value 1.00 points Silven Industries, which manufactures and sells a highly succe
ID: 2501634 • Letter: V
Question
value 1.00 points 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 initiat 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 $7 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $105,000 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 150,000 boxes of Chap-Off, the Accounting Department has developed the following cost per box Direct materials Direct labor Manufacturing overhead $3.30 1.80 1.20 Total cost $6.30 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 $1.30 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 by25% 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 5.60 per boxExplanation / Answer
Silven Industries Details Amt $/unit Yearly Fixed cost 105,000 Yearly production 150,000 Fixed OH /unit 0.70 Variable OH cost /unit 0.50 Total OH/Unit 1.20 Variable cost of Making Amt $/BOX Direct Material 3.30 Direct Labor 1.80 Variable Mfg OH 0.50 1a. Total Variable cost/unit $ 5.60 1b. Variable cost of Buying tube & producing Chap off per BOX Details Amt $/Box Direct Material(less 25%) 2.48 Direct Labor (less 10%) 1.62 Variable Mfg OH(less 10%) 0.45 Total variable cost $ 4.55 1c. Silvian Industries should Buy the tubes as viable cost of buying tubes and producing is less than making whole unit. 2 Maximum purchase price accpetable will be =$1.30 +difference of variable cost =1.30+1.05=2.35 per box 3 Relevant cost of producing 170,000 Boxes Variable cost of Making Amt $/BOX Total Amt Direct Material 3.30 561,000 Direct Labor 1.80 306,000 Variable Mfg OH 0.50 85,000 Cost of machine rental 54,000 Total relevant cost $ 1,006,000 Relevant cost of buying Boxes 170,000 Details Amt $/Box Total Amt $ Direct Material(less 25%) 2.48 420,750 Direct Labor (less 10%) 1.62 275,400 Variable Mfg OH(less 10%) 0.45 76,500 Cost of machine rental 54,000 Tota relevant cost $ 826,650 b Based on above calculation , Silvian should buy tubes When tube cost is $1.35 , then direct materials increases by $0.05 Relevant cost of buying Boxes 170,000 Details Amt $/Box Total Amt $ Direct Material(less 25%) 2.53 429,250 Direct Labor (less 10%) 1.62 275,400 Variable Mfg OH(less 10%) 0.45 76,500 Cost of machine rental 54,000 Tota relevant cost $ 835,150 But per unit variable cost and relevant cost of production still remain beneficial for buy tube and produce situation. 4 So Silvian should buy 170,000 tubes and produce Chap Off
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