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Question - The product selected (called Chap-Off) is a lip balm that will be sold in a lipstick like 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 $90,000 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 100,000 boxes of Chap-Off, the Accounting Department has developed the following cost per box:
Direct material - $3.60
Direct labor - 2.00
Manufacturing overhead - 1.40
Total cost - $7.00
The costs above include costs for producing both the lip balm and the tube that contains it. As an alternative to making the tube, 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 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 material costs would be reduced by 25%.
Should Silven Industries make or buy the tubes? Use calculations to prove answer.
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