Question 2 (20 marks) A company produces a single product from two subcomponents, SC1 and SC2. These components are purchased from an outside supplier at a price of N$30 and N$9 respectively. To increase their competitive advantage, the company has adopted a product differentiation strategy. The objective is to create customer preference for the product based on its quality and image. This will be achieved by rebranding the product and image advertising which will create the brand loyalty. The management of the company is considering making the subcomponents in-house, thereby having better control over the quality of the end product. Currently the company is not operating at full capacity and can manufacture the subcomponents in-house with the spare machine hours of 22 500. To manufacture one SC1 would require 4.5 machine hours and one SC2 would require three machine hours. They would require 4 000 of each subcomponent on the next period. The cost accountant has estimated the variable manufacturing costs to be N$24 and N$7.50 for SC1 and SC2 respectively. Fixed manufacturing overheads will not be affected by the production of the subcomponents and manufacturing overheads are absorbed on a machine hour basis. Marks Required Sub- total 2.1 Advise management whether the components should be manufactured in- house. Motivate your answer by means of calculations. 20 20 Total 20 Total