Electron Ltd. (Electron) manufactures various electronic devices. Each of the devices (final products) which Electron sells to the entitys customers is assigned to a specific department within Electron. One of the devices which Electron manufactures is a laptop called Valedictorian and is assigned to department H within Electron. Each Valedictorian is defined as a unit as a Valedictorian is the final product sold to customers. The current market demand for Valedictorian is 670 per financial year, and department H has the sufficient operational and non-operational capacity to meet this demand. The market is willing to pay R8 000 per Valedictorian. Electrons management accountant drafted the following budgeted costing report: Valedictorian Cost per unit Direct material R1 900 Direct labour R2 400 Variable manufacturing overheads R360 Fixed manufacturing overheads R250 Non-manufacturing variable overheads R180 Non-manufacturing fixed overheads R220 The operational manager has performed research and encountered an international supplier which will be able to manufacture the required Valedictorians on Electrons behalf. In return, the international supplier would want a remuneration of R2 200 per Valedictorian (inclusive of R290 delivery fees per unit). As the international supplier will manufacture the Valedictorian products, no addition of materials will be required to the purchased units. It will also cause the current employees of Department H to become redundant within Electron. A once-off retrenchment fee of R35 000 in total will be paid to these employees. ANNEXURE F: FORMATIVE ASSESSMENT 1 61 HMAC330-1_FA1_Jan-Jun2023_V4_ES_07122022 Scenario 1 The variable manufacturing overheads will be avoidable should Valedictorians production be outsourced while the non-manufacturing variable overheads will reduce with R45 000 over a financial year. Fixed manufacturing overheads will be decreased to R110 900 per financial year; however, the non-manufacturing fixed overheads will remain as is as they are largely non-dependant on Valedictorians. Electrons capacity which was utilised on Valedictorians will initially have no alternative use. Scenario 2 Electron will utilise the free capacity which becomes available, if Valedictorians are outsourced, on a new product eTab. With this free capacity, Electron will be able to manufacture 740 eTabs per financial year which is expected to also be sold within the relevant year of manufacturing for R5 700 each. The current materials used directly in Valedictorians production, will not be useful in eTabs production as a new type of material will be required which will amount to R800 per eTab. The current department H direct manufacturing employees will then not become redundant as previously mentioned, but they will rather be trained at a total cost of R49 000 to be able to manufacture eTabs. Their total wages will however be decreased by R300 per eTabs. Each eTabs requires the same amount of direct labour hours as each Valedictorian. Both the variable and fixed manufacturing overheads will increase to R252 000 per annum and R182 000 per annum respectively. The variable non-manufacturing overheads will remain the same as currently while the non-manufacturing fixed overheads incurred for a financial year will decrease with R11 000.

Refer to Scenario 2. Advise Electron Ltd. whether it would be more beneficial to continue manufacturing Valedictorians during the next financial year, OR to make use of the international supplier. Support your answer with the necessary calculations