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-Ofm) 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 $12 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $103,500 charge for fixed manufacturing overhead will be absorbed by the product under the company's absorption costing systerm 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 $5.20 3.60 2.20 $11.00 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, Silven has approached a supplier to discuss the possibility of buying the tubes. The purchase price of the supplier's empty tubes would be $1.90 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 25%

Explanation / Answer

The fixed manufacturing costs of $103500 are unavoidable as they are allocated costs and would be incurred irrespective of whether the tubes are made or bought.

2. Financial disadvantage per box: $0.11 per box

3. Financial disadvantage total: $12650

Calculations:

4. Make.

Silven Industries should make the tubes since the cost of making is lower than that of buying.

Please note that per Chegg guidelines, 4 sub-parts have been answered. Please post the remaining separately. Thank you.

1 Avoidable manufacturing costs per box of Chap-Off: $1.79 Total manufacturing overheads = $2.20 per box Fixed manufacturing overheads = $103500 / 115000 = $0.90 per box Variable manufacturing overheads = $2.20 - $0.90 = $1.30 per box Per box $ Direct materials (25% of $5.20) 1.3 Direct labor (10% of $3.60) 0.36 Variabe manufacturing overheads 0.13 (10% of $1.30) Total avoidable costs $ 1.79

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