Silven Industries, which manufactures and sells a highly successful line of summer lotions and insedt 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 10 tubes for $8.00 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $120,000 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 $3.00 2.00 1.80 Total cost $6.80 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 $0.90 per box of 10 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% equired: 1a. Calculate the total variable cost of producing one box of Chap-off? (Round your intermediate calculations and final answer to 2 decimal places.) otal variable cost 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? (Round your intermediate calculations and final answer to 2 decimal places.) otal variable cost per box 1c. Should Silven Industries make or buy the tubes? Make uy 2. What would be the maximum purchase price acceptable to Silven Industries? (Round your intermediate calculations and final answer to 2 decimal places.)
Ans 1a. Calculation of total Variable Cost of producing one chap box
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
|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|
Ans 3b. Silven should buy.
Ans. 3c. Buy all 128000 boxes from outside supplier.