The Vemom Corporation, which produces and sells

The Vemom Corporation, which produces and sells

Subject: Business    / Accounting   
Question

S.7 The Vemom Corporation, which produces and sells to wholesalers a highly succ summer lotions and insect repellents, has decided to diversify in order to throughout the year. A natural area for the company to consider is the producti lotions and creams to prevent dry and chapped skin.

After considerable research, a winter products line has been developed. How of the conservative nat ure of the company management, Vernom's president ha introduce only one of the new products for this coming winter. If the product further expansion in future years will be initiated.

The product selected (called "Chap-off ') is a lip balm that will be sold in a tube. The product will be sold to wholesalers in boxes of 24 tubes for $8 per box available capacity, no additional fixed charges will be incurred to produce However, a $100,000 fixed charge will be absorbed by the product to allocate a fai company's present fixed costs to the new product.

Using the estimated sales and prod uction of 100,000 boxes of Chap-off as volume, the accounting department has developed the following costs:

Direct labor Direct materials Total overhead Total

$2.00 per box

3.1 per box 1.50 per box

$6.50 per box

Vemom has approached a cosmetics manufacturer to discuss the possibility o the tubes for Chap-off. The purchase price of the empty tubes from the cosmetics would be $0.90 per 24 tubes. If the Vernom Corporation accepts the purchase estimated that direct labor and variable overhead costs would be reduced by 10 direct material costs would be red uced by 20 percent.

1. Should the Vemom Corporation make or buy the tubes? Show calculations to answer.

2. What would be the minimum purchase price acceptable to the Vemom Corpor tubes? Support your answer with an appropriate explanation.

3. Instead of sales of 100,000 boxes, revised estimates show sales volume at 125,0 this new volume, additional equipment, at an annual rental of $10,000, must b manufact ure the tubes. However, this incremental cost would be the only ad cost required even if sales increased to 300,000 boxes. (The 300,000 level is th third year of prod uction.) Under these circumstances, should the Vemom make or buy the tubes? Show calculations to support your answer.

4. The company has the option of making and buying at the same time. What w

answer to question 3 if this alternative was considered? Show calculations to answer.

5. What nonquantifiable factors should the Vernom Corporation consider in whether they should make or buy the lipstick tubes?