Slilven Industries, which manufactures and sells a highly successful line of sum

Question

Slilven Industries, which manufactures and sells a highly successful line of summer lotions and insect repellonts, has decided to diversify in order to stabilize sales throughout the year. A 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 (caled Chap-Ofl) is a lip balm that will be sold in a lipsick-type tube. The product wil be sold to wholesalers in boxes of 12 tubes for $7.60 per box. Because of excess capacity, no charge for fixed manufacturing overhead will be absorbed by the product under the company's absorption costing systom Using the estimated sales and production of 100,000 boxes of Chap·the Accounting Department has developed the following cost per box: Direct materials Direct labor Manufacturing overhead $3.70 1.50 $6 20 Total cost The costs above indlude costs for producing both the lp balm and the tube that contains it. As an alternative to making the tubes, Silven has approached a supplier to discuss the possbility of purchasing the tubes for Chap-On. The purchase price of the empty tubes from the supplier would be $1.20 per box of 12 tubes. If Silven Industries accepts the purchase proposal, direct labor and variable manufacturing overhead costs per box ofChapoe would be reduced by 10% and direct materials costs would be reduced by20%. Required: 1a. Calculate the total variable cost of producing one box of Chap-Off (Do not round intermediate calculations. Round your answer to 2 decimal places.J per box tb. 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.) variable per box

Explanation / Answer

1a.

Working:

1b.

Working:

1c. Silver Industries should 'MAKE'

2.

The maximum price that would be acceptable to Silver Industries would be $0.90 per box.

Cost difference = $5.60 - $5.30 = $0.30

Price acceptable = $1.20 - $0.30 = $0.90

3.a.

Working:

3b. 'BUY'

4. Make 100,000 boxes and buy 28,000 boxes.

As there is capacity to make 100,000 tubes , the company shall make them. For the balance 28,000 boxes there is additional fixed costs of $40,000 which is more than the buying cost of $33,600 (28,000 x $1.20).

Total variable cost $5.30 per box

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