Silven Industries, which manufactures and sells a highly successful line of summ
ID: 2499256 • 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 $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:
7.00
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%.
1-a.Calculate the total variable cost of producing one box of Chap-Off?
total variable cost:__________ per box
1-b. 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?
total variable cost:__________per box
1-c. Should Silven Industries make or buy the tubes?
2. What would be the maximum purchase price acceptable to Silven Industries?
maximum purchase price_____________per box
3. Instead of sales of 100,000 boxes, revised estimates show a sales volume of 120,000 boxes. At this new volume, additional equipment must be acquired to manufacture the tubes at an annual rental of $40,000. Assume that the outside supplier will not accept an order for less than 120,000 boxes.
a. Calculate the total relevant cost of making 120,000 boxes and total relevant cost of buying 120,000 boxes.
total cost making:___________
total cost buying:____________
b. Based on the above calculations, should Silven Industries make or buy the boxes?
4. 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?
make all 120,000 boxes
buy all 120,000 boxes
make 100,000 boxes and buy 20,000 boxes
make 60,000 boxes and buy 60,000 boxes
7.00
Explanation / Answer
Solution 1-a:
Total manufacturing overhead per unit at 100000 boxes = $1.40 per unit
Fixed manufacturing overhead per unit = $90000 / 100000 = $0.90 per unit
Variable manufacturing overhead per unit = $1.40 - $0.90 = $0.50 per unit
Total variable cost per box = Direct material +direct labor + Variable maunfacturing overhead =3.60 + 2+ 0.50 = $6.10 per box
Solution 1-b:
Reduction in Chap-Off Variable manufacturing costs per box, if tubes purchased from outside vendor = (Direct labor cost per unit + Variable manufacturing overhead per unit) * 10% + Direct material cost per unit * 25%
= ($2 + $0.50)*10% + ($3.60*25%) = $1.15 per unit
Total variable Cost if tubes for the Chap-Off are purchased from the outside supplier = $6.10 - $1.15 = $4.95
Solution 1-c:
Purchase price of the empty tubes from the supplier = $1.35 per box
Reduction in Chap-Off Variable manufacturing costs per box, if tubes purchased from outside vendor = $1.15per box
Since, Purchase price is higher than the savings from purchasing the empty tubes, therefore, Silven Industries Should make the tubes beacause of financial disadvantage of $1.15 - $1.35 = $0.20 per box.
Solution 2:
Maximum purchase price acceptable to Silven Industries = Reduction in manufacturing costs per box = $1.15 per box
Solution 3-a:
Total cost of making 120,000 boxes = 120,000* $1.15 + $40,000 = $178,000
Total Cost of Buying 120,000 boxes = 120,000 *$1.35 = $162,000
Solution 3-b:
Net financial advantage (disadvantage) of buying = $178,000 - $162,00 = $16,000
Therefore silvenindustreis should buy the tubes.
Solution 4:
Option 1: Make all 120000 boxes, Cost = $1.15 *120000 + $40000 = $178,000
Option 2: Buy all 120000 boxes, cost = 120000 *$1.35 = $162,000
Option 3: Make 100,000 and buy 20,000 boxes, Cost = $1.15 *100000 + 20000 *$1.35 = $142,000
Option 4: Make 60,000 and buy 60,000 boxes, cost = $1.15 *60000 + 60000 *$1.35 = $150,000
If outside supplier will accept an order of any size for the tubes then silven industries should make 100000 tubes and buy 20000 boxes of tubes from outside supplier because its cost will be lowest i.e. $142,000
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