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ID: 2594614 • Letter: A
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a balanced scorecard consists of a balanced scorecard consists of a balanced scorecard consists of Problem 12-23 Make or Buy Decision [L012-3] 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, Siven'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 (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 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 $110,000 charge for fixed manufacturing overhead will be absorbed by the product under the Using the estimated sales and production of 110,000 boxes of Chap-Off, the Accounting Department has developed the following manufacturing cost per box: $ 5.00 3.40 Direct material Direct labor Manufacturing overhead 2.10 Total cost $10.50 The costs 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 $1.65 per box of 24 tubeslf Silven Industries stops making the tubes and buys them from the outside supplier, its direct labor and variable manufacturing overhead costs per box of Chap-Off would be reduced by 10% and its direct materials costs would be reduced by 20 Prev 3 of 3Explanation / Answer
Manufacturing costs per box of chap off :
Total variable manufacturing cost per box of Chap Off = $ ( 5.00 + 3.40 + 1.10) = $ 9.50.
Req. 1 :
If the tubes are procured from the outside manufacturer, avoidable manufacturing cost per box of chap off = $ 5.00 x 20% + $ ( 3.40 + 1.10) x 10 % = $ 1.45.
Req. 2 :
If Silven buys the boxes from the outside supplier at $ 1.65 per box,
Req. 3 :
Req. 4 :
Silven Industries should make the box.
Req. 5 :
Req. 6 :
Total cost of making the empty tubes for 137,000 boxes = 137,000 x $ 1.45 + $ 47,000 = $ 245,650.
Total cost of buying the empty tubes for 137,000 boxes = 137,000 x $ 1.65 = $ 226,050.
Net financial advantage of buying the tubes from outside supplier = $ 245,650 - $ 226,050 = $ 19,600.
Req. 7.
Silven Industries should make 110,000 boxes, and outsource the excess requirement to the outside supplier. However, if the demand is higher than 235,000 boxes ( $ 47,000 / $ 0.20) of Chap Off, Silven Industries is better off making all the boxes.
Upto 110,000 boxes, Silven should make.
Between 110,000 and 234,999 boxes, Silven should make 110 boxes, and outsource the excess.
If the demand is 235,000 boxes of Chap Off or more, Siven should make all the boxes, provided that no further equipment is required other than the one costing $ 47,000.
$ Direct Materials 5.00 Direct Labor 3.40 Variable Manufacturing Overhead [( 2.10 x 110,000) - $ 110,000] / 110,000 1.10 Fixed Manufacturing Overhead 1.00 Total Manufacturing Costs per box of Chap Off $ 10.5Related Questions
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