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 12 tubes for $8.50 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $110,000 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 $4.80 1.00 1.40 Total cost $7.20 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 $1.20 per box of 12 tubes. If Siln 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 by20%

Explanation / Answer

1b Calculation of total variable cost Variable cost per box if tubes are manufacturied: A Direct Material $4.80 B Direct Labor $1.00 C Variable Overhead(1.4-(110000/100000)) $0.30 (Fixed overhead=110000/100000=$1.1, Total overhead=$1.4 X=A+B+C Total Variable Cost $6.10 Variable cost per box if tubes are Purchased from outside: D=(1-0.2)*A Direct Material $3.84 E Cost of empty tubes from outside suppler $1.20 F=(1-0.1)*B Direct labor $0.90 G=(1-0.1)*C Variable overhead $0.27 H=D+E+F+G Total Variable Cost $6.21 per box 2 I=H-X Reduction in purchase price required $0.11 J=E-I Maximum Pirchase price acceptable to Silven $1.09 (1.2-0.11) Maximum Pirchase price $1.09 Per box of tubes 3 Total Relevant cost of making 115000 boxes: K=X*115000 Total Variable cost of making: $701,500 L Annual Rental of equipment $32,000 M=K+L Total Cost of making $733,500 Total Relevant Cost of Buying 115000 boxes N=115000*H Total variable cost $714,150 Making Buying Total cost $733,500 $714,150

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