MAKE OR BUY DECISION

TUTORIAL MAKE OR BUY DECISION MANAGEMENT ACCOUNTING QUESTION 2 Trendsetter Enterprise is an apparel manufacturer. Their new Earthguardians Collection includes eco-friendly materials that can keep those who wear feels comfortable and protected in any environment. The eco-friendly materials are known as Secret1'. The following information is the cost of making Secret1: Per unit (RM) 15.00 12.00 4.00 Direct materials Direct labour Variable manufacturing overhead *Supervisor salaries Depreciation of special equipment Other fixed manufacturing overhead Total cost of Secret1 30.00 4.00 9.00 74.00 *10% of the supervisor salaries is the commission paid base on unit of production. Due to the large cost of producing Secret1, the top management is thinking of buying Secret1 from a supplier. Trendsetter has received two quotations from Thailand and a Vietnam supplier. Both suppliers offer to sell 15,000 units Secret1 at a price of RM40 and RM35 respectively. However, the price does not include import duty. Trendsetter needs to pay another 5% of the purchasing cost for the import duty charge, either from the Thailand or Vietnam supplier. a. Required: Assuming that the company has no alternative use for the facilities that are now being used to produce Secret1. Analyse and decide whether the company should manufacture internally or buy Secret1 from the Thailand or Vietnam supplier. (11 marks) b. Suppose that if Secret1 were purchased, Trendsetter could use the freed capacity to launch a new product. The new product sales is estimated to be RM200,000; with estimation cost of the direct material is RM30,000; the direct labour cost is RM40,000, and the variable expenses is RM10,000. Analyse and decide whether the company should make or buy Secret1 from the Thailand or Vietnam supplier. (11 marks) State THREE (3) characteristics of relevant cost: (3 marks) c