Silven Industries, which manufactures and sells a highly successful line of summ
ID: 2476951 • 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 $9 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $60,000 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: Direct materials Direct labor Manufacturing overhead $4.00 2.10 1.50 Total cost $7.60 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.) Total variable cost per box 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.) Total variable cost per boxExplanation / Answer
1a. Calculation of variable cost per unit
Direct material $4.00
Direct labour $2.10
Manfaturing overheads $1.50
Total variable cost = $7.6 Per unit
Total variable cost per box = $7.6 * 24
= $182.4
1b. Total variable cost for purchasing of out side
Direct material cost will decrease by 25% = $4 - $4*25%
=$4 - $1
Cost of material after decreasing the price =$3
Overhead and labour cost will decrese by 10% = $3.6*10%
$.36
Cost after decreasing = 3.6-.36=$3.24
Total variable cost of puchasing = $3+$3.24+1.35
=$7.59 unit
Total variable cost per box = $7.59* 24
= $182.16
1c. It is advisble to buy because it reduces a cost of $.24 per box
2.
A price of $1.36 is the maximum price that is acceptable from the supplier because we are also incurring $1.36 per unit beyond that price it is not acceptable to buy
3.
Total cost of making 150,000 boxes = 150,000 * $7.6 + $50,000
= $1,190,000
Total cost of buying 150,000 boxes = $150,000 * $7.59 + $50,000
=$1,188,500
3b.
It is advised to buy because it decreases an cost of $2000
4)
Buy all 150,000 boxes because buying of all 150,000 boxes will decreases an overall cost of $2000
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