QUESTION 2 (25 MARKS)

(a) (i) Briefly explain the terms relevant costs, sunk costs and opportunity costs.

(ii) Explain why relevant costs are considered for decision-making. (6 marks)

SunSupers annual requirement for these components is 8,000 units of MIRA and 11,000 units of TISU. Recently, the management decides to devote additional machine hour to other product lines leaving only 41,000 hours per year for producing the two components. An outside company has offered to provide SunSuper its annual supply of components at prices of RM11.25 for MIRA and RM13.50 for TISU. Management wants to schedule 41,000 machine hours to produce components so that the company can minimise costs.

Required:

(i) Compute the profit (or loss) per machine hour that would result if SunSuper accepts the suppliers offer per unit for component TISU. (6 marks)

(ii) Should SunSuper make or buy both the components? Show workings. (8 marks) (iii) This question is not related to the question b(i) above. Assume the management drops MIRA and that the companys idle capacity of 41,000 hours has a traceable, avoidable annual fixed cost of RM44,000, which will be incurred only if the capacity is used. Calculate the maximum price SunSuper should pay the supplier for component TISU. (5 marks)

(b) Sun Super produces two components Mira and Tisu for use in production. Data regarding these two components are as follows: Mira Tisu Machine hours required per unit 2.5 3.0 Standard cost per unit: Direct material RM2.25 RM3.75 Direct labour RM4.00 RM4.50 Manufacturing overhead: Variable* RM2.00 RM2.25 Fixed** RM3.75 RM4.50 Total costs RM12.00 RM15.00 *Variable overhead is applied based on direct labour hours **Fixed manufacturing overhead is applied based on machine hours