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 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 $70,000 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 140,000 boxes of Chap-Off, the Accounting Department has developed the following cost per box: Direct materials Direct labor Manufacturing overhead $3.70 2.00 1.40 Total cost $7.10 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% 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.) otal variable cost per box

Explanation / Answer

Variable overhead cost Total manufacturing Overhead 1.40*140000 196000 Less Fixed cost 70000 Variable overhead cost 126000 Variable overhead cost per Unit 0.90 Direct materiaL 3.7 Direct labor 2 Variable overhead cost per Unit 0.9 Total Variable Cost 6.6 Purchasse pirce of tube 1.35 Direct materiaL(3.7*.75) 2.775 Direct labor(2*.90) 1.8 Variable overhead cost per Unit (.90*.90) 0.81 6.74 Company Should make the product 2 maximum Purchase price acceptable=1.35-(6.74-6.6) =1.21

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