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 $6 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $90,440 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 119,000 boxes of Chap-Off, the Accounting Department has developed the following cost per box:

Direct material $5.5

Direct labor 2.8

Manufacturing overhead 1.5

Total cost $9.8

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 $1.26 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 6% and direct materials costs would be reduced by 33%.

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.
(b) Calculate the total variable cost of one box of Chap-Off if the tubes are purchased from the outside supplier.

(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?

Requirement 3:

Instead of sales of 119,000 boxes, revised estimates show a sales volume of 127,000 boxes. At this new volume, additional equipment must be acquired to manufacture the tubes at an annual rental of $50,000. Calculate the cost under the three alternatives. (Round your answers to the nearest dollar amount.

(a) Total cost to produce all tubes internally

(b) Purchase all cartridges externally:

(c) Produce 119,000 boxes of tubes internally, and purchase 8,000 boxes of tubes externally: