3 Problem 12-23 Make or Buy Decision [L012-3] 12 oints Silven Industries, which

Question

3 Problem 12-23 Make or Buy Decision [L012-3] 12 oints 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. eBook Print PeterencesThe 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 $87,500 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 of Chap-Off, the Accounting Department has developed the following manufacturing cost per box Direct material Direct labor Manufacturing overhead Total cost 5.60 4.08 2.48 $12.00 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-Off, s approached a supplier to discuss the possibility of buying the tubes. The purchase price of the supplier's empty tubes tries stops making the tubes and buys them from the outside supplier, its direct would be $1.90 per box of 24 tubes. If Silven In and variable manufacturing overhead costs per box of Chap-Off would be reduced by 10% and its direct materials costs w reduced by 20%. K Prev3 of 3 Next > Sha. .mp3

Explanation / Answer

Answer 1. Variable Cost per Box Direct Materials                            5.60 Direct Labor                            4.00 Variable MOH                            1.70 Total Variable Cost per Box                          11.30 Total Manufacturing Overhead = $2.40 X 125,000 Boxes = $300,000 Variable MOH = $300,000 - $87,500 = $212,500 Variable MOH per Box = $212,500 / 125,000 Boxes = $1.70 per Box Variable Cost per Box to be Avoided   Chap Off is purchased from Outside Supplier Direct Materials - $5.60 X 20%                            1.12 Direct Labor - $4.00 X 10%                            0.40 Variable MOH - $1.70 x 10%                            0.17 Total Avoidable Variable Cost per Box                            1.69 Answer 2. Cost per Box                            1.90 Total Avoidable Variable Cost per Box                            1.69 Net Profit (Loss) Per Box is Purchased from outside Supplier                          (0.21) The company should Make the tube as there will be saving of $0.21 per Box. Answer 3. Total Net Profit (Loss) - Purchased from outside Supplier ($0.21) X 125,000 Tubes               (26,250.00) Answer 4. The company should Make the tube as there will be saving of $0.10 per Box. Answer 5. Maximum Purchase Price Acceptable Per Box: Direct Materials - $5.60 X 20%                            1.12 Direct Labor - $4.00 X 10%                            0.40 Variable MOH - $1.70 x 10%                            0.17 Maximum Purchase Price Acceptable Per Box                            1.69 Answer 6. Making Buying Variable Cost                 1,751,500                   1,784,050 ($11.30 X 155,000 Boxes) ($11.51 X 155,000 Boxes) Rent - Additional Equipment                       50,000 Total Cost                 1,801,500                   1,784,050 Buy the tube. Answer 7. Make - 125,000 Boxes Buy - 30,000 Boxes

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