.30 |
Solution 1b: | |||
Avoidable manufacturing costs per box of Chap-off | |||
Existing | Reduction % | Avoidable cost | |
Direct materials | 2.00 | 20% | 0.40 |
Direct labor | 1.00 | 10% | 0.10 |
Variable manufacturing overhead | 0.30 | 10% | 0.03 |
Avoidable manufacturing costs per box of Chap-off | 0.53 | ||
Computation of Total variable cost of producing one box of Chap-Off, if purchased from outside supplier | |||
Total variable cost of producing one box of Chap-Off | 3.30 | ||
Less: Avoidable manufacturing costs per box of Chap-off | -0.53 | ||
Add: purchased from outside supplier per box of tubes | 0.80 | ||
Total variable cost per box of Chap-Off, if purchased | 3.57 |
Solution 1c: | |
Should Silven Industries make or Buy the Tubes = | Make |
(Because buying cost is higher than making cost) | |
Solution 2: | |
Maximum Price = Avoidable costs per box of Chap-off | 0.53 |
Solution 3a and 3b: | ||
For Revised volume of Boxes of Tubes: | Cost to Make | Cost to Buy |
Number of Boxes | 121000 | 121000 |
*Cost per box | 3.30 | 3.57 |
Normal Costs | 399300 | 431970 |
Add: Annual Rent on Extra Equipment | 42000 | 0 |
Total Relevent costs to make or buy | 441300 | 431970 |
a. Financial advantage (Disadvantage) if buy: | Advantage | |
(Cost to make - Cost to buy) | 9330 | |
b. make or Buy the boxes of Tubes? | Buy |
Solution 4: | |
Number of Boxes of tubes manufactured by Silven | 100000 |
Number of Boxes of tubes purchased from outside | 21000 |