Silven Industries, which manufactures and sells a highly successful line of summ

ID: 2484283 • 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 $66,000 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 110,000 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 $1.35 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 110,000 boxes, revised estimates show a sales volume of 140,000 boxes. At this new volume, additional equipment must be acquired to manufacture the tubes at an annual rental of $42,000. Assume that the outside supplier will not accept an order for less than 140,000 boxes.

Calculate the total relevant cost of making 140,000 boxes and total relevant cost of buying 140,000 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 $1.35 per box. Which of these is the best alternative?

Using the estimated sales and production of 110,000 boxes of Chap-Off, the Accounting Department has developed the following cost per box:

Explanation / Answer

Answer:

1a) Calculation of total variable cost of producing one box of Chap-Off

1b) Calculation of total variable cost of producing one box of Chap-Off (Assumed that the tubes for the Chap-Off are purchased from the outside supplier)

1c) Since in house manufacturing variable cost of Chap-off is less than outside purchase of box. Silven Industries should make the boxes in house.

2. The maximum acceptable purchase price is variable cost per box i.e. $5.60 per box because above this price, purchasing from outside is not profitable to the company & company will incur loss.

3a) Calculation of Total Relevant Cost for making 140,000 boxes and total relevant cost of buying 140,000 boxes

Relevant Cost is the cost which has influence on the management for decision making. It is a future cost and different under each alternative course of action.

Relevant Cost for Making 140,000 boxes

Variable Cost (140,000 x $5.60) = $784,000

Additional Equipment Cost = $42,000 (Relevant because due to increase capacity new equipment is required)

Total Relevant Cost for making 140,000 boxes = $784,000 + $42,000 = $826,000

Relevant Cost for buying 140,000 boxes

Variable Cost (140,000 x $5.88) = $823,200

Total Relevant Cost for making 140,000 boxes = $823,200

3b) Yes, Silven Industries should buy the boxes from outside supplier, since the buying cost is less than making the boxes. Company will save $2,800 ($826,000 - $823,200) if buying from outside supplier.

4) Calculation of best alternative on the basis of cost incurred

From the above table and calculation, it is clear under Making of 70,000 boxes and buying of 70,000 boxes, relevant cost is lowest, hence best alternative is Make 70,000 boxes and buy 70,000 boxes

Note 1: Calculation of Variable Manufacturing Expenses per box

Total Manufacturing Cost = Fixed manufacturing Cost + Variable Manufacturing Cost

$1.10 x 110,000 boxes = $66,000 + Variable Manufacturing Cost

Variable Manufacturing Cost = $121,000 - $66,000 = $55,000

Variable Manufacturing Cost Per Box = $55,000 / 110,000 = $ 0.50 per box

Particulars Amount Direct Material $3.40 Direct Labour $1.70 Variable Manufacturing Overhead (note 1) $0.50 Total Variable Cost per Box $5.60

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Silven Industries, which manufactures and sells a highly successful line of summ

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Silven Industries, which manufactures and sells a highly successful line of summ

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