Question & Answer: Silven Industries, which manufactures and sells a highly successful line of summer lotions an…..

Ans 1a. Calculation of total Variable Cost of producing one chap box

 Direct Material \$3.00 Direct labor \$2.00 Manufacturing Overhead \$1.80 Variable Cost \$6.80

Note: Fixed manufacturing cost will not be considered as that cost will continue to occur.

Ans 1b. Calculation of Variable Cost if tubes for chap box is purchased from outside supplier

 Direct Material 3- (20% of 3) \$2.40 Direct Labor 2-(10% of 2) \$1.80 Manufacturing Overhead 1.80-(10% of 1.80) \$1.62 Cost of purchasing tubes from outside supplier \$0.90 Total Variable Cost \$6.72

As been given cost of material will reduced by 20% and cost of labor and manufacturing Overhead by 10% per box if empty tubes is purchased from outside supplier.

Ans 1c. It’s better to buy empty tubes from outside supplier because the Variable Cost in case empty tubes purchased from outside supplier Will be \$ 6.72

Thus company’s contribution will increase by \$0.08 (\$6.80-\$6.70).

Ans 2. Maximum purchase price acceptable to Silven Industries.

Cost of making tubes in Industries per box

 Direct Material 3-(80% of 3) \$0.60 Direct Labor 2-(90% of 2) \$0.20 Manufacturing Overhead 1.80-(90% of 1.80) \$0.18 Total Variable Cost of tubes \$0.98

As given in question if tubes purchased from outside supplier than cost will reduced by the amount given in question thus with the help of tha cost we calculated cost for producing tubes.

Now the rate supplier is charging is \$0.90

Thus maximum purchase price acceptable to Silven Industries will be \$0.98 per box because if outside supplier charge more than \$0.98 than Silven will prefer to make tubes in co. As it will cost less to it.

2. Total Relevant Cost for Making and buying 128000 boxes

Statement of Comparative Cost

 Making Buying Particulars calculation Amount in \$ Particulars calculation Amount in \$ Direct Material 128000*3 384000 Direct Material 128000*2.4 307200 Direct labor 128000*2 256000 Direct labor 128000*1.80 230400 Manf. Ovh. 128000*1.80 230400 manf. Ovh. 128000*1.62 207360 Avoidable FC Rent to be paid 30000 purchase cost 128000*.90 115200
 Total Cost 900400 Total Cost 860160