Reference no: EM132536386

Point 1: Kiel Corporation manufactures and sells summer lotions and insect repellents. To counter the cyclical nature of its business, the company decided to diversify its business through the production of winter creams and lotions.

Point 2: A line of products catered for the winter season was developed after considerable research. However, the company's president decided to launch only one of the new products for the coming winter. Expansion plans would be initiated if the new product were to be successful.

Point 3: The new product is a lip balm called Glide, and will be sold as a lipstick-like tube. The product will be sold to wholesalers in boxes of 48 tubes for $16 per box. There is sufficient production capacity for the new line of products without having to incur additional fixed manufacturing overhead costs. However, a $180,000 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, the Accounting Department has developed the following expected cost per box:

Total Cost Direct labour $4.00

Direct material 7.20

Total manufacturing overhead 2.80

Total cost $14.00

The cost of $14.00 per box is inclusive of the tubes containing the lip balm. As an alternative to producing their own tubes, Kiel Corporation is in discussion with an outside supplier regarding the possibility of purchasing the tubes. The supplier has quoted $2.70 per box of 48 tubes. If the company accepts the purchase proposal, direct labour and variable manufacturing overhead costs per box of Glide would be reduced by 10% and direct materials costs would be reduced by 25%.

Questions:

Question (a) Propose if Kiel Corporation should purchase the empty tubes from the outside supplier. Provide computations to justify your answer.

Question (b) Based on the financial information available, compute and explain the maximum price that the company would be willing to pay the outside supplier.

Question (c) The company revised its sales forecast of Glide from 100,000 boxes to 120,000 boxes. At the revised sales volume, additional equipment will need to be rented at an annual cost of $80,000 for the increased production of empty tubes for Glide. Assuming that the minimum order acceptable by the outside supplier for the empty tubes is 120,000 boxes, propose if the company should purchase from the outside supplier. Show clear computations to justify your answer.

Question (d) If the supplier has no minimum order, would your answer be different from part (c)? Explain with clear computations.

Question (e) List two (2) qualitative factors that the company should consider when deciding whether to buy from the external supplier.