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. 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 16 tubes for $6.90 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $100,000 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 $2.60 1.00 1.80 Total cost $5.40 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 $0.80 per box of 16 tubes. If Siln 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 Required 1a. Calculate the total variable cost of producing one box of Chap-off? (Round your intermediate calculations and final answer to 2 decimal places.) Total variable cost per box

Explanation / Answer

1. (a).

Total Variable Cost:

Direct Material = 2.6

Direct labour = 1

Manf. Overhhead = 0.8 (1.8-1 )

So Total Variable cost = $ 4.4

1(b)

See if we purchase tube from outside our all cost will reduce,

So Total variable cost :

Direct Material = 2.08 (2.6 * 80%)

Direct labour = 0.9 (1*90%)

Manf. Overhhead = 0.72 (0.8*90% )

Tube cost = 0.8

So Total Variable cost = $ 4.5

1(c) Due to buying the tube , our cost has been increased from 4.4 to 4.5 , So we should make the tube.

2. Maximum purchase price acceptable will be

=0.8 - 0.1 (4.5 - 4.4)

=0.7 per tube box

3. (a)

Total relevant cost of making =

= (4.4*115000) + 22000

= 528,000

Total relevant cost of buying =

=4.5*115000

=517,500

(b) Based on above we should buy the tube from supplier.

4. Answer will be Make 100,000 boxes and buy 15,000 boxes

See if we manfacture tube more than 100,000 we need to incur addittional cost of $22000, if we buy the tube from outside supplier we incur loss of 0.1 $ per tube box , say on 15000 addittional units our total loss will be 1500 $ , which is obviously less than 22000 $ , so our decision will be manfacture till 100,000 and buy rest addittional 15000 units.

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