PROBLEM 13-23 Make or Buy Decision LO13-3Silven Industries, which manufactures and sells a highly successful line of summer lotions and insect repellents, has decided todiversify in order to stabilize sales throughout the year. A natural area for the company to consider is the production of winter lotions andcreams 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 thenew 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 boxesof 24 tubes for $8 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce theproduct. However, a $90,000 charge for fixed manufacturing overhead will be absorbed by the product under the company's absorptioncosting system.Using the estimated sales and production of 100,000 boxes of Chap-Off, the Accounting Department has developed the followingmanufacturing cost per boxDirect materialDirect laborManufacturing overheadTotal cost$3502.001.40$7.00The costs above relate to making both the lip balm and the tube that contains it. As an alternative to making the tubes for Chap-Off, Silvenhas approached a supplier to discuss the possibility of buying the tubes. The purchase price of the supplier's empty tubes would be $1.35 perbox of 24 tubes. If Silven Industries stops making the tubes and buys them from the outside supplier, its direct labor and variablemanufacturing overhead costs per box of Chap-Off would be reduced by 10% and its direct materials costs would be reduced by 25%.Required:1. If Silven buys its tubes from the outside supplier, how much of its own Chap-Off manufacturing costs per box will it be able to avoid?(Hint: You need to separate the manufacturing overhead of $1.40 per box that is shown above into its variable and fixed components toderive the correct answer.)2. What is the financial advantage (disadvantage) per box of Chap-Off if Silven buys its tubes from the outside supplier?3. What is the financial advantage (disadvantage) in total (not per box) if Silven buys 100,000 boxes of tubes from the outside supplier?4. Should Silven Industries make or buy the tubes?Page 6125. What is theprice that Silven should be willing pay the outside supplier for a box of 24 tubes? Explain.6. Instead of sales of 100,000 boxes, revised estimates show a sales volume of 120,000 boxes. At this higher sales volume, Silven would needto rent extra equipment at a cost of $40,000 per year to make the additional 20,000 boxes of tubes. Assuming that the outside supplierwill not accept an order for less than 120,000 boxes, what is the financial advantage (disadvantage) in total (not per box) if Silven buys120,000 boxes of tubes from the outside supplier? Given this new information, should Silven Industries make or buy the tubes?7. Refer to the data in (6) above. Assume that the outside supplier will accept an order of any size for the tubes at a price of $1.35 per box.How many boxes of tubes should Silven make? How many boxes of tubes should it buy from the outside supplier?8. What qualitative factors should Silven Industries consider in determining whether they should make or buy the tubes?

Variable manufacturing overhead per unit = Total manufacturing overhead per unit - Fixed…

Silven Industries, which manufactures and sells a highly successful line of summer lotions and insect repellents, has decided to in order to stabilize sales throughout the year. A natural area for the company to consider is the production of winter lotions and to prevent dry and chapped skin. onsiderable research, a winter products line has been developed. However, Silven's president has decided to introduce only one of the oducts for this coming winter. If the product is a success, further expansion in future years will be initiated. duct 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 bes for $8 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the However, a $90,000 charge for fixed manufacturing overhead will be absorbed by the product under the company's absorption system. he estimated sales and production of 100,000 boxes of Chap-Off, the Accounting Department has developed the following cturing cost per box: Direct material Direct labor Manufacturing overhead Total cost $50 2.00 1.40 $7.00 sts above relate to making both the lip balm and the tube that contains it. As an alternative to making the tubes for Chap-Off, Silven proached a supplier to discuss the possibility of buying the tubes. The purchase price of the supplier's empty tubes would be $1.35 per 24 tubes. If Silven Industries stops making the tubes and buys them from the outside supplier, its direct labor and variable acturing overhead costs per box of Chap-Off would be reduced by 10% and its direct materials costs would be reduced by 25%. ired: Silven buys its tubes from the outside supplier, how much of its own Chap-Off manufacturing costs per box will it be able to avoid? int: You need to separate the manufacturing overhead of $1.40 per box that is shown above into its variable and fixed components to ive the correct answer.) hat is the financial advantage (disadvantage) per box of Chap-Off if Silven buys its tubes from the outside supplier? hat is the financial advantage (disadvantage) in total (not per box) if Silven buys 100,000 boxes of tubes from the outside supplier? ould Silven Industries make or buy the tubes? Page 612 hat is the maximum price that Silven should be willing to pay the outside supplier for a box of 24 tubes? Explain. tead of sales of 100,000 boxes, revised estimates show a sales volume of 120,000 boxes. At this higher sales volume, Silven would need rent extra equipment at a cost of $40,000 per year to make the additional 20,000 boxes of tubes. Assuming that the outside supplier 1 not accept an order for less than 120,000 boxes, what is the financial advantage (disadvantage) in total (not per box) if Silven buys 0,000 boxes of tubes from the outside supplier? Given this new information, should Silven Industries make or buy the tubes? fer to the data in (6) above. Assume that the outside supplier will accept an order of any size for the tubes at a price of $1.35 per box. ow many boxes of tubes should Silven make? How many boxes of tubes should it buy from the outside supplier? hat qualitative factors should Silven Industries consider in determining whether they should make or buy the tubes?

