Can someone help me. Thank you!!! Problem 12.23 Make or Buy Decision [L01231 Sil
ID: 2537362 • Letter: C
Question
Can someone help me. Thank you!!!
Problem 12.23 Make or Buy Decision [L01231 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 $10 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $128,000 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 160,000 boxes of Chap-Off, the Accounting Department has developed the following manufacturing cost per box: Direct material Direct labor Manufacturing overhead Total cost $4.50 2.80 2.00 $9.30 The costs above relate to making both the lip balm and the tube that contains it. As an alternative to making the tubes for Chap-Off Silven has approached a supplier to discuss the possibility of buying the tubes. The purchase price of the supplier's empty tubes would be $1.40 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 be reduced by 10% and its direct materials costs would be reduced by 20%.Explanation / Answer
Solution 12-23-1:
Total manufacturing cost per box at production level of 160000 box = $9.30
Manufacturing overhead per box = $2
Fixed manufacturing overhead absorbed by lip balm = $128,000
Fixed manufacturing overhead cost per box = $128,000 / 160000 = 0.80
Variable manufacturing overhead per box = $2 - $0.80 = $1.20
If tube is purchased from outside vendor then direct labor and variable manufacturing cost will be reduced by 10% and direct material cost will be reduced by 20%.
Therefore
Total manufacturing cost to be avoided if tube purchased from outside supplier = ($2.80 + $1.20)*10% + $4.50*20%
= $1.30 per box
Solution 2:
Purchase price of empty tubes = $1.40 per box
Manufacturing cost to be avoided if purchased from outside = $1.30 per box
Financial advantage (disadvantage) of purchasing = $1.30 - $1.40 = ($0.10) per box
Solution 3:
Total financial advantage (disadvantage) of buying = ($0.10) * 160000 = ($16,000)
Solution 4:
As there is net financial disadvantage of $16,000 for buying empty tubes from outside supplier, hence silven industries should make the empty tubes.