Bexon Company is considering various options in the manufacture of some products. The management of the company has sought your assistance to decide on the following two situations. Situation 1 (9 marks) The management of the company is considering dropping product Alpha. Data from the company's accounting system appear below: Sales RS480,000 Variable expenses Rs202,000 Fixed manufacturing expenses Rs158,000 Fixed selling & administrative expenses Rs130,000 All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that Rs86,000 of the fixed manufacturing expenses and Rs67,000 of the fixed selling and administrative expenses are avoidable if product Alpha is discontinued. Page 5 of 7 Required: (a) What is the net operating income earned by product Alpha according to the company's accounting system? (7 marks) (b) What would be the effect on the company's overall net operating income of dropping product Alpha? Should the product be dropped? (2 marks) Situation 2 (16 marks) Part Beta is used in one of the company's products. The company reports that 7,000 units of the part needed every year. Unit costs are as follows: Direct materials Rs7.00 Direct labour Rs6.00 Variable overhead Rs5.60 Supervisor salary Rs4.70 Depreciation of special equipment R$1.50 Allocated general overhead Rs5.40 An outside supplier has offered to make the part and sell it to the company for Rs28.30 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labour, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer was accepted, only Rs9,000 of these allocated general overhead costs would be avoided. Required: (a) Prepare a report that shows the effect on the company's total net operating income of buying part Beta from the supplier rather than continuing to make it inside the company (7 marks) (b) Which alternative should the company choose? (2 marks) (c) Discuss briefly some of the dangers in outsourcing production of parts in a foreign country? (7 marks)