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 24 tubes for $8 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $60,000 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 120,000 boxes of Chap-Off, the Accounting Department has developed the following cost per box:
Direct Materials $3.90
Direct labor 1.90
Manufacturing overhead 1.30
Total cost $7.10
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 $1.40 per box of 24 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 25%.
1a. Calculate the total variable cost of producing one box of chap-off
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
1c. Should Silven Industries make or buy the tubes?
A) Make
B) Buy
2. What would be the maximum purchase price acceptable to Silven Industries?

Answer 1

Answer:

1a. $6.60

1b. $6.76

1c. Silven Industries should make the tubes for this cost $0.16 less than purchasing

2.  $1.24

Explanation:

1a. Calculation total variable cost of producing one box of chap-off (24)

Note :  No additional fixed manufacturing overhead costs will be incurred to produce the product

Direct Materials                                        3.90

Direct labor                                               1.90

Manufacturing overhead (1.30 -0.50)     0.80

Total                                                          6.60

1b Calculation of the total variable cost of producing one box of chap-off

Purchase of Tubes                                             1.40

Direct Materials (3.90× 75%)                             2.93

Direct labor ( 1.90× 90%)                                    1.71

Manufacturing overhead (1.30 -0.50) × 90%   0.72

Total                                                                   6.76

1c Consider incremental cost per unit

Total incremental cost = 6.76 - 6.60

                                     = $0.16

Therefore Silven Industries make the tubes for this cost $0.16 less than purchasing

2.

Maximum purchase price acceptable to Silven Industries

Purchase of Tubes                                             1.24

Direct Materials (3.90× 75%)                             2.93

Direct labor ( 1.90× 90%)                                    1.71

Manufacturing overhead (1.30 -0.50) × 90%   0.72

Total                                                                   6.60

The Overall total cost must not exceed the $6.60 of making Internally -

Thus,Working from Back - Wards the maximum price acceptable to Silven Industries is $1.24

Answer 2

Answer (1 A):

       Calculation Total variable cost of producing one box of chap-off  

• Direct Materials    =                                   3.90
• Direct labor          =                                     1.90
• Manufacturing overhead (1.30 -0.50) =     0.80
• Total                                                       =   6.60

Answer (1B)

 Calculation of the total variable cost of producing one box of chap-off

Purchase of Tubes    =                                        1.40

Direct Materials (3.90× 75%)     =                        2.93

Direct labor ( 1.90× 90%)           =                        1.71

Manufacturing overhead (1.30 -0.50) × 90%  = 0.72

Total   =                                                               6.76

Answer (1 C) Part 1:

                  Consider incremental cost per unit

Total incremental cost = 6.76 - 6.60  = $0.16

Therefore,Silven Industries make the tubes for this cost $0.16 less than purchasing

Part 2 :  

          Maximum purchase price acceptable to Silven Industries

Purchase of Tubes  =                                           1.24

Direct Materials (3.90× 75%)    =                        2.93

Direct labor ( 1.90× 90%)        =                           1.71

Manufacturing overhead (1.30 -0.50) × 90%=   0.72

Total   =                                                                6.60

 Therefore ,The maximum price acceptable to Silven Industries is $1.24.

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