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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 21 tubes for $7 per box. Because of excess capacity, no
additional fixed manufacturing overhead costs will be incurred to
produce the product. However, a $95,040 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 108,000 boxes of Chap-Off, the
Accounting Department has developed the following cost per box:

 

 

 

  Direct materials

$4.2  

  Direct labor

2.0  

  Manufacturing overhead

3.0  

  Total cost

$9.2  

 

        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 $1.23 per box of 21 tubes. If Silven Industries
accepts the purchase proposal, direct labor and variable
manufacturing overhead costs per box of Chap-Off would be reduced
by 8% 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.
(Round your answer to 2 decimal places. Omit the “$” sign
in your response.)

 

  Total variable cost per box

 

(b)

Calculate the total variable cost of one box of Chap-Off if the
cartridges are purchased from the outside supplier. (Round
your answer to 2 decimal places. Omit the “$” sign in your
response.)

 

  Total variable cost per box

 

(c)

Should Silven Industries accept the outside supplier’s
offer?

 

 

 
 

 

Requirement 2:

What is the maximum price that Silven Industries should be
willing to pay the outside supplier per dozen cartridges?
(Round your answer to 2 decimal places. Omit the “$” sign
in your response.)

 

  Maximum price

per box  

 

Requirement 3:

Instead of sales of 108,000 boxes, revised estimates show a
sales volume of 130,000 boxes. At this new volume, additional
equipment must be acquired to manufacture the tubes at an annual
rental of $49,000. Calculate the cost under the three alternatives.
(Round your answers to the nearest dollar amount. Omit the
“$” sign in your response.)

 

(a)

Total cost to produce all tubes internally

 

  Cost

 

 

(b)

Purchase all cartridges externally:

 

  Cost

 

 

(c)

Produce 108,000 boxes of tubes internally, and purchase 22,000
boxes of tubes externally:

 

  Cost

 

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