Problem 12-23 Make or Buy Decision [LO12-3] Silven Industries, which manufacture
ID: 2567794 • Letter: P
Question
Problem 12-23 Make or Buy Decision [LO12-3]
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 8 tubes for $7.50 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $80,000 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:
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 $1.20 per box of 8 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%.
Calculate the total variable cost of producing one box of Chap-Off? (Round your intermediate calculations and final answer to 2 decimal places.)
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.)
Total variable cost ?
What would be the maximum purchase price acceptable to Silven Industries? (Round your intermediate calculations and final answer to 2 decimal places.)
Instead of sales of 100,000 boxes, revised estimates show a sales volume of 114,000 boxes. At this new volume, additional equipment must be acquired to manufacture the tubes at an annual rental of $46,000. Assume that the outside supplier will not accept an order for less than 114,000 boxes
Calculate the total relevant cost of making 114,000 boxes and total relevant cost of buying 114,000 boxes. (Round intermediate calculations to 2 decimal places.)
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 8 tubes for $7.50 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $80,000 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:
Explanation / Answer
Chap off Product Box Cost SP 7.50 UOM 8 Per Unit SP 0.9375 Absorbed OH 80000 Units 100000 FOH PU 0.8 Total M OH 1.4 FOH PU 0.8 Variable M OH 0.6 Estimated Production & Sales Units 100000 Boxes Without Tube Direct Material 3.90 3.12 Direct Labor 1.00 0.90 MOH 0.60 0.54 Total Variable Cost 5.50 4.56 Purchase price of Tube 1.2 Total Cost 5.76 Excess Cost 0.26 (5.76-5.50) Maxm PP of Tube 0.94 (1.20-0.26) 3 Making Buying Units 114000 114000 Direct Material 3.90 3.12 Direct Labor 1.00 0.90 MOH 0.60 0.54 Additional Cost 0.40 0.00 Total Variable Cost 5.90 4.56 Purchase price of Tube 0.00 1.20 Total Relevent Cost 5.90 5.76 If the order size is 114000 then we should avail buying option since it is having lower Relevant Cost Note: Fixed Manufacturing OH Cost has been avoided for calculation, since it is a sunk cost