MAKE OR BUY DECISION

TUTORIAL MAKE OR BUY DECISION MANAGEMENT ACCOUNTING Audio Video Sdn Bhd manufactures video systems for automobiles. The video system can be sold at RM2,500 per unit. Commission is to be paid to salesperson at 5% of selling price per unit of video system sold. The production cost per unit for the video system is shown below: Item Direct materials Direct labour (RM30/hour) Overheads Total cost per unit RM 720 180 600 1,500 The fixed overhead is absorbed based on direct labour hours. The total budgeted fixed overhead and budgeted labour hours for the year are expected to be RM450,000 and 7,500 labour hours respectively. One hour of direct labour is estimated to produce one unit of speaker. The company is currently buying one of its components (a set of speakers) from a supplier at RM160 to be installed in the video system. It is forecasted that the price of the speakers will increase to RM200 in the next period. The company is considering manufacturing the speakers on its own for the coming period as the cost to manufacture the speakers is only RM150. The total budgeted cost to manufacture the speaker set is made up the following: Items: RM Direct materials Direct labour (RM30/hour) 30 Overheads 80 Total costs of a speaker set 150 The company has enough materials and machine capacity to produce the speaker in the next period but has limited direct labour hours. Currently, the company has only 1,500 direct labour hours to produce either the video system or the speakers. In order to manufacture the speakers the company has to buy a special wiring system that cost RM15 per set of speakers. 40 Required: a. Advice the management of Audio Video Sdn Bhd as to whether to manufacture or buy the speakers. (16 marks) b. Give FOUR (4) qualitative factors that need to be considered when making the decision either to make or buy the speakers. (4 marks) TUTORIAL MAKE OR BUY DECISION MANAGEMENT ACCOUNTING Audio Video Sdn Bhd manufactures video systems for automobiles. The video system can be sold at RM2,500 per unit. Commission is to be paid to salesperson at 5% of selling price per unit of video system sold. The production cost per unit for the video system is shown below: Item Direct materials Direct labour (RM30/hour) Overheads Total cost per unit RM 720 180 600 1,500 The fixed overhead is absorbed based on direct labour hours. The total budgeted fixed overhead and budgeted labour hours for the year are expected to be RM450,000 and 7,500 labour hours respectively. One hour of direct labour is estimated to produce one unit of speaker. The company is currently buying one of its components (a set of speakers) from a supplier at RM160 to be installed in the video system. It is forecasted that the price of the speakers will increase to RM200 in the next period. The company is considering manufacturing the speakers on its own for the coming period as the cost to manufacture the speakers is only RM150. The total budgeted cost to manufacture the speaker set is made up the following: Items: RM Direct materials Direct labour (RM30/hour) 30 Overheads 80 Total costs of a speaker set 150 The company has enough materials and machine capacity to produce the speaker in the next period but has limited direct labour hours. Currently, the company has only 1,500 direct labour hours to produce either the video system or the speakers. In order to manufacture the speakers the company has to buy a special wiring system that cost RM15 per set of speakers. 40 Required: a. Advice the management of Audio Video Sdn Bhd as to whether to manufacture or buy the speakers. (16 marks) b. Give FOUR (4) qualitative factors that need to be considered when making the decision either to make or buy the speakers. (4 marks)