Icon Malaysia produces 5,000 units of carbon filters annually for its air purifier, at the following costs:

Inova Technology offers to supply 5,000 units of the carbon filters at a price of RM35 per unit. The outsourcing of carbon filter production to Inova Technology will reduce fixed manufacturing costs by RM5,000.

1. Weigh total costs between these two alternatives: (a) continue to produce carbon filter and (b) buy carbon filter from Inova Technology.

(8 marks)

2. Explain which of the two alternatives is advantageous to Icon Malaysia?

(2 marks)

3. Assume that in manufacturing the carbon filter, Icon Malaysia replaces the existing direct labour with contract employees who will be paid RM40,000 per annum. They need certain level of skill and must complete a training program at a cost of RM 10,000. In addition, an existing superior who receives RM100,000 salary per annum will oversee these contract employees. This supervision constitutes 10% of the superiors total work time.

a. Revise total direct labour costs for the carbon filter production.

(5 marks)

b. Investigate whether Icon Malaysia should continue to produce or buy carbon filter when it employs the contract employees.