QUESTION

Different machines are set up in a production department of M&P Company. On machine A123, only one product - Matte, is manufactured. The total unit cost of producing and selling one unit of Matte is as follows:

Direct material = RM40

Direct labour (0.5 hours x RM60 per hour) = RM 30

Machine costs (0.3 hours x RM150 per hour) = RM45

Variable selling expenses = RM 5

Total costs = RM120

The direct labours who work on producing Matte consist of one-third specialized personnel for handling machine A123. The remaining labours could also be employed in the rest of the production department, where other products are made. In total, enough work is provided for all of the direct labours. The machine costs of RM150 comprise the following:

Depreciation = RM90

Energy = RM30

Maintenance costs = RM30

Unlike energy, maintenance costs are independent of the production volume.

The normal production and sales of Matte is 10,000 units per year, and the normal production capacity of the machine to produce Matte is 3,000 hours per year. Matte is sold at RM125 per unit.

Required:

a.Suppose the current production capacity of machine A123 is 2,700 hours. M&P Company has been approached by Kent Ltd. to supply 1,000 units of Matte for RM100 per unit. If M&P Company accepts the order, an additional cost of RM4 per unit will be incurred for special packaging. However, no variable selling expenses will be incurred as the order was made directly to M&P Company.

i.Should M&P Company accept the special order? Justify your answer.

ii. Without decreasing its total net income, what is the minimum unit sales price for which the company could sell to Ken Ltd.?

b.Refer to the original data. For the coming year, a reduction in selling price of Matte by RM5 is expected. Due to this unfortunate development, the management of M&P Company considers to stop the production of Matte and outsource the production to an external supplier for RM95 per unit. If the production of Matte is outsourced, the specialized personnel would be terminated, and machine A123 would have no other uses and has no resale value.

i. Should M&P Company outsource Matte in the coming year? Justify your answer.

ii.List THREE qualitative factors that M&P should consider in deciding whether to make or outsource Matte?

c. Give TWO examples of sunk cost and explain why they are irrelevant in decision making.

QUESTION Different machines are set up in a production department of M&P Company. On machine A123, only one product i Matte, is manufactured. The total unit cost of producing and selling one unit of Matte is as follows: Direct material RM40 Direct labour (0.5 hours x RM60 per hour) 30 Machine costs (0.3 hours x RM150 per hour) 45 Variable selling expenses 5 Total costs RM120 The direct labours who work on producing Matte consist of one-third specialized personnel for handling machine A123. The remaining labours could also be employed in the rest of the production department, where other products are made. In total, enough work is provided for all of the direct labours. The machine costs of RM150 comprise the following: Depreciation RM9O Energy RM3 0 Maintenance costs RM30 Unlike energy, maintenance costs are independent of the production volume. The nonnal production and sales of Matte is 10,000 units per year, and the normal production capacity of the machine to produce Matte is 3,000 hours per year. Matte is sold at RM125 per unit. Required: at Suppose the current production capacity of machine A123 is 2,700 hours. M&P Company has been approached by Kent Ltd. to supply 1,000 units of Matte for RM100 per unit. If M&P Company accepts the order, an additional cost of RM4 per unit will be incurred for special packaging. However, no variable selling expenses will be incurred as the order was made directly to M&P Company. i. Should M&P Company accept the special order? Justify your answer. ii. Without decreasing its total net income, what is the minimum unit sales price for which the company could sell to Ken Ltd.? b Refer to the original data. For the coming year, a reduction in selling price of Matte by RM5 is expected. Due to this unfortunate development, the management of M&P Company considers to stop the production of Matte and outsource the production to an external supplier for RM95 per unit. If the production of Matte is outsourced, the specialized personnel would be terminated, and machine A123 would have no other uses and has no resale value. i. Should M&P Company outsource Matte in the coming year? Justify your answer. ii. List THREE qualitative factors that M&P should consider in deciding whether to make or outsource Matte? (2. Give TWO examples of sunk cost and explain why they are irrelevant in decision making