Silven Industries, which manufactures and sells a highly successful line of summ

Question

Silven Industries, which manufactures and sells a highly successful line of summer lotions and insect repellents, has decided to diversify in order to stablize 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-om 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 $12 per box. Because of excess capacity, no to produce the product. However, additional flixed manufacturing overhead costs will be incurred a $110.000 charge for fixed manufacturing overhead will be absorbed by the product under the Using the estmated sales and production of 110,000 boxes of Chap-Off, the Accounting Department has ng cost per box: Direct labor Total cost $10.50 The costs above relate to making both the lip balm and the tube that contains it. As an alttrnative 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 suppliers empty tubes would be $1.65 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 10% and its direct materials costs would be reduced by 20%. Required: 1. If Silven buys its tubes from the outside supplier, how much of its own Chap-Off manufacturing costs per box ill It be able to avoid? (Hint: You need to separate the manufacturing overhead of $2.10 per box that is shown above into its variable and fixed 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) it Silven buys 110,000 boxes of tubes from the outside 4. Should Silven Industries make or buy the tubes? Pre

Explanation / Answer

4. Make or buy decision

Total variable cost of producing one box of chap-off would be

If tubes purchased from outside

Therefore, the company would reject the outside suppliers' offer. A saving of 0.1 (10.6 - 10.50) per box will be realised.

5. The maximum purchase price is 1.55

6. At the volume of 137000, the company should buy the tubes.

cost of making 137000 boxes

137000*1.55 = 212350

Rent =47000

Total cost = 259350

Cost of buying 137000 boxes

137000*1.65 = 226050

137000*10.50 per box = 1438500

Rent = 47000

Total cost = 1485500

Cost of buying 137000 boxes

137000 boxes * 10.60 = 1452200

cost of making: 110000 boxes * 10.50 = 1155000

cost of buying: 27000 boxex * 10.60 = 286200

Total cost = 1441200

Total manufacturing overhead 2.10 Less Fixed portion (110000/110000) 0 Variable Overhead cost per box 2.10

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