Let's break down the problem step by step: ### **Given Data:** - **Sales Volume:** 110,000 boxes (of 24 tubes each) - **Selling Price:** Not needed for make-or-buy - **Direct Materials:** $5.10 per box - **Direct Labor:** $3.40 per box - **Manufacturing Overhead:** $2.30 per box (needs to be separated into variable and fixed) - **Total Cost Per Box:** $10.80 - **Fixed Manufacturing Overhead Incurred:** $99,000 (absorbed in costing system) - **Cost to Buy Tubes from Supplier:** $1.70 per box (of 24 tubes) - **If tubes are bought:** - Direct materials cost drops by 20% - Direct labor and variable overhead costs drop by 10% - **If sales increase to 150,000 boxes, extra equipment rental:** $60,000/year --- ## **Step 1: Separate Manufacturing Overhead** Since only **variable costs** are relevant for decision making, we need to separate the $2.30 per box overhead into variable and fixed. Let’s assume all $99,000 is the fixed portion. \[ \text{Fixed Overhead per box} = \frac{$99,000}{110,000} = \$0.90 \text{ per box} \] So, variable overhead per box: \[ \text{Variable Overhead per box} = $2.30 - $0.90 = \$1.40 \text{ per box} \] --- ## **Step 2: Current Relevant Costs Per Box** | Cost Component | Per Box | |-----------------------|-----------| | Direct Materials | $5.10 | | Direct Labor | $3.40 | | Variable Overhead | $1.40 | | **Total** | **$9.90** | --- ## **Step 3: Costs IF Tubes Are Bought** - **Direct labor and variable overhead** drop by **10%**. - **Direct materials** drop by **20%**. **New Costs:** - Direct materials: $5.10 × 0.8 = **$4.08** - Direct labor: $3.40 × 0.9 = **$3.06** - Variable overhead: $1.40 × 0.9 = **$1.26** - Outside supplier: **$1.70** - **Total**: $4.08 + $3.06 + $1.26 + $1.70 = **$10.10** per box --- ## **Step 4: Avoidable Cost Calculation** But when buying tubes, the $1.70 likely **replaces** the cost components of making tubes (not added to them). We need to compare the relevant (avoidable) cost of making tubes vs. buying. **Relevant cost of making tubes (per box):** - Direct materials (whole amount is avoidable): $5.10 - Direct labor (whole amount is avoidable): $3.40 - Variable overhead (whole amount is avoidable): $1.40 - **Total avoidable**: $5.10 + $3.40 + $1.40 = **$9.90** **Cost to buy:** $1.70 per box But, if tubes are bought: - Direct labor and variable overhead drop by 10%. - Direct materials cost drops by 20%. So, after buying, the cost components become: - Direct materials: $5.10 × 0.8 = $4.08 (for the rest of the product) - Direct labor: $3.40 × 0.9 = $3.06 - Variable overhead: $1.40 × 0.9 = $1.26 - Cost to buy tubes: $1.70 So, **new total cost per box**: \[ = \$4.08 + \$3.06 + \$1.26 + \$1.70 = \$10.10 \] --- ## **Step 5: Financial Advantage (Disadvantage) Per Box** **Current cost:** $9.90 **Cost if bought:** $10.10 \[ \text{Financial Disadvantage per box} = \$10.10 - \$9.90 = \$0.20 \] --- ## **Step 6: Financial Advantage (Disadvantage) in Total** For 110,000 boxes: \[ = 110,000 \times \$0.20 = \$22,000 \text{ disadvantage} \] --- ## **Step 7: Should Silven Make or Buy the Tubes?** **It should continue making the tubes** because buying is more expensive by $0.20 per box. --- ## **Step 8: Maximum Price Willing to Pay** Maximum price = Current avoidable cost per box = **$9.90** But the $9.90 includes the cost for the whole box, not just the tubes. The cost to make just the tubes is what Silven would be willing to pay. However, since the cost to buy is $1.70 (and is higher than the avoidable cost), **Silven should not pay more than the avoidable cost to make tubes**. --- ## **Step 9: If Sales Increase to 150,000 Boxes (with extra $60,000 rental)** **Total Extra Cost:** $60,000 **Boxes:** 150,000 Current cost per box (for 150,000 boxes): - Direct materials: $5.10 - Direct labor: $3.40 - Variable overhead: $1.40 - Fixed overhead: $99,000 / 150,000 = $0.66 - Extra equipment: $60,000 / 150,000 = $0.40 Total: $5.10 + $3.40 + $1.40 + $0.66 + $0.40 = $11.00 per box **If buying from outside:** - Direct materials: $4.08 - Direct labor: $3.06 - Variable overhead: $1.26 - Buy tubes: $1.70 - Fixed overhead: $0.66 - Extra equipment: $0 (not needed) Total: $4.08 + $3.06 + $1.26 + $1.70 + $0.66 = $10.76 per box So, for 150,000 boxes: - Make: $11.00/box × 150,000 = $1,650,000 - Buy: $10.76/box × 150,000 = $1,614,000 **Financial advantage of buying:** \[ = \$1,650,000 - \$1,614,000 = \$36,000 \] --- ## **Step 10: Should Silven Buy or Make at 150,000 boxes?