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 20 tubes for $12.5 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $83,620 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 113,000 boxes of Chap-Off, the Accounting Department has developed the following cost per box:
- Direct materials $5.5
- Direct labor 3.0
- Manufacturing overhead 2.9
- Total cost
- $11.4
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 $1.35 per box of 20 tubes. If Silven Industries accepts the purchase proposal, direct labor and variable manufacturing overhead costs per box of Chap-Off would be reduced by 9% and direct materials costs would be reduced by 33%.
Requirement 3:
Instead of sales of 113,000 boxes, revised estimates show a sales volume of 136,000 boxes. At this new volume, additional equipment must be acquired to manufacture the tubes at an annual rental of $52,000. Calculate the cost under the three alternatives. (Round your total variable cost per box to 2 decimal places. Round your answers to the nearest dollar amount. Omit the "$" sign in your response.)
(a) Total variable cost to produce 136,000 boxes of Chap-off, if all tubes required are produced internally:
Total variable cost $
(b) Total variable cost to produce 136,000 boxes of Chap-off, if all tubes required are purchased externally:
Total variable cost $
(c) What is the total variable cost of producing 136,000 boxes of Chap-Off , if 113,000 Chap-Off boxes are produced with tubes manufactured internally and tubes for remaining 23,000 Chap-Off boxes are purchased externally?
Total variable cost $