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View History Bookmarks Tools Help meworkc Chapter 12 + ezto.mheducation.com/mm.tpx sited Getting Started Suggested Stes Web Sice Gallery Siven Industies, which manufactures and sells a highly successtul line of summer lotions and insect y successful line of summer lotions and insect s and sells a highl 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. Ater considerable research, a winter products line has been developed. However, Silven's president to introduce only one of the new products for this coming winter. If the product is a success e of excess capacity, no absorption only one of the new products for this com has decided to introduce further expansion in future years will be initiated The product selected (called Chap Of) 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 ca additional fixed manufacturing owerhead costs will be incurred to produce the product. However, a $112,000 charge for fixed manufacturing overhead will be absorbed by the product under the company's costing system Using the estimated sales and production of 140,000 boxes of Chap-Off, the Accounting Department has developed the following cost per box Direct materials Direct labor Manufacturing overhead $3.40 1.80 1.20 Total cost $6.40 The costs above include costs for producing both the lip balm and the tube that contains it. As an altermative 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 $1.30 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 drect materials costs would be reduced by 25% Required: 1a Calculate the total variable cost of producing one box of Chap-Om (Round your intermediate calculations and final answer to 2 decimal places.) Total variable cost Mo e I'm Cortana. Ask me anything Homework Cha

Explanation / Answer

Fixed manufacturing overhead absorbed under the absorption costing principle of the company = $112000

Number of boxes = 140000

Fixed overhead allocated per box = $112000 / 140000 = $ 0.80

Variable manufacturing overhead cost per box = $1.20 - $0.80 = $0.40

Variable cost per box

= Direct material cost + direct labour cost + variable manufacturing overhead

= $3.40 + $ 1.80 + $0.40

= $5.60

1b)

Revised Direct material cost per box =               $3.40 - $3.40 x 25% = $2.55

Revised Direct labour cost = $1.80 x 90% = $1.62

Revised variable manufacturing overhead = $0.40 x 90% = 0.36

Variable cost per box

= Direct material cost + direct labour cost + variable manufacturing overhead

= $2.55 + $1.62 + $0.36

= $4.53

1c)

If purchased, saving in variable cost per box = $5.60 - $4.53 = $1.07

Purchase price per box = $1.30

Incremental loss if purchased from outside = $1.30 - $1.07 = $0.23 per box.

Decision: Make the box

2) The maximum purchase price that would be acceptable = $1.07

3a)

Relevant cost for making 170000 boxes

= Variable cost (@$5.60 for 170000 boxes) + Annual rent

= $5.60 per box x 170000 + $48000

= $952000 + $48000

= $1000000

Relevant cost of purchasing 170000 boxes

= Reduced variable cost of making 170000 boxes @ $4.53 per box + purchase price of 170000 boxes @ $1.30 per box

= $4.53 x 170000 + $1.30 x 170000

= $770100 + $221000

= $991100

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