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 lip balm that will be sold in a lipstick-type tube. The product will be sold to wholesalers in boxes of 14 tubes for $9.10 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $120,000 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 $4.10 2.00 1.80 Direct labor Manufacturing overhead Total cost $7.90 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 14 tubes. If Silven Industries accepts the purchase overhead costs per box of Chap-Off would be reduced by 10% and direct materials costs would be reduced by20% proposal, direct labor and variable manufacturing 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.) Answer is complete but not entirely correct Total variable $7.90 per box

Explanation / Answer

1a. Total variable cost of producing one box of chap-off Direct materials                 4.10 Direct labor                 2.00 Variable Manufacturing overhead*                 0.60                 6.70 *Total manufacturing overhead                 1.80 Less: fixed overhead absorbed (120000/100000)              (1.20) Variable Manufacturing overhead                 0.60 1b. Purchase price of empty tube per box                 1.30 Direct materials (4.10*80%)                 3.28 Direct labor (2*90%)                 1.80 Variable Manufacturing overhead (.6*90%)                 0.54 Total variable cost                 6.92 2 Under the purchase option, the variable cost is higher by $.22 per box. So, the maxium price acceptable to Silven Industries is $1.08 (1.30-0.22) 3 Relevant costs refers to incremental cost of producing a product Variable cost of producing 1 box (as calculated under point 1a) 6.7 Total variable cost of producing 122000 boxes (6.7*122000)          817,400 Add: fixed cost of additional equipment            50,000 Total relevant cost of making 122000 boxes          867,400 Variable cost of buying 1 box (as calculated under point 1b) 6.92 Total variable cost of buying 122000 boxes (6.92*122000)          844,240 Total relevant cost of buying 122000 boxes          844,240 4 Make 100000 boxes and buy 22000 boxes The make option is cheaper than buying at a volume of 100000 boxes. Buying makes sense only at a volume of 122000 boxes as additional fixed cost is not incurred for additional volume of 122000 boxes So, it's better to make 100,000 boxes and buy 22000 boxes Cost of 100000 boxes as calculated under pt 1a (100000*6.7)          670,000 Cost of buting 22000 boxes as calculated under 3 (22000*6.92)          152,240 Total cost          822,240

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