** **Buy the tubes** (since it saves $36,000). --- ## **Step 11: Minimum Order Quantity** If the supplier will only accept orders of at least 150,000 boxes, **Silven should buy all tubes from the supplier** at the higher sales volume. --- ## **Step 12: Number of Boxes to Make or Buy (if supplier will accept any order size)** If the supplier will accept any order size at $1.70/box, Silven should buy tubes only when it is financially advantageous, i.e., when sales exceed the breakeven point (between 110,000 and 150,000 boxes). --- ## **Summary Table:** | Scenario | Make Cost | Buy Cost | Advantage (Buy) | Recommendation | |---------------|-----------|----------|-----------------|----------------| | 110,000 boxes | $9.90 | $10.10 | -$0.20/box | Make | | 150,000 boxes | $11.00 | $10.76 | +$0.24/box | Buy | --- ## **Final Answers** ### **1. Avoidable manufacturing cost per box if buy tubes:** **$9.90** ### **2. Financial advantage (disadvantage) per box if buy tubes:** **Disadvantage of $0.20 per box** ### **3. Financial advantage (disadvantage) in total for 110,000 boxes:** **Disadvantage of $22,000** ### **4. Should Silven make or buy (at 110,000 boxes)?** **Should make the tubes (making is cheaper)** ### **5. Maximum price Silven should pay to outside supplier:** **$9.90 per box** (but more accurately, the avoidable cost of making the tubes only) ### **6. If 150,000 boxes, what is financial advantage (disadvantage) in total if buy?** **Advantage of $36,000** ### **7. Should Silven make or buy at 150,000 boxes?** **Should buy the tubes** ### **8. If supplier accepts any order size, how many boxes should Silven make and buy?** **Buy only if sales exceed breakeven point; otherwise, make in-house.** --- **If you need the step-by-step calculations for each sub-question or clarification on any step, let me know!**

Certainly! Let's go through each part step-by-step with detailed calculations, explanations, and final answers. --- ### **Given Data Recap** | Item | Amount | |-----------------------------------------|--------------------------| | Estimated sales and production volume | 110,000 boxes | | Selling price per box | Not needed for decision | | Cost per box (absorption costing): | | | - Direct materials | $5.10 | | - Direct labor | $3.40 | | - Manufacturing overhead (total) | $2.30 | | Total cost per box | $10.80 | | Fixed manufacturing overhead (absorbed) | $99,000 | | Cost to buy tubes from outside supplier | $1.70 per box of 24 tubes | | Cost reduction if buy tubes: | | | - Direct materials drop by 20% | Yes | | - Direct labor drops by 10% | Yes | | - Variable manufacturing overhead drops by 10% | Yes | | Additional sales volume considerations | 150,000 boxes; extra rent of $60,000/year for additional capacity | --- ### **Part 1: Separating Fixed and Variable Manufacturing Overhead** **Step 1:** Find fixed overhead per box: \[ \text{Fixed Overhead per box} = \frac{\text{Total fixed overhead}}{\text{Estimated units}} = \frac{\$99,000}{110,000} = \$0.90 \] **Step 2:** Find variable overhead per box: \[ \text{Variable Overhead} = \text{Total Overhead} - \text{Fixed Overhead} = \$2.30 - \$0.90 = \$1.40 \] **Final:** | Cost component | Amount per box | |--------------------------------|----------------| | Direct materials | \$5.10 | | Direct labor | \$3.40 | | Variable manufacturing overhead| \$1.40 | | Fixed manufacturing overhead | \$0.90 | | Total | \$10.80 | --- ### **Part 2: Cost if Silven continues making the tubes** **Relevant (avoidable) costs:** - Direct materials: \$5.10 - Direct labor: \$3.40 - Variable overhead: \$1.40 Total avoidable cost per box: \[ \$5.10 + \$3.40 + \$1.40 = \$9.90 \] --- ### **Part 3: Cost if Silven buys tubes from outside supplier** **Adjusting costs:** - Direct