Make or Buy Decision
Detailed budget for garden products for year 2023: Lawnmowers Grass Hedge Robotic Total trimmers trimmers |lawnmowers Quantity (units) 97.750 57,500 51,750 6,900 Per Unit RM RM RM RM Average selling price 325.00 85.00 135.00 560.00 Standard costs 148.75 37.75 65.25 266.00 Gross profit 176.25 47.25 69.75 294.00 RM'000 RM'000 RM'000 RM'00 RM'000 Total sales 31.769 4.888 6,986 3,864 47.507 Total cost of sales 14.540 2,171 3,377 1,835 21.923 Total gross profit 17.229 2,717 3.609 2.029 25.584 Gross profit margin 54.2% 55.6% 51.7% 52.5% 53.9% Budgeted average standard costs per unit of garden products: Lawnmowers Grass Hedge Robotic trimmers trimmers lawnmowers RM RM RM RM Direct material cost 100.00 25.00 45.00 00.00" Direct labour cost 16.25 4.25 6.75 22.00 Variable production 4.88 1.28 2.03 6.60 overheads Fixed production 27.62 7.22 11.47 37.40 overheads Total standard costs 148.75 37.75 65.25 266.00 Additional information: "Details on component required for a unit of Robotic lawnmowers: Component code Usage of External supplier's Total cost component per price per unit RM unit of Robotic component lawnmowers RLMO1 4 units RM30 20.00 RLM02 3 units RM12 36.00 RLMO 2 units RM15 30.00 RLM04 units RM14 14.00 200.00 The Procurement Manager anticipated that the components industry would be facing a price hike due to unforeseeable economic conditions. He has sent a proposal to the Managing Director to proceed with the company's intention to produce its product components. This is to minimize the increasing cost of buying the components in future After a discussion with the Production and Research Departments, the Managing Director decided to produce the four types of highly demanded components used in making Robotic lawnmowers. The components are coded as RLM01, RLM02, RLM03 and RLM04. Based on the current trend, it is forecasted that the price of the components will increase by 5% starting January 2024. In the year 2024, the demand for Robotic lawnmowers is expected to remain the same as the budgeted level of the year 2023 since the awareness of this product is still low in Malaysia The Production and Research Departments have worked together to estimate the production cost of the components and the company has spent RM170,000 to complete the research. The estimated production costs for making the required components to meet the demand of Robotic lawnmower for the year 2024 are as follows: Components RLM01 RLM02 RLM03 RLM04 Total Total direct material (RM) 358,800 82,800 151,800 34,500 627,900 Total direct labour (RM) 331,200 248,400 165,600 82,800 828,000 Total production overheads (RM) 950,000 All direct labours are paid at RM4 per hour. Variable production overheads are absorbed based on direct labour hours. The total allocated budgeted fixed production overhead is estimated at RM329,000. All components are assumed to be made in the factory. Additional costs to be borne by the company if they continue buying the component are inspection and insurance. The cost will be RM5.00 and RM2.00 respectively for each of the components. However, the supplier agreed to reduce the transportation cost by 5% of the purchase cost for the year 2024 if the company continues buying from them for the year 2024. Required: (Answer to three decimal places for cost and revenue amount) a. Determine whether the company should purchase or manufacture the required units of four components individually. Support your decision with detailed calculations on the potential total cost savings by each components. (16 marks)
