QUESTION 3

The management of Finnigan Manufacturing is trying to decide whether to continue manufacturing a part or to buy it from an outside supplier. The part, called BIZBE, is a component of the companys finished product. The following information was collected from the accounting records and production data for the year ending December 31, 2017.

1. 6,000 units of BIZBE were produced in the Machining Department.

2. Variable manufacturing costs applicable to the production of each BIZBE unit were: direct materials RM4.75, direct labor RM4.60, indirect labor RM0.45, utilities RM0.35.

3. Fixed manufacturing costs applicable to the production of BIZBE were: Cost Item Direct (RM) Allocated (RM) Depreciation 1,100 900 Property taxes 500 200 Insurance 900 600 2,500 1,700 All variable manufacturing and direct fixed costs will be eliminated if BIZBE is purchased. Allocated costs will have to be absorbed by other production departments.

4. The lowest quotation for 6,000 BIZBE units from a supplier is RM66,000.

5. If BIZBE units are purchased, freight and inspection costs would be RM0.30 per unit, and receiving costs totaling RM750 per year would be incurred by the Machining Department. Required

(a) Prepare an incremental analysis for BIZBE. (16 marks)

(b) Based on your analysis, what decision should management make? (1 mark)

(c) Would the decision be different if Finnegan has the opportunity to produce RM6,000 of net income with the facilities currently being used to manufacture BIZBE? Show computations. (5 marks)

(d) What nonfinancial factors should management consider in making its decision? Quality, supplier relation, process control, trade secret (3 marks)