Question

Problem 10-23A Make or Buy Decision [LO10-3]

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 12 tubes for $8.50 per box. Because of excess capacity, noadditional fixed manufacturing overhead costs will be incurred toproduce the product. However, a $110,000 charge for fixedmanufacturing overhead will be absorbed by the product under thecompany’s absorption costing system.

Using theestimated sales and production of 100,000 boxes of Chap-Off, theAccounting Department has developed the following cost per box:

Directmaterials	$	4.80
Direct labor		1.00
Manufacturingoverhead		1.40
Total cost	$	7.20

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 $1.20 per box of 12 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 by20%.

Required:
1a.	Calculate the total variable cost of producing one box ofChap-Off. (Do not round intermediate calculations. Roundyour answer to 2 decimal places.)
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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. (Do not round intermediatecalculations. Round your answer to 2 decimal places.)
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1c.

Should Silven Industries make orbuy the tubes?

	Make
	Buy

2.	What would be the maximum purchase price acceptable to SilvenIndustries? (Do not round intermediate calculations. Roundyour answer to 2 decimal places.)
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3.	Instead of sales of 100,000 boxes, revised estimates show asales volume of 115,000 boxes. At this new volume, additionalequipment must be acquired to manufacture the tubes at an annualrental of $32,000. Assume that the outside supplier will not acceptan order for less than 115,000 boxes.

a.	Calculate the total relevant cost of making 115,000 boxes andtotal relevant cost of buying 115,000 boxes. (Do not roundintermediate calculations.)
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b.

Based on the above calculations,should Silven Industries make or buy the boxes?

	Make
	Buy

4.

Refer to the data in (3) above. Assume that the outside supplierwill accept an order of any size for the tubes at $1.20 per box.Which of these is the best alternative?

	Make all 115,000 boxes
	Buy all 115,000 boxes
	Make 100,000 boxes and buy 15,000 boxes
	Make 32,000 boxes and buy 32,000 boxes