QUESTION 4 (20 MARKS: 36 MINUTES)

A. Famay Sdn Bhd (FSB) is a manufacturing company that produces high-technology electrical products. One of the items used in the product is component M-2712. Each month, 10 units of M-2712 is required in production. Currently, component M-2712 is produces internally with the following costs incurred:

Direct material RM500

Direct labor RM4,000

Manufacturing overhead 150% of direct labor

Material handling 20% from direct material

Additional information related to production of M-2712 are as below:

i. Material handling is a separate charge in addition to manufacturing overhead. It involves the variable cost at Receiving Department that apply to direct material and purchased components on the basis of their cost.ii. Manufacturing overhead cost consists of ? variable cost, and ? fixed cost.

Currently, there are one company approach FSB to supply components M-2712 at a unit price of RM7,500. FSB has three options regarding the empty spaces if they choose to accept the offer from outside supplier:

i. The empty spaces will remain idle. ii. FSB able to rent out the empty space for RM12,500 per month. iii. FSB can use the empty space to manufacture new product that would contribute RM26,000 every month.

REQUIRED:

(a) Evaluate each option for FSB regarding the empty spaces. Show all workings. (8 Marks)

(b) Justify whether the decision to accept the offer from outside supplier on components M-2712 is a correct decision made by FSB.(2 Marks)

B. MFS Sdn Bhd (MFSSB) manufactures sports attire. The capacity of the production is 5,000 units each month. Currently, the normal production is at 75%. The price for one suit of sport attire is RM175. Below are the costs incurred for the 75% current activity level:

Variable costs: Amount Direct material RM131.250 Direct labor RM187.500 Marketing RM93.750 Total variable costs RM412.500 Fixed costs: Amount Manufacturing RM137.500 Marketing RM87.500 Total fixed costs RM225.000\fInvestment Information Project Tl Project T2 Initial investment RM500,000 RM100.000 Annual cash flows RM88,500 RM34,320 Life of the project 10 years 4 years Depreciation per year RM50,000 RM25,000Current Machine (in RM) New Machine (in RM) Salaries 40,000 36,000 Supplies 7,000 5,000 Maintenance 9,000 5,000 Total 56,000 46,000Project NPV Initial Investment RM5 million RM15 million RM15 million RM50 million RM10 million RM10 million RM20 million RM60 million RM12 million RM35 million