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 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. Iif 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 14 tubes for $6.20 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $50,000 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 100,000 boxes of Chap-Off, the Accounting Department has developed the following cost per box Direct materials Direct labor Manufacturing overhead 1.00 1.40 Total cost $4.90 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 $1.00 per box of 14 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 20%. 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.) per box 1b. 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.) otal variablo cot per box Silven Industries make or buy the tubes? O Make

Explanation / Answer

Answer 1(a)

Direct Material - $2.50 (completely variable)

Direct Labour - $ 1.00 (completely variable)

Manufacturing overhead - $ 1.40 (partially variable)

Fixed manufacturing overhead absorbed per unit = $ 50,000/ 100,000 units = $ 0.50 per unit

Variable manufacturing overhead = Total- fixed = $1.40-$0.50 = $ 0.90 per unit

Total variable cost = 2.50 + 1.00 + 0.90 = $ 4.40 per unit

Answer 1(b)

Costifpurchased

Variable cost if box is purchased= $ 4.71

Answer 1(c)

Silven industries should make the tubes as the total variable cost is less in making. Please note that fixed manufacturing overheads are irrelevant for the purpose of decision making.

Answer 2

Variable cost if manufactured inhouse = $ 4.40

Variable cost if purchased (excluding purchase cost of box 2.00+0.90+0.81) = 3.71 per unit

Difference = 4.40-3.71 = 0.69 per unit is the maximum amount that can be paid.

Note: The decision to purchase can be taken if the new variable cost os less or atleast equal to existing variable cost. If maximum purchase cost is $ 0.69, the maximum total variable cost would be $4.40 (2.00+0.90+0.81+0.69) which is equal to variable cost if box is manufactured

PLEASE NOTE THAT ANSWER CAN BE GIVEN TO MAXIMUM 4 SUBPARTS IN ONE SINGLE QUESTION. FOR BALANCE QUESTIONS, PLEASE INITIATE A DIFFERENT QUESTION

Expense existing (if box is manufactured) Change if purchased Amoubt of change

Costifpurchased

Direct material $ 2.50 Reduction 20% 2.50X 20-% = 0.50 decrease $ 2.00 Direct labour $ 1.00 Reduction 10% 1.00 X 10% = 0.10 decrease $ 0.90 Variable manufacturing overhead $ 0.90 Reduction 10% 0.90 X 10% = 0.09 decrease $ 0.81 Purchase cost $ 0.00 Increase $1.00 $ 1.00 increase $ 1.00 $ 4.71

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