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Part A (Make or Buy decision] Mobile Tech manufactures mobile modems. For several years, the company has purchased 10,000 modems annually from Xeo Ltd at
Part A (Make or Buy decision] Mobile Tech manufactures mobile modems. For several years, the company has purchased 10,000 modems annually from Xeo Ltd at $80 per unit. Due to price increases, company management has asked for an estimate of the cost of manufacturing the modem. The engineering, manufacturing and accounting departments have prepared a report for the management that includes the cost estimate shown below for 10,000 modems. The report states that total costs for 10,000 units are estimated at $957 000, or $95.70 a unit. As the current purchase price is $80 a unit, the report recommends continued purchase of the product. Components (outside purchases) $120 000 Labour 300 000 Manufacturing overhead 450 000 General and administrative overhead 87 000 Total costs $957 000 Although extra staff would need to be hired to accommodate manufacturing modems, no additional equipment, space or supervision would be needed. Variable manufacturing overhead will make up 100%.of direct labour cost. General and administrative overhead, which is a fixed cost, is applied at 10 per cent of the total cost of material (or components), labour and manufacturing overhead. Required: Question 5.1 Consider the analysis prepared by Mobile Tech's engineering, manufacturing and accounting departments, and their recommendation to continue purchasing the modems. Explain whether you think this analysis and the decision made were correct? In your answer, include any supporting calculations you consider necessary. (4 marks) (Word limit: 150 words. Show the word count at the end of your answer] Your Answer (expand the space as required): Word count=e Question 5.2 Do an incremental analysis and provide your decision based on revised calculation. Show workings. (6 marks) Your Answer (expand the space as required)
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