PART A

International Chocolate (M) Sdn. Bhd. (ICM) produces and sells fine chocolate. In addition to fine chocolate, ICM also produces chocolate-covered pretzels (crispy biscuit baked in the form of a knot or stick) in its Melaka plant. This product is sold in five kilogrammes metal canisters (round containers). The plant manager, Alice Lee, was recently approached by Canister Sdn. Bhd. with an offer to supply the canisters at a price of RM1.05 each.

Currently, ICM produces 760,000 canisters internally in 2020. The demand for canisters for year 2021 is 760,000 canisters. ICMs conventional product costing system assigns the following costs to 760,000 canister production in year 2020:

		RM
Direct material (Note 1)		300,000
Direct labour (12,000 hours @ RM15 per hour) (Note 1)		180,000
Variable overhead (RM10 per direct labour hour) (Note: 1)		120,000
Fixed overhead (RM45 per direct labour hour) (Note:2)		540,000
Total cost		1,140,000
Unit cost		1.50

Note 1:

Direct material, direct labour and variable overhead costs are subjected to increase by 10%, 2021.

Note 2:

The fixed overhead includes RM80,000 of supervisory costs and RM28,000 of machinery depreciation, which are avoidable if the canisters are purchased. These costs will remain unchanged for year 2021.

Alice Lee has heard about Activity based costing (ABC) and with the help from ICMs management accountant, Ramli, who has concluded that if the canisters are purchased the following activity driver levels associated with canister production could be avoided:

Cost driver rate for 2021	No of activity driver avoided
RM600 per product specs	10 product specs
RM40 per supervisory hours	2000 supervisory hours
RM8 per material handling	6000 material handling hours
hours
RM250 per purchase order	55 purchase orders
RM300 per inspection	30 inspections
RM400 per set up	15 set ups
RM2.40 per machine hour	70,000 machine hours

Required:

1. Complete the relevant cost analysis of the make or buy decision using conventional data. On quantitative basis, state your recommendation. (4 marks)
2. Complete the relevant cost analysis of the make or buy decision using ABC data. On quantitative basis, state your recommendation. (6 marks)
3. On quantitative basis, briefly explain why ICM should make its decision based on (b) and outline five strategic factors that ICM should consider before making the final decision to buy from Canister Sdn. Bhd. (8 marks)