ttps/ Silven Industries, which manufactures and sells a highly successful line o
ID: 2514730 • Letter: T
Question
ttps/ 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. Iif 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 $13 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $87500 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 125,000 boxes bf Chap-Oft,the Accounting Department has developed the following manufacturing cost per box Direct labor nmufacturing overhead The costs above relate to making both the lip balm and the tube that contains it. As an alternative to making the tubes for Chap-Oft Silven has approached a supplier to discuss the possibility of buying the tubes. The purchase price of the supplier's empty tubes would be $1.90 per box of 24 tubes. If Siliven Industries stops making the tubes and buys them from the outside supplier, its direct labor and variable manufacturing overhead costs per box of Chapom would be reduced by 10% and its direct materials costs would be reduced by 20% 1. If Silven buys its tubes from the outside suppliet, how much of ts own Chap-Off manufacturing costs per bax will it be able to avoid (Hint. You need to separate the manufacturing overhead of $2. 40 per box that is shown above into its variable and fxed to derive the correct answer) 2. What is the financial advantage (disadvantage) per box of Chap-Off if Silven buys its tubes from the outside supplier? 3 What is the financial advantage (disadvantage) in total (not per box) if Silven buys 125,000 bowes of tubes from the outside supplier? 4. Should Sliven Industries make or buy the tubes? 5. What is the maximum price that Silven should be wiling to pay the outside supplier for a box of 24 tubes? 6 Instead of sales of 125,000 boxes of subes, revised estimates show a sales volume of 155,000 boxes of tubes. At this higher sales volume. Silven would need to rent extra equipment at a cost of $50,000 per year to make the additional 30.000 boxes of tubes Assuming that the outside supplier will not accept an order for less than 155,000 boxes of tubes, what is the financial advantage (dsadvantage) in total (nat per box) if Silven buys 155,000 boxes of tubes from the outside supplier? Given this new information, should Silven Industries make or buy the tubes? 7 Refer to the data in (6) above. Assume that the outside supplier will accept an order of any size for the tubes at a price of $1.90 per box How many boxes of tubes should Sliven make? How many boxes of tubes should a buy from the outside supplie? Prev2 of 4 Next> anythingExplanation / Answer
Solution 1:
Manufacturing overhead per unit of chap off = $2.40
Fixed manufacturing overhead per box = $87.500 / 125000 = $0.70 per box
Variable manufacturing overhead = $2.40 - $0.70 = $1.70 per box
If buys its tubes from outside supplier then reduction in manufacturing cost = ($5.60 *20%) + ($4 + $1.70)*10%
= $1.69 per box
Solution 2:
Cost of buying tube per box from outside supplier = $1.90
Financial advantage (disadvantage) per box of chapoff, if silven buys it from outside supplier = $1.69 - $1.90 = ($0.21) per box
Solution 3:
Total Financial advantage (disadvantage) of chapoff, if silven buys it from outside supplier = 125000 * -$0.21 = ($26,250)
Solution 4:
As there is net financial disadvantage of $26,250, therefore silven should make the tubes.
Solution 5:
The maxium price that sliven can pay to outside supplier for 1 box of empty tubes equal to its avoidable manufacturing cost i.e. $1.69 per box.
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