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 lp 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 Direct materials Direct labor Manufacturing overhead $3.60 2.00 1.40 Total cost $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%. Type here to search TI 2 40

Explanation / Answer

Part 1-a)

The total variable cost of producting one box of Chap-off is calculated as below:

____

Part 1-b)

The total variable cost of producting one box of Chap-off (if tubes are purchased from outside supplier) is arrived as follows:

____

Part 1-c)

Silven Industries should "Make" the tubes as it results in lower total variable cost of manufacturing one box of Chap-off.

____

Part 2)

The maximum purchase price acceptable to Silven Industries is determined as below:

The company can save a total of $.20 per box (1.35 - 1.15) by manufacturing boxes internally. In order to derive the same benefit as available in the case of manufacturing, the maximum purchase price that would be acceptable to Silven Industries would be $1.15 per box.

Answer for Part 2) is $1.15 per box of tubes.

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Part 3)

a)

The value of total relevant cost of making and buying 120,000 boxed is arrived as follows:

____

b)

Based on the above calculations, Silven Industries should "Buy" the boxes as it results in a total saving of $16,000 (178,000 - 162,000).

____

Part 4)

We will have to calculate total cost under each scenario to make a decision as below:

Based on the above calculations, it can be seen that the total relevant cost will be lower with the option of making 100,000 boxes and buying 20,000 boxes.

Option C (Make 100,000 Boxes and Buy 20,000 Boxes) is correct.

Direct Materials 3.60 Direct Labor 2.00 Variable Manufacturing Overhead (1.40 - 90,000/100,000) 0.50 Total Variable Cost of Producting One Box of Chap-Off $6.10

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