Check my work Silven Industries, which manufactures and sells a highly successfu

Question

Check my work 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. 10 points 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 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 $10 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $80,500 charge for fixed manufacturing overhead will be absorbed by the product under the company's absorption costing system. References Using the estimated sales and production of 115,000 boxes of Chap-Off, the Accounting Department has developed the following manufacturing cost per box: Direct material Direct labor Manufacturing overhead Total cost $4.20 2.60 1.70 $8.50

Explanation / Answer

Solution 1:

Total manufacturing overhead per unit at 115000 boxes = $1.70 per unit

Fixed manufacturing overhead per unit = $80,500 / 115000 = $0.70 per unit

Variable manufacturing overhead per unit = $1.70 - $0.70 = $1.0 per unit

Reduction in Chap-Off manufacturing costs per box, if tubes purchased from outside vendor = (Direct labor cost per unit + Variable manufacturing overhead per unit) * 15% + Direct material cost per unit * 30%

= ($2.6 + $1.00)*15% + ($4.20*30%) =$0.54 + $1.26 = $1.80 per unit

Solution 2:

Financial advantage (disadvantage) per box of Chap-Off if Silven buys its tubes from the outside supplier = $1.80 - $1.90 = ($0.10)

Solution 3:

Financial advantage (disadvantage) in total (not per box) if Silven buys 115,000 boxes of tubes from the outside supplier = -$0.10 * 115000 = ($11,500)

Solution 4:

As there is net financial disadvantage of $11,500, therefore silven should make the tubes.

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