Silven Industries manufactures and sells a highly successful line of summer lotions and insect...

Question:

Silven Industries manufactures and sells a highly successful line of summer lotions and insect repellents. The company 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 lipstick-type tube. The product will be sold to wholesalers in boxes of 24 tubes for $8 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $91,000 charge for fixed manufacturing overhead costs will be absorbed by the product under the company's absorption costing system.

Using the estimated sales and production of 130,000 boxes of Chap-Off, the Accounting Department has developed the following cost per box:

Direct materials $ 3.10
Direct labor 2.10
Manufacturing overhead 1.50
Total cost $ 6.70

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 $1.30 per box of 24 tubes. If Silven Industries accepts the purchase proposal, direct labor and variable manufacturing overhead costs per box of Chap-Off would be reduced by 10% and direct materials costs would be reduced by 25%.

Required:

1a. Calculate the total variable cost of producing one box of Chap-Off? (Round your immediate calculations and final answers to 2 decimal places.)

Total variable cost                            per box

1b. Assume that the tubes for the Chap-Off are purchased from the outside supplier, calculate the total variable cost of producing one box of Chap-Off? (Round your immediate calculations and final answers to 2 decimal places.)

Total variable cost                            per box

2. What would the maximum purchase price acceptable to Silven Industries? (Round your immediate calculations and final answers to 2 decimal places.)

Maximum purchase price                            per box

3. Instead of sales of 130,000 boxes, revised estimates show a sales volume of 150,000 boxes. At this new volume, additional equipment must be acquired to manufacture the tubes at an annual rental of $46,000. Assume that the outside supplier will not accept an order for less than 150,000 boxes.

a. Calculate the total relevant cost of making 150,000 boxes and total relevant cost of buying 150,000 boxes. (Round your immediate calculations and final answers to 2 decimal places.)

Making Buying
Total cost                                               

Relevant Costs

Relevant costs relate to future costs that are specific to an alternative during decision making. The aim of relevant costing is to determine the alternative that yields the highest profits for the company. As such, costs that are common across alternatives are not considered in decision making. In make or buy decisions, relevant costs for the alternative of making will include variable manufacturing costs, avoidable fixed costs or any opportunity costs that results from manufacturing products internally. Relevant costs for the purchasing alternative will include purchase costs and other incremental costs that need to be incurred in the purchasing process.

Answer and Explanation: 1

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1a.

Variable overhead = 1.50 - (91,000/130,000) = $0.80

Total variable cost | 3.10 + 2.10 + 0.8 = $6 | per box

1b.

Direct materials 2.325 (3.10...

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Impact of Relevant Costs on Make-or-Buy Decisions

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Chapter 9 / Lesson 9
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Businesses will weigh up a decision on whether to make or buy products while taking into consideration the outcome on the business's finances. Learn more about the impact of relevant costs, to make or buy, calculate relevant costs and how to consider qualitative factors with examples.


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