3 Problem 12-23 Make or Buy Decision [LO12-3] Silven Industries, which manufsctu
ID: 2526115 • Letter: 3
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3 Problem 12-23 Make or Buy Decision [LO12-3] Silven Industries, which manufsctures and sells a highly successful line of summer lotions and insect repellents, has decided to diversify in order to stabilize ssles throughout the year. A nstural sres for the company to consider is the production of winter lotions and creams to prevent dry and chapped skin. After considerable research, s winter products line has been developed. However, Siliven'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 initisted. 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 wholesslers 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 system Print Using the estimated sales and production of 115,000 boxes of Chap-Off, the Accounting Department has developed the following Reerence cost per box: Direct materia Direct labor Manufacturing overhead Total cost The costs above relate to making both the lip balm and the tube that contains it. As an alternstive to making the tubes for Chap-Off, Silven has approsched 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·lf Silven Industries stops making the tubes ond buys them from the outside supplier, its direct laborand vonable manufacturing overhead costs per box of Chap-Off would be reduced by 10% ond its direct materials costs would be reduced by 25%. 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 separste the manufacturing overhesd of $220 per box that is shown sbove into its varisble and fixed components to derive the correct answer) 2. Whst is the financial sdvantage (dissdvantage) per box of Chap-Off if Silven buys its tubes from the outside supplier? 3. What is the financial advantage (disadvantage) in total (not per box) if Silven buys 115,000 boxes of tubes from the outside supplier? 4. Should Silven Industries make or buy the tubes? 5. Whst is the maximum price that Silven should be willing to pay the outside supplier for a box of 24 tubes? 6. Instead of sales of 115,000 boxes of tubes, revised estimates show a ssles volume of 143,000 boxes of tubes. At this higher sales volume, Silven would need to rent extre equipment st a cost of $48,000 per year to make the additional 28,000 boxes of tubes. Assuming that the outside supplier will not eccept an order for less than 143,000 boxes of tubes, what is the financial dventage (disadvantage) in total (not per box) if Silven buys 143,000 boxes of tubes from the outside supplier? Given this new information, should Silven Industries make or buy the tubes? 7. Refer to the dets in (6) above. Assume that the outside supplier will accept an order of any size for the tubes st a price of $1.90 per box. How many boxes of tubes should Silven make? How many boxes of tubes should it buy from the outside supplier?Explanation / Answer
1) Total manufacturing overhead = 2.2*115000
= $253,000
variable manufacturing overhead = 253000 - 103500
= $1,49,500
Per box variable overhead = 149500 / 115000
= $1.3
Therefore, Silven wil be able to avoid $1.79 per box if it buys from outside.
2) The financial disadvantage per box of chap off if Siver buys its tubes from outside suppliers would be $0.11 ($1.9 - $1.79)
3) The total financial disadvantage of if Silver buys 115000 boxes of tubes from the outside suplier = 115000*0.11
=$12,650
4) Silver should make the boxes as the cost per tube is less in manufacturing as compared to buying.
Original Savings Direct material $5.20 $1.30 Direct labor $3.60 $0.36 variable overhead $1.30 $0.13 Total $1.79Related Questions
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