Return to question Silven Industries, which manufactures and sells a highly succ

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Return to 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. 12.5 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. 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 $8 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $135,000 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 135,000 boxes of Chap-Off, the Accounting Department has developed the following manufacturing cost per box: Direct material Direct labor Manufacturing overhead Total cost $3.50 1.80 1.50 $6.80 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, Silven has approached a supplier to discuss the possibility of buying the tubes. The purchase price of the supplier's empty tubes would be $1.50 per box of 24 tubes. If Silven Industries stops making the tubes and buys them from the outside supplier, its direct labor and variable manufacturing overhead costs per box of Chap-Off would be reduced by 10% and its direct materials costs would be reduced by 30%. Required: 1 If Silven buys its tubes from the outside supplier, how much of its own Chap-Off manufacturing costs per box will it be able to avoid? (Hint: You need to separate the manufacturing overhead of $1.50 per box that is shown above into its variable and fixed components to derive the correct answer.) 2. what is the financial advantaae ldisadvantae) ner box of Chan-Off if Silven bls its tubes from the cutside sunnlier?

Explanation / Answer

1 Segregation of fixed and variable manufacturing overhead: Manufacturing overhead per unit 1.5 Fixed manufacturing overhead based on 135000 boxes (Fixed overhead/135000) (135000/135000) 1 Variable manufacturing overhead per unit 0.5 Costs which can be avoided Direct material (3.5*30%) 1.05 Direct labor (1.8*10%) 0.18 Variable manufacturing overhead (0.5*10%) 0.05 1.28 2 Purchase price of tubes 1.5 Less:Costs which can be avoided 1.28 Financial disadvantage per box 0.22 3 Financial disadvantage per box 0.22 Boxes purchased 135000 Total Financial disadvantage 29700 4 Silven industries should make the tubes.Otherwise buying from outsider will result in financial disadvantage of $0.22 per box 5 Maximum price=Costs which can be avoided=$1.28 per box 6 Advantage from buying: Cost which can be avoided (167000*1.28) 213760 Additional cost for equipment 52000 265760 Less:Purchase price of tubes (167000*1.5) 250500 Financial advantage 15260 It is better to purchase Tubes from outside suppliers since it will result in financial advantage of $15260. : 7 Better option a Make 135000 units Buy 32000 units (167000-135000)

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