Silven Industries, which manufactures and sells a highly successful line of summer lotions and insect repellents, has decided to in order to stabilize sales throughout the year. A natural area for the company to consider is the production of winter lotions and to prevent dry and chapped skin. onsiderable research, a winter products line has been developed. However, Silven's president has decided to introduce only one of the oducts for this coming winter. If the product is a success, further expansion in future years will be initiated. duct 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 bes for $8 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the However, a $90,000 charge for fixed manufacturing overhead will be absorbed by the product under the company's absorption system. he estimated sales and production of 100,000 boxes of Chap-Off, the Accounting Department has developed the following cturing cost per box: Direct material Direct labor Manufacturing overhead Total cost $50 2.00 1.40 $7.00 sts above relate to making both the lip balm and the tube that contains it. As an alternative to making the tubes for Chap-Off, Silven proached a supplier to discuss the possibility of buying the tubes. The purchase price of the supplier's empty tubes would be $1.35 per 24 tubes. If Silven Industries stops making the tubes and buys them from the outside supplier, its direct labor and variable acturing overhead costs per box of Chap-Off would be reduced by 10% and its direct materials costs would be reduced by 25%. ired: Silven buys its tubes from the outside supplier, how much of its own Chap-Off manufacturing costs per box will it be able to avoid? int: You need to separate the manufacturing overhead of $1.40 per box that is shown above into its variable and fixed components to ive the correct answer.) hat is the financial advantage (disadvantage) per box of Chap-Off if Silven buys its tubes from the outside supplier? hat is the financial advantage (disadvantage) in total (not per box) if Silven buys 100,000 boxes of tubes from the outside supplier? ould Silven Industries make or buy the tubes? Page 612 hat is the maximum price that Silven should be willing to pay the outside supplier for a box of 24 tubes? Explain. tead of sales of 100,000 boxes, revised estimates show a sales volume of 120,000 boxes. At this higher sales volume, Silven would need rent extra equipment at a cost of $40,000 per year to make the additional 20,000 boxes of tubes. Assuming that the outside supplier 1 not accept an order for less than 120,000 boxes, what is the financial advantage (disadvantage) in total (not per box) if Silven buys 0,000 boxes of tubes from the outside supplier? Given this new information, should Silven Industries make or buy the tubes? fer to the data in (6) above. Assume that the outside supplier will accept an order of any size for the tubes at a price of $1.35 per box. ow many boxes of tubes should Silven make? How many boxes of tubes should it buy from the outside supplier? hat qualitative factors should Silven Industries consider in determining whether they should make or buy the tubes?

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter12: Activity-based Management

Section: Chapter Questions

Problem 15E: Refer to Exercise 12.14. Suppose that for 20x2, Sanford, Inc., has chosen suppliers that provide...

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