Question

7. Zana, Rally and Engine Purr are three companies that need you advice them on issues pertaining to accounting.

(a) Zana needs 1,000 motors in its manufacture of motorcar. It can buy the motors from Perjo Motor Company for RM1,250 each. The Zana factory can manufacture the motors for the following costs per unit: RM Direct materials 500 Direct manufacturing labour 250 Variable manufacturing overhead 200 Fixed manufacturing overhead 350 Total 1,300 If Zana buys the motors from Perjo, 70% of the fixed manufacturing overhead applied cannot be avoided.

Required:

(i) Decide whether the company should make or purchase the motors. [8 marks]

(ii) Describe other factors that Zana should consider in deciding whether or not to make or purchase the motors. [5 marks]

(b) Rally Bicycles has been manufacturing its own wheels for its bikes. The company is currently operating at 100% capacity, and variable manufacturing overhead is charged to production at the rate of 30% of direct labour cost. The direct materials and direct labor cost per unit to make the wheels are RM3.00 and RM3.60 respectively. Normal production is 200,000 wheels per year. A supplier offers to make the wheels at a price of RM8 each. If the bicycle company accepts this offer, all variable manufacturing costs will be eliminated, but the RM84,000 of fixed manufacturing overhead currently being charged to the wheels will have to be absorbed by other products.

Required:

(i) Prepare an incremental analysis for the decision to make or buy the wheels. [6 marks]

(ii) Decide with justification whether Rally Bicycles should outsource or not. [4 marks]

(c) Engine Purr Company currently manufactures three different types of motor oil. The firm is considering eliminating one of the three products. Explain factors should be taken into account in making this decision [7marks]

Answer 1

1. (I) ZANA MOTORS SHOULD MANUFACTURE MOTOR CAR AS IT WILL SAVE AROUND RM195 EACH.
EXPLANATION-
IF ZANA BUY FROM PERJO THAN IT WILL COST AROUND RM1495(1250+245)
IF ITS SELF MANUFACTURING HOUSE THAN IT WILL COST AROUND RM1300(500+250+200+350)

(II)OTHER FACTORS THAT SHOULD BE TAKE IN CONSIDERATION ARE AS FOLLOWS;-
a) DEMAND OF MOTOR CAR IN THERE COUNTRY
b) QUAILITY AND QUANTITY REQUIRED.
c) CAPACITY OF OPERATING
d) supply of that commodity in area
e) POLITICAL STRUCTURE IN THAT COUNTRY
F) ROTATION OF MONEY

2)BALLY BISYCLES SHOULD MANUFACTURE THERE OWN AS IT WILL SAVE THEM AROUND 0.32RM EACH UNIT.

VARIABLE COST IS 30%OF DL I.E., 1.08
DL IS 3.60
DM IS 3
AND FIX COST IS 0.42
SO TOTAL COST IS 8.10RM EACH WHEN THEY PRODUCE BY THEMSELVES

AND IF THEY ACCEPTS THE OFFER OF SUPPLIER THAN IT WILL COST THEM AROUND 8.42RM EACH.

SO TO SAVE 0.32RM EACH THEY SHOULD PRODUCE BY THEMSELVES.

ii) RALLY BICYCLES SHOULDNT OUTSOURCE AS IT WILL LEAD IT TO HIGHER COST TO THEMSELVES BUT STILL IF THERE IS MORE DEMAND THAN THEY CAN MOVE FOR OUTSOURCE TOO AS THEY HAVE LIMITED PRODUCTION. IN NORMAL STRUCURE THEY SHOULD CONTINUE WITH THERE OWN PRODUCTION.

3. LOSS IN THAT COMMODITY CONSTRANING FOR LONG PERIOD. I.E., LOSS A COMMODITY IS INCURRING DAY BY DAY

HOW THAT COMMODITY IS PERFOMING IN DAILY CYCLE

DEMAND AND SUPPLY OF THAT COMMODITY

ROLE OF SUBSTITUTE AND COMPOSITE GOODS

COST OF PRODUCTION

QUALITY OF PRODUCT