Silven Industries, which manufactures and sells a highly successful line of summ
ID: 2475149 • Letter: S
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 24 tubes for $7 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $84,000 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 120,000 boxes of Chap-Off, the Accounting Department has developed the following cost per box
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 $1.40 per box of 24 tubes. If Silven 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 by 25%.
Calculate the total variable cost of producing one box of Chap-Off. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Assume that the tubes for the Chap-Off are purchased from the outside supplier, calculate the total variable cost of producing one box of Chap-Off. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
What would be the maximum purchase price acceptable to Silven Industries? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Instead of sales of 120,000 boxes, revised estimates show a sales volume of 150,000 boxes. At this new volume, additional equipment must be acquired to manufacture the tubes at an annual rental of $48,000. Assume that the outside supplier will not accept an order for less than 150,000 box
Calculate the total relevant cost of making 150,000 boxes and total relevant cost of buying 150,000 boxes. (Do not round intermediate calculations.)
Refer to the data in (3) above. Assume that the outside supplier will accept an order of any size for the tubes at $1.40 per box. Which of these is the best alternative?
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 24 tubes for $7 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $84,000 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 120,000 boxes of Chap-Off, the Accounting Department has developed the following cost per box
Explanation / Answer
Q.1(a)
TOTAL VARIABLE COST ONE BOX OF CHAP OFF:
Direct Material = $3.40
Direct Labour = $1.70
Manufacturing Overhead = $1.10
Total variable cost of one box = $ 6.20
(B) TOTAL VARIABLE COST IF COMPANY PURCHASED EMPTY TUBE FROM OUTSIDE:
Purchase Price for empty tubes = $1.40
Direct material (3.40*.75) = $ 2.55
Direct Labour (1.70*.90) = $ 1.53
Manufacturing Overhead (1.10*.90) = $ 0.99
TOTAL VARIABLE COST IF COMPANY
PUCHASED FROM OUTSIDE = $6.47
(C) Silver industries should make the tubes if comapny purchase from outside then varibale cost is higher by (6.47-6.20=0.27)
Q.2MAXIMUM PURCHASE PRICE FOR SILVER INDUSTRIES:
Total manufacturing cost if company not purchase tubes $6.20
Total manufacturing cost if comapny purchased tubes $6.47
MAXIMUM PURCHASE PRICE $1.13
Q.3 IF COMPANY SALES VOLUME INCREASED TO 150000:
IF CO. MANUFACTURE TUBE THEN RELEVANT COST:
Direct material ($3.40*150000) =$510000
Direct labour ($1.70*150000) =$255000
Manufacturing o/h ($1.10*150000) =$165000
Fixed overhead =$48000
TOTAL MANUFACTURING COST =$978000
IF COMPANY PURCHASED EMPTY TUBES FROM OUTSIDE THEN MANU CTURING COST:
Purchase price ($1.40*150000) =$210000
Direct Material (2.55*150000) =$382500
Direct Labour (1.53*150000) =$229500
Manufacturing o/h (0.99*150000) =$148500
TOTAL RELEVANT COST =$970500
(b) If company want to increase sales volume 150000 then company should puchase empty tubes from outside because purchase option give lower cost by (978000-970500=7500)
Q.4 WHICH ALTERNATIVE IS BEST:
(i) Make all 150000 Boxes:
Total variable cost = $978000
(ii) Buy all 150000 Boxes:
Total varibale cost = $970500
(iii) Make 120000 boxess and 30000 buy:
Make variable cost(120000*$6.20) =$744000
Buy variable cost (30000*$6.47) =$194100
TOTAL COST =$938100
(IV)Make 75000 and buy 75000:
Make variable cost (75000*$6.20) =$465000
Buy variable cost (75000*$6.47) =$485250
TOTAL COST =$950250
CONCLUSION: From above calclution option three make 120000 and buy 30000 is best alternative.
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