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

Question

Silven Industries, which manufactures and sells a highly successful line of summer lotions and insect repellents, has decided to diversity in order to stablize 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 resident has decided to in one of the new products for this coming winter.If the product troduce only 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 pr boxes of 24 tubes for $ produce the product. H company's absorption costing system. product will be sold to wholesalers in 8 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to owever, a $135,000 charge for fixed manufacturing overhead will be absorbed by the product under the boxes of Chap-Off, the Accounting Department has developed the following Using the estimated sales and production of 135,000 manufacturing cost per box: Direct material Direct labor Manufacturing overhead Total cost $3.50 1.80 1.50 $6.80 osts above relate to making both the lip balm and the tube that contains it, As an alternative to making the tubes for Chap-off Silven has approached a supplier to discuss the possibility of buying the tubes. The purchase price of the supplier's empty tubes would be $1.50 per box of 24 tubes. If Silven Industries stops making the tubes and buys them from the outside su labor and variable manufacturing overhead costs per box of Chap-Off would be reduced by 10% and its drect materials costs would be reduced by 30%.

Explanation / Answer

Req 1: Total Manufacturing overheads per box   $ 1.50 per box Less: Fixed Manufacturing overheads per box $1.00 per box ($135,000 allocated overheads for 135,000 box) VariableManufacturing Overheads per box $ 0.50 per box Now, Variable Manufacturing Cost for manufacturing the tube and product inhouse: Direct material per box 3.50 Direct labour per box 1.80 Variable manufacturing overheads 0.50 Total Manufacturing cost 5.80 Variable Own manufacturing cost of manufacturing the product when purchasing the tube from supplier: Direct material per box(3.50 -30%) 2.45 Direct Labour per box(1.80-10%) 1.62 Variable manufacturing overheads(0.50-10%) 0.45 Total Manufacturing cost 4.52 Therefore, Own manufacturing cost that could be able to avoid is $ 1.28 per box (i.e. 5.80-4.52) Manufacturing Cost avoided per box of chap Off $1.28 Req2: Financial Advantage /Disadvantage of buying the tubes: Total cost when tubes are bought from outside supplier Own Manufacturing cost per box $4.52 Add: Cost of tubes from supplier per box $1.50 Total Cost per box $6.02 per box Less: Total Manufacturing cost when produce in house $5.80 per box Net Financial Disadvantage $0.22 per box Net Financial Disadvantage $0.22 per box Req 3: Total Financial Disadvantage of buying 135,000 boxes from Supplier Number of boxes to be produced 135,000 Financial Disadvantage per box $0.22 Total Financial Disadvantage in $ 29700 (135,000 boxes@0.22 per box) Total Financial Disadvantage in $ 29,700 Req 4: Silven Industries should make the tubes Make the tubes

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