materials: drop by 20%: \[ \$5.10 \times 0.8 = \$4.08 \] - Direct labor: drop by 10%: \[ \$3.40 \times 0.9 = \$3.06 \] - Variable overhead: drop by 10%: \[ \$1.40 \times 0.9 = \$1.26 \] - Cost of buying tubes: \$1.70 (per box) **Total cost if bought:** \[ \$4.08 + \$3.06 + \$1.26 + \$1.70 = \$10.10 \] --- ### **Part 4: Determine the financial advantage/disadvantage per box** - Making cost: \$9.90 - Buying cost: \$10.10 \[ \text{Disadvantage per box} = \$10.10 - \$9.90 = \$0.20 \] **Interpretation:** It costs \$0.20 more per box to buy the tubes from outside than to make them, so **Silven would incur a disadvantage of \$0.20 per box if they buy**. --- ### **Part 5: Total impact for 110,000 boxes** \[ \$0.20 \times 110,000 = \$22,000 \] **Conclusion:** **Total disadvantage of \$22,000** if Silven buys instead of making. --- ### **Part 6: Maximum price Silven should be willing to pay for the tubes** Since making the tubes costs \$9.90 per box (avoidable costs), the **maximum price** Silven should pay: \[ \boxed{\$9.90 \text{ per box}} \] **But note:** The actual outside purchase price (\$1.70) is much lower, so buying is favorable unless the supplier charges more than \$9.90. --- ### **Part 7: Should Silven make or buy at 110,000 boxes?** - Since buying costs more (\$10.10) than making (\$9.90), **Silven should continue making the tubes** at this sales volume. --- ### **Part 8: At increased sales volume (150,000 boxes), considering extra costs** **Additional info:** - Extra equipment rental: \$60,000/year - Sales volume: 150,000 boxes **Step 1:** Find the per-box costs without considering the new equipment: - Fixed overhead per box: \[ \frac{\$99,000}{150,000} = \$0.66 \] - Extra equipment cost per box: \[ \frac{\$60,000}{150,000} = \$0.40 \] **Step 2:** Calculate total cost per box if making in-house: \[ \text{Materials} = \$5.10 \\ \text{Labor} = \$3.40 \\ \text{Variable overhead} = \$1.40 \\ \text{Fixed overhead} = \$0.66 \\ \text{Extra equipment} = \$0.40 \\ \text{Total} = \$5.10 + \$3.40 + \$1.40 + \$0.66 + \$0.40 = \$10.96 \] **Step 3:** Calculate total cost if buying: - Adjusted costs (as earlier): \[ \$4.08 + \$3.06 + \$1.26 + \$1.70 = \$10.10 \] - Fixed overhead and equipment costs are avoided if buying (since outside supplier supplies tubes), so total per box: \[ \$10.10 \] **Step 4:** Compare total costs: - **Making:** \$10.96 per box - **Buying:** \$10.10 per box \[ \text{Total cost difference} = (\$10.96 - \$10.10) \times 150,000 = \$0.86 \times 150,000 = \$129,000 \] **Advantage of buying:** \[ \$129,000 \] **Conclusion:** At 150,000 boxes, **Silven saves \$129,000 by buying**. --- ### **Part 9: Final decision at 150,000 boxes** **Silven should buy** the tubes from outside suppliers, considering the significant cost savings. --- ### **Part 10: How many boxes to make vs. buy?** - Since the outside supplier is willing to supply **any size order**, and at 150,000 boxes it is financially advantageous to buy, **Silven should buy all 150,000 boxes**. - If the company prefers to produce some in-house, it should do so **only if the cost to make per box is less than \$10.10** (the buying price). Given the data, making costs \$10.96 per box (including extra equipment), so **it's better to buy all**. --- ## **Summary of Final Results** | Scenario | Make Cost per Box | Buy Cost per Box | Advantage/Disadvantage per Box | Final Decision | |-------------------------------------|------------------|------------------|------------------------------|-----------------------------------| | 110,000 boxes (current estimate) | \$9.90 | \$10.10 | **\$0.20 disadvantage** | **Make** | | 150,000 boxes (with extra costs) | \$10.96 | \$10.10 | **\$0.86 advantage** | **Buy** | --- ### **Key Takeaways:** - **At 110,000 boxes:** Continue making tubes (cheaper). - **At 150,000 boxes:** Buy tubes from outside suppliers (cost savings). - **Maximum price Silven should pay:** Approximately \$9.90 per box. - **Optimal decision:** Make at 110,000 boxes; buy at 150,000 boxes. --- Let me know if you'd like further clarification or calculations for any step!