Silven Industries, which manufactures and sells summer lotions and insect repellents, has decided to diversify in...

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Silven Industries, which manufactures and sells 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, Silven developed a new lip balm called Chap-Off that is sold to wholesalers in boxes of 24 tubes for $9 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce Chap-Off. However, a $99,000 charge for fixed manufacturing overhead will be absorbed by the product under the company's absorption costing system. Using estimated sales and production of 110,000 boxes of Chap-Off, the Accounting Department developed the following manufacturing cost per box: Direct material Direct labor Manufacturing overhead Total cost $ 4.00 2.40 1.60 $ 8.00 The costs above include the lip balm and the tube containing it. As an alternative to making the tubes for Chap-Off, Silven is considering buying them from an outside supplier for $1.45 per box of 24 tubes. If 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 decrease by 10% and its direct materials costs would drop by 25%. Required: 1. If Silven buys its tubes from the outside supplier, how much of its own Chap-Off manufacturing costs per box will it avoid? (Hint: You need to separate the manufacturing overhead of $1.60 per box shown above into its variable and fixed components.) 2. What is the financial advantage (disadvantage) per box of Chap-Off if Silven buys its tubes from the outside supplier? 3. What is the financial advantage (disadvantage) in total (not per box) if Silven buys 110,000 boxes of tubes from the outside supplier? 4. Should Silven Industries make or buy the tubes? 5. What is the maximum price Silven should be willing to pay the outside supplier for a box of 24 tubes? 6. Instead of sales of 110,000 boxes of tubes, revised estimates show a sales volume of 132,000 boxes of tubes. At this higher sales volume, Silven would need to rent extra equipment at a cost of $42,000 per year to make the additional 22,000 boxes of tubes. Assuming the outside supplier will not accept an order for less than 132,000 boxes of tubes, what is the financial advantage (disadvantage) in total (not per box) if Silven buys 132,000 boxes of tubes from the outside supplier? Given this new information, should Silven Industries make or buy the tubes? 7. Refer to the data in Required 6. Assume the outside supplier will accept an order of any size for the tubes at a price of $1.45 per box. How many boxes of tubes should Silven make? How many boxes of tubes should it buy from the outside supplier? Silven Industries, which manufactures and sells 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, Silven developed a new lip balm called Chap-Off that is sold to wholesalers in boxes of 24 tubes for $9 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce Chap-Off. However, a $99,000 charge for fixed manufacturing overhead will be absorbed by the product under the company's absorption costing system. Using estimated sales and production of 110,000 boxes of Chap-Off, the Accounting Department developed the following manufacturing cost per box: Direct material Direct labor Manufacturing overhead Total cost $ 4.00 2.40 1.60 $ 8.00 The costs above include the lip balm and the tube containing it. As an alternative to making the tubes for Chap-Off, Silven is considering buying them from an outside supplier for $1.45 per box of 24 tubes. If 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 decrease by 10% and its direct materials costs would drop by 25%. Required: 1. If Silven buys its tubes from the outside supplier, how much of its own Chap-Off manufacturing costs per box will it avoid? (Hint: You need to separate the manufacturing overhead of $1.60 per box shown above into its variable and fixed components.) 2. What is the financial advantage (disadvantage) per box of Chap-Off if Silven buys its tubes from the outside supplier? 3. What is the financial advantage (disadvantage) in total (not per box) if Silven buys 110,000 boxes of tubes from the outside supplier? 4. Should Silven Industries make or buy the tubes? 5. What is the maximum price Silven should be willing to pay the outside supplier for a box of 24 tubes? 6. Instead of sales of 110,000 boxes of tubes, revised estimates show a sales volume of 132,000 boxes of tubes. At this higher sales volume, Silven would need to rent extra equipment at a cost of $42,000 per year to make the additional 22,000 boxes of tubes. Assuming the outside supplier will not accept an order for less than 132,000 boxes of tubes, what is the financial advantage (disadvantage) in total (not per box) if Silven buys 132,000 boxes of tubes from the outside supplier? Given this new information, should Silven Industries make or buy the tubes? 7. Refer to the data in Required 6. Assume the outside supplier will accept an order of any size for the tubes at a price of $1.45 per box. How many boxes of tubes should Silven make? How many boxes of tubes should it buy from the outside supplier?

Answer rating: 100% (QA)

Answer 1 To calculate the manufacturing costs Silven Industries will avoid if it buys its tubes from the outside supplier we need to separate the manufacturing overhead of 168 per box into its variabl... View the full answer