Question
PogromLtdisacompanythatproducingandsellingElectricScooterToyforkidsthatconsistsofScootertoyandElectroniccomponents.Thecompanyisexpectingtoproduce20000unitsofScooters.Currently,PogromLtdmakestheElectroniccomponentsinhousefortheScooters.ThecostdatatomaketheElectroniccomponentsfor30000Scootersareas follows: Directmaterialcostperunit $9.00 Directlabourcostperunit $6.00 Variablemanufacturingoverhead$3.00 Inspection,setup,materialhandlingperbatch$200 Allocatedcommittedfixedcost(admin,taxesandinsurance)$50,000 Recently,PogromLtdreceivedacallfromanoutsidesupplierwhoofferedtosupplytheElectroniccomponentsat$18.00perElectroniccomponents.ThemanagementofPogromLtdconsidersthisofferandstartstoobtainmoredatabeforemakethedecision.Inspection,setupandmaterialshandlingcostsvarywiththenumberofbatchesinwhichtheElectroniccomponentsareproduced.PogromLtdproducestheElectroniccomponentsfortheScooterinbatchsizesof1000unitsandwillproducethe20000unitsin20batches. Required(showyourworkings): a)AssumethatPogromLtdpurchasestheElectroniccomponentsfromtheoutsidesupplier,thefacilitywheretheElectroniccomponentsarecurrentlymadewillremainidle(unused).Onthebasisoffinancialconsiderationsalone,shouldPogromLtdacceptorrejecttheofferfromtheoutsidevendorattheanticipatedproduction(andsales)volume20000units? b)Assumethat,iftheElectroniccomponentsarepurchasefromoutside,thefacilitieswheretheElectroniccomponentsarecurrentlymadewillbeusedtomakeanewproductthatwillbringacontributionof$105000.Anadditionaltoolingcostsof$100000wouldbeincurredtomakethisnewproduct.Onthebasisoffinancialconsiderationsalone,shouldPogromLtdmakeorbuytheElectroniccomponents,assumingthat20000Scootersareproducedandsold? c)Usingthepart(b)assumption,thesalesmanagerofPogromLtdisconcernedthattheestimationof20000unitsmaybetoohighanditisbelievedthatonly18000unitswillbesoldandthereforeitneedstobuyonly18,000units.Atthisloweroutput,PogromLtdwillproducetheElectroniccomponentsin18batchesof1000unitseach.Onthebasisoffinancialconsiderationsalone,shouldPogromLtdpurchasetheElectroniccomponentsfromtheoutsidersuppliers?(40marks)
PogromLtdisacompanythatproducingandsellingElectricScooterToyforkidsthatconsistsofScootertoyandElectroniccomponents.Thecompanyisexpectingtoproduce20000unitsofScooters.Currently,PogromLtdmakestheElectroniccomponentsinhousefortheScooters.ThecostdatatomaketheElectroniccomponentsfor30000Scootersareas follows:
Directmaterialcostperunit $9.00
Directlabourcostperunit $6.00
Variablemanufacturingoverhead$3.00
Inspection,setup,materialhandlingperbatch$200
Allocatedcommittedfixedcost(admin,taxesandinsurance)$50,000
Recently,PogromLtdreceivedacallfromanoutsidesupplierwhoofferedtosupplytheElectroniccomponentsat$18.00perElectroniccomponents.ThemanagementofPogromLtdconsidersthisofferandstartstoobtainmoredatabeforemakethedecision.Inspection,setupandmaterialshandlingcostsvarywiththenumberofbatchesinwhichtheElectroniccomponentsareproduced.PogromLtdproducestheElectroniccomponentsfortheScooterinbatchsizesof1000unitsandwillproducethe20000unitsin20batches.
Required(showyourworkings):
a)AssumethatPogromLtdpurchasestheElectroniccomponentsfromtheoutsidesupplier,thefacilitywheretheElectroniccomponentsarecurrentlymadewillremainidle(unused).Onthebasisoffinancialconsiderationsalone,shouldPogromLtdacceptorrejecttheofferfromtheoutsidevendorattheanticipatedproduction(andsales)volume20000units?
b)Assumethat,iftheElectroniccomponentsarepurchasefromoutside,thefacilitieswheretheElectroniccomponentsarecurrentlymadewillbeusedtomakeanewproductthatwillbringacontributionof$105000.Anadditionaltoolingcostsof$100000wouldbeincurredtomakethisnewproduct.Onthebasisoffinancialconsiderationsalone,shouldPogromLtdmakeorbuytheElectroniccomponents,assumingthat20000Scootersareproducedandsold?
c)Usingthepart(b)assumption,thesalesmanagerofPogromLtdisconcernedthattheestimationof20000unitsmaybetoohighanditisbelievedthatonly18000unitswillbesoldandthereforeitneedstobuyonly18,000units.Atthisloweroutput,PogromLtdwillproducetheElectroniccomponentsin18batchesof1000unitseach.Onthebasisoffinancialconsiderationsalone,shouldPogromLtdpurchasetheElectroniccomponentsfromtheoutsidersuppliers?(40marks)
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