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 $8.9 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $86,860 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 101,000 boxes of Chap-Off, the Accounting Department has developed the following cost per box:
Direct materials $4.1
Direct labor 2.0
Manufacturing overhead 2.3
Total cost
$8.4
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 $1.33 per box of 24 tubes. If Silven Industries accepts the purchase proposal, direct labor and variable manufacturing overhead costs per box of Chap-Off would be reduced by 6% and direct materials costs would be reduced by 27%.
Requirement 1:
(a)Calculate the total variable cost of one box of Chap-Off if the company manufactures all of its own tubes from start to finish. (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "tiny_mce_markerquot; sign in your response.)
Total variable cost per box $
(b)Calculate the total variable cost of one box of Chap-Off if the tubes are purchased from the outside supplier. (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "tiny_mce_markerquot; sign in your response.)
Total variable cost per box $
(c) Should Silven Industries accept/reject the outside supplier's offer?
Requirement 2:What is the maximum price that Silven Industries should be willing to pay the outside supplier per box of 24 tubes? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "tiny_mce_markerquot; sign in your response.)
Maximum price $ per box
Requirement 3:Instead of sales of 101,000 boxes, revised estimates show a sales volume of 131,000 boxes. At this new volume, additional equipment must be acquired to manufacture the tubes at an annual rental of $59,000. Calculate the cost under the three alternatives.
(a) Total variable cost to produce 131,000 boxes of Chap-off, if all tubes required are produced internally:
Total variable cost $
(b) Total variable cost to produce 131,000 boxes of Chap-off, if all tubes required are purchased externally:
Total variable cost $
(c) What is the total variable cost of producing 131,000 boxes of Chap-Off , if 101,000 Chap-Off boxes are produced with tubes manufactured internally and tubes for remaining 30,000 Chap-Off boxes are purchased externally?