Please show all steps P7-43A The Kamloops Outdoors Corporation, which produces a
ID: 2550282 • Letter: P
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Please show all steps
P7-43A The Kamloops Outdoors Corporation, which produces a highly successful line of summer lotions and insect repellents and sells them to wholesalers, has decided to diversify in order to stabilize its 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, the company has developed a winter products line. However, because of the conserva- tive nature of company management, the president has decided to introduce only one of the new products for this coming winter. If the product is a success, there will be further expansion in future years. The product selected is a lip balm to be sold in a lipstick-type tube. The company will sell the product to wholesalers in boxes of 24 tubes for $16.00 per box. Because of available capacity, the company will incur no additional fixed charges to produce the product. However, to allocate a fair share of the company's present fixed costs to the new product, the product will absorb a $150,000 fixed charge Using the estimated sales and production of 100,000 boxes of lip balm as the standard volume, the accounting depart ment has developed the following costs per box of 24 tubes: Direct labour Direct materials Total overhead Total $ 4.00 6.00 3.00 $13.00 Kamloops Outdoors has approached a cosmetics manufacturer to discuss the possibility of purchasing the tubes for the new product. The purchase price of the empty tubes from the cosmetics manufacturer would be $1.90 per 24 tubes. If Kamloops Outdoors accepts the purchase proposal, it is estimated that direct labour and variable overhead costs would be reduced by 10% and direct materials costs would be reduced by 20%Explanation / Answer
a) Firstly we need to seperate the total overhead cost of $3 per tube in to fixed and variable component to calculate total reduction in cost per box.
Fixed Overhead per box = Total Fixed Overhead/Estimated boxes produced
= $150,000/100,000 = $1.50 per box
Variable overhead per box = Total Overhead cost - Fixed overhead per box
= $3.00 - $1.50 = $1.50 per box
Calculation of total reduction in cost if company accept the proposal (Amounts in $)
As reduction in cost of manufacturing empty tubes is $1.75 per box which is less than the offer price of $1.90 per box, the company should make the tubes.
b) The maximum purchase price acceptable to Kamloops outdoors is $1.75 per box because it will result in the same net income if the company decides to make the tubes.
c) Total cost of buying all the boxes = 125,000*$1.90 = $237,500
Total saving in cost of making the tubes = (125,000*$1.75)+$10,000
= $218,750+$10,000 = $228,750
As the cost of buying the boxes is more than saving in manufacturing cost, the company should make all the boxes. (whether the volume is 125,000 boxes or 300,000 boxes).
d) In this case, upto 100,000 boxes it is better that company should make the boxes and for additional 25,000 boxes (125,000 - 100,000) the cost comparison of both alternatives is shown as follows:-
Cost of buying additional volume = 25,000 boxes*$1.90 = $47,500
Total saving in Cost of making tubes = (25,000*$1.75)+$10,000
= $43,750+$10,000 = $53,750
As the cost of buying additional boxes is less than saving in cost of making tubes, the company should buy the boxes for additional volume of 25,000.
Therefore the company should make 100,000 boxes and buy 25,000 boxes.
Saving in Direct Materials cost ($6.00*20%) 1.20 Saving in Direct Labor cost ($4.00*10%) 0.40 Saving in variable manufacturing overhead ($1.50*10%) 0.15 Total Reduction in cost per box ($1.20+$0.40+$0.15) 1.75Related Questions
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