Question

Silven Industries, which manufactures and sells a highlysuccessful line of summer lotions and insect repellents, hasdecided to diversify in order to stabilize sales throughout theyear. A natural area for the company to consider is the productionof winter lotions and creams to prevent dry and chapped skin.

Afterconsiderable research, a winter products line has been developed.However, Silven’s president has decided to introduce only one ofthe new products for this coming winter. If the product is asuccess, further expansion in future years will be initiated.

Theproduct selected (called Chap-Off) is a lip balm that will be soldin a lipstick-type tube. The product will be sold to wholesalers inboxes of 24 tubes for $7 per box. Because of excess capacity, noadditional fixed manufacturing overhead costs will be incurred toproduce the product. However, a $88,000 charge for fixedmanufacturing overhead will be absorbed by the product under thecompany’s absorption costing system.

Using theestimated sales and production of 110,000 boxes of Chap-Off, theAccounting Department has developed the following cost per box:

Directmaterials	$	3.60
Direct labor		1.50
Manufacturingoverhead		0.90
Total cost	$	6.00

The costs above include costs for producing both the lip balmand the tube that contains it. As an alternative to making thetubes, Silven has approached a supplier to discuss the possibilityof purchasing the tubes for Chap-Off. The purchase price of theempty tubes from the supplier would be $1.40 per box of 24 tubes.If Silven Industries accepts the purchase proposal, direct laborand variable manufacturing overhead costs per box of Chap-Off wouldbe reduced by 10% and direct materials costs would be reduced by25%.

Required:

1a.

Calculate the total variable cost of producing one box ofChap-Off? (Round your intermediate calculations and finalanswer to 2 decimal places.)

Totalvariable cost

perbox

1b.

Assume that the tubes for the Chap-Off are purchased from theoutside supplier, calculate the total variable cost of producingone box of Chap-Off? (Round your intermediate calculationsand final answer to 2 decimal places.)

Totalvariable cost

perbox

2.

What would be the maximum purchase price acceptable to SilvenIndustries? (Round your intermediate calculations and finalanswer to 2 decimal places.)

maximumpurchase price

perbox

3.	Instead of sales of 110,000 boxes, revised estimates show asales volume of 130,000 boxes. At this new volume, additionalequipment must be acquired to manufacture the tubes at an annualrental of $56,000. Assume that the outside supplier will not acceptan order for less than 130,000 boxes.

a.

Calculate the total relevant cost of making 130,000 boxes andtotal relevant cost of buying 130,000 boxes. (Roundintermediate calculations to 2 decimal places.)

	Making	Buying
Totalcost