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 variable cost, and 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.