Iawaidal Corporation ia a manufacturer of electronie components for Automobiles Company Its old equipment for making the component is worn out The Company is considering two ccuses of action (a) completely replacing the old equipment with new equipment or (b) buying the electronic component fron a reliable outside supplier, who has qcted a unit price of RM1 on a seven years contract for a minimim of $0,000 units per year QUESTION 2 Production was 60,000 units in each of the past two years. Future needs for the next seven years are not expected to fluctuate beyond 50,000 to 70,000 units per year. Cost records for the past wo years revenl the following unit oosts of manufacturing the sub-assembly RM 0.30 0.35 0.10 Direct materials Direct labar Variable overhead Fixed ovechead ( including RMO.10 depreciation and RMO.10 for direct departmental fixed overhead) 0.25 Total 1.00 The new equipment will cost RM188,000 cash, will last seven years, and will have a disposal value of RM20,000 The current disposal value of the old equipment is RM10,000. The sales representative for the new equipment has summarized her position as follows: The increase in machine speeds will reduce total direct labor and variable overhead by RMO.30 per unit Consider last years' experience of one of your major competitors with identical equigment They produced 100,000 units under operating conditions vary comparable to yours and showed the following unit costs: RM Direct materials Direct labor Variable overhead 0.30 0.05 0.05 Fixed overhead (including depreciation of RM0.24) 0.40 Total 0.80 or purposes of this question, assume that any idle facilities cannot be put to altemative use. Also assume that RMO.50 of the company's old unit cost is allocated fixed overhead that will unaffected by the decision biuuuet, brand 1 and and units and" Required a) Identify and explain the irrelevant costs should Tawakkal decide to make or buy the 3 marks) b) The president of the company asks you to compare the altermatives on a total-annual-cost basis and on a per-unit basis for annual needs of 60,000 units. Which alternative seems to be more attractive? (10 marks) Would your answer in (b) change if the needs were i 50,000 units ii 70,000 units c) (7 marks) d) At what vohume level Tawakkal Corporation would be indifferent between making and buying the component? Show your computations (2 marks) e) What factons, other than the preceding ones (requirement in (e) to (d), should the accountant bring to the attention of management to assist them in making their decision? Include the considerations that might be applied to the outside supplier. (3 marks) Total: 25 marks QUESTION 2 Tawakkal Corporation is a manufacturer of electronic components for Automobiles Company Its' old equipment for making the component is worn out The Company is considering two courses of action: (a) completely replacing the old equipment with new equipment or (b) buying the electronic component from a reliable outside supplier, who has quoted a unit price of RMI on a seven years contract for a minimum of 50,000 units per year Production was 60,000 units in each of the past two yearns. Future needs for the next seven years are not expected to fluctuate beyond 50,000 to 70,000 units per year. Cost records for the past two years reveal the following unit costs of manufacturing the sub-assembly: RM 0.30 0.35 0.10 Direct materials Direct labor Variable overhead Fixed overhead ( including RMO.10 depreciation and RM0.10 for direct departmental fixed overhead)0.25 Total 1.00 The new equipment will cost RM188,000 cash, will last seven years, and will have a disposal value of RM20,000. The current disposal value of the old equipment is RM10,000. The sales representative for the new equipment has summarized her position as follows: The increase in machine speeds will reduce total direct labor and variable overhead by RMO.30 per unit Consider last years' experience of one of your major competitors with identical equipment. They produced 100,000 units under operating conditions vary comparable to yours and showed the following unit costs: RM 0.30 0.05 0.05 Direct materials Direct labor Variable overhead Fixed overhead ( including depreciation of RM0.24) 0.40 Total 0.80 For purposes of this question, assume that any idle facilities cannot be put to altenative use. Also assume that RMO.50 of the company's old unit cost is allocated fixed overhead that will be unaffected by the decision Required a) Identify and explain the irrelevant costs should Tawakkal decide to make or buy the component (3 marks) b) The president of the company asks you to compare the alternatives on a total-annual-cost basis and on a per-unit basis for annual needs of 60,000 units. Which alternative seems to be more attractive? (10 marks) c) Would your answer in (b) change if the needs were i. 50,000 units ii 70,000 units (7 marks) d) At what volume level Tawakkal Corporation would be indifferent between making and buying the component? Show your computations (2 marks) e) What factors, other than the preceding ones (requirement in (a) to (d), should the accountant bring to the attention of management to assist them in making their decision? Include the considerations that might be applied to the outside supplier (3 marks) Total: 25 marks