Silven Industries, which manufactures and sells a highly successful line of summ
ID: 2446492 • Letter: S
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 24 tubes for $8 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $96,000 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 120,000 boxes of Chap-Off, the Accounting Department has developed the following cost per box:
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 $1.35 per box of 24 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 25%.
Calculate the total variable cost of producing one box of Chap-Off. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
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.)
What would be the maximum purchase price acceptable to Silven Industries? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Instead of sales of 120,000 boxes, revised estimates show a sales volume of 140,000 boxes. At this new volume, additional equipment must be acquired to manufacture the tubes at an annual rental of $60,000. Assume that the outside supplier will not accept an order for less than 140,000 boxes.
Calculate the total relevant cost of making 140,000 boxes and total relevant cost of buying 140,000 boxes. (Do not round intermediate calculations.)
Refer to the data in (3) above. Assume that the outside supplier will accept an order of any size for the tubes at $1.35 per box. Which of these is the best alternative?
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 $8 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $96,000 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 120,000 boxes of Chap-Off, the Accounting Department has developed the following cost per box:
Explanation / Answer
1. 1a. Computation of Total variable cost of producing 1 box of lipbalm Particulars Amount Direct Material 3.80 Direct Labour 1.70 Variable Manufacturing overhead 1.10 Total Variable cost 6.60 1b. Computation of Total variable cost of producing 1 box of lipbalm if the tube is purchased from outside supplier Particulars Original Cost % change Cost saving per box Revised Cost Direct Material 3.80 -25% -0.95 2.85 Direct Labour 1.70 -10% -0.17 1.53 Variable Manufacturing overhead 1.10 -10% -0.11 0.99 Cost of Tube 1.35 6.60 6.72 Revised Variable Cost 6.72 1c. Since the cost of producing tubes is lower than procuring them, it is advisable to produce them. The option of procuring is 6.48% more costly than producing in house. 2. Computation of maximum purchase price payable for procuring tubes. The Maximum purchase price payable would be equal to the cost saving in direct material and direct labour as follows Table showing cost saving per box Particulars Original Cost % change Cost saving per box Direct Material 3.80 25% 0.95 Direct Labour 1.70 10% 0.17 Variable Manufacturing overhead 1.10 10% 0.11 Cost Saving 1.23 The maximum price payable should be $ 1.23 per box of tube 3. 3a. Statement showing relevant cost of making additional 20000 units Particulars First 120000 units Additional 20000 units Total Direct Material 3.80 3.80 Direct Labour 1.70 1.70 Variable Manufacturing overhead 1.10 1.10 Total Cost 6.60 6.60 * no of units 120000 20,000.00 140000 Relevant Variable cost 792000 132000 924000 Relevant Fixed cost 0 60000 60000 Total Relevant cost 792000 192000 984000 Relevant cost/unit 6.6 9.6 7.03 3b. Statement showing the comparision between Make and buy for revised capacity Particulars Make Buy Direct Material 3.80 2.85 Direct Labour 1.70 1.53 Variable Manufacturing overhead 1.10 0.99 Tubes 1.35 Total Cost 6.60 6.72 * no of units 1,40,000.00 1,40,000.00 Relevant Variable cost 9,24,000.00 9,40,800.00 Relevant Fixed cost 60,000.00 - Total cost 9,84,000.00 9,40,800.00 Cost/unit 7.03 6.72 In the above scenario, it is advisable to go for Buying the tubes 4. Statement showing the comparision of the 4 options Make all 140000 Buy all 140000 Make 120000 and buy 20000 Make 70000 and buy 70000 Particulars Amount Amount Amount Amount Total Amount Amount Total Direct Material 3.80 2.85 3.80 2.85 3.80 2.85 Direct Labour 1.70 1.53 1.70 1.53 1.70 1.53 Variable Manufacturing overhead 1.10 0.99 1.10 0.99 1.10 0.99 Tubes 1.35 1.35 1.35 Total Cost 6.60 6.72 6.60 6.72 6.60 6.72 * no of units 1,40,000.00 1,40,000.00 1,20,000.00 20,000.00 1,40,000.00 70,000.00 70,000.00 1,40,000.00 Relevant Variable cost 9,24,000.00 9,40,800.00 7,92,000.00 1,34,400.00 9,26,400.00 4,62,000.00 4,70,400.00 9,32,400.00 Relevant Fixed cost 60,000.00 - 0 0 0 0 Total cost 9,84,000.00 9,40,800.00 7,92,000.00 1,34,400.00 9,26,400.00 4,62,000.00 4,70,400.00 9,32,400.00 Cost/unit 7.03 6.72 6.60 6.72 6.62 6.60 6.72 6.66 Silven Industries should go for Making 120000 and procuring 20000 tubes from outside supplier as this option has the least cost per unit
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