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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.

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.

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


  Direct labor


  Manufacturing overhead


  Total cost



        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:


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



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


  Total variable cost per box



Should Silven Industries accept the outside supplier’s





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.)



Total cost to produce all tubes internally






Purchase all cartridges externally:






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





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