Question 1

Hamama Sdn Bhd is a company that specialises in online school uniforms retailing. Each set school uniforms sells for RM40 each. The company expects to produce and sell 100,000 sets this year, although there is a total production capacity of 120,000 in the current factory setup. Fixed costs are RM160,000 per year. The direct costs of production are RM24 per set. Its finance director is considering a proposal to put forward by the company's CEO to buy in a new automated sewing machine that links with new design software. Production capacity could be increased to 180,000 set per year. There are very large overheads associated with the purchase of the new machine and IT system, namely the high cost of financing these purchases. Total fixed costs would double to RM320,000 per year. Savings would be made by reducing the number of factory workers directly employed in the manufacturing process. Direct costs of production would decrease to RM18.00 per set. Research from the marketing department indicates that higher quality designs and a price reduction to RM36 would increase the demand for uniforms by 50 per cent to 150,000 sets per year.

Required:

a.Construct a break-even graph to represent the current data, identifying the break- even level of production and the safety margin.(10 marks)

b.Calculate the break-even level of output associated with the new manufacturing System.(5 marks)

c.The profit associated with the current system of production.(5 marks)

d.The profit associated with the new manufacturing system.(5 marks)