JVC Ltd manufactures televisions with built-in voice command and hi-fi audio-visual system. An essential part of these televisions is a control board which the company builds in-house and each board costs 100. Sysco, an outside supplier, has offered the company to supply the control board at 65 a unit. The cost of producing one unit of the control board is as follows: Description Direct material 30 Direct labour 20 Variable manufacturing overhead 10 Absorbed fixed manufacturing overhead 15 Traceable fixed manufacturing overhead cost for the division 25 Total manufacturing cost 100 If Sysco's offer is accepted, the above costs will be affected in the following manner 1. The company will continue to spend 20% direct labour and 90% variable manufacturing overhead costs for installing the control board in the television set. 2. The traceable fixed manufacturing cost entails rent, salary of the supervisor and depreciation of machines. The rent (calculated as E10 per unit) is paid for sharing the manufacturing facilities If Sysco's offer is accepted, the above costs will be affected in the following manner: 1. The company will continue to spend 20% direct labour and 90% variable manufacturing overhead costs for installing the control board in the television set. 2. The traceable fixed manufacturing cost entails rent, salary of the supervisor and depreciation of machines. The rent (calculated as 10 per unit) is paid for sharing the manufacturing facilities; however, there is no immediate use of the floor space currently used by the Control Board division. The supervisor's job will be terminated if the division is closed. His salary amounts to 5 per unit. The division is currently using two machines- VC1 & IR3. VC1 will continue its operation and its depreciation is 4 per unit. IR3 will be out of service and its residual value is completely recoverable from selling it outside. Required: a) Should JVC limited make or buy the Control board? Show your computation. In your analysis, you must identify the irrelevant costs with brief explanations. (20 marks) b) What would be the maximum purchase price of the control board acceptable to JVC limited if they buy the board from Sysco? (4 marks) Senior management of JVC is considering to expand an existing manufacturing division that may use the space of the control board to be vacated if Sysco's offer is accepted. Would it change your decision of making or buying the control boards? What would be the maximum price JVC is willing to pay if Sysco's proposal is approved? (6 marks) d) Critically evaluate how new business processes and technologies affect management accounting practice. 120 marks)
