Question

Famay Sdn Bhd (FSB) is a manufacturing company that produces high-technology electrical products. One of the items used in the product is component M-2712. Each month, 10 units of M-2712 is required in production. Currently, component M-2712 is produces internally with the following costs incurred:

Direct material RM500

Direct labor RM4,000

Manufacturing overhead 150% of direct labor

Material handling 20% from direct material

Additional information related to production of M-2712 are as below:

i. Material handling is a separate charge in addition to manufacturing overhead. It involves the variable cost at Receiving Department that apply to direct material and purchased components on the basis of their cost. ii. Manufacturing overhead cost consists of ⅓ variable cost, and ⅔ fixed cost.

Currently, there are one company approach FSB to supply components M-2712 at a unit price of RM7,500. FSB has three options regarding the empty spaces if they choose to accept the offer from outside supplier:

i. The empty spaces will remain idle. ii. FSB able to rent out the empty space for RM12,500 per month. iii. FSB can use the empty space to manufacture new product that would contribute RM26,000 every month.

REQUIRED:

(a) Evaluate each option for FSB regarding the empty spaces. Show all workings.

(b) Justify whether the decision to accept the offer from outside supplier on components M-2712 is a correct decision made by FSB.

Answer 1

(a)
(i)	Empty Space-Remain Idle		Amount RM
		Make	Buy
	Purchase Cost ( 7,500 x 10 )	-	75,000
	Direct materials	5,000
	Direct labor	40,000
	Material Handling-Variable ( 5,000 x 20% )	1,000
	Variable Manufacturing Overhead ( 4,000 x 150% x 1/3 x 10 )	20,000
	Total Costs	66,000	75,000
	It is better to Make because it has saving of RM 9,000 ( 75,000 - 66,000 ) as compare to Purchase.
(ii)	Empty Space-Rent Out		Amount RM
		Make	Buy
	Purchase Cost ( 7,500 x 10 )	-	75,000
	Direct materials	5,000
	Direct labor	40,000
	Material Handling-Variable ( 5,000 x 20% )	1,000
	Variable Manufacturing Overhead ( 4,000 x 150% x 1/3 x 10 )	20,000
	Opportunity Cost of rent	12,500
	Total Costs	78,500	75,000
	It is better to purchase because it has saving of RM 3,500 ( 78,500 - 75,000 ) as compare to Make.
(iii)	Empty Space-Manufacture new product		Amount RM
		Make	Buy
	Purchase Cost ( 7,500 x 10 )	-	75,000
	Direct materials	5,000
	Direct labor	40,000
	Material Handling-Variable ( 5,000 x 20% )	1,000
	Variable Manufacturing Overhead ( 4,000 x 150% x 1/3 x 10 )	20,000
	Opportunity Cost- Contribution Margin	26,000
	Total Costs	92,000	75,000
	It is better to purchase because it has saving of RM 17,000 ( 92,000 - 75,000 ) as compare to Make.

(b ) Under option (i) ,it is better to make as the there is saving of RM 9,000 on making rather than purchase. Whereas under option (ii) & (iii) , it is better to accept the offer from outside supplier, as there is saving of RM 3,500 & RM 17,000 respectively as compare to make.