Question G2

Soap Opera is the market leader in the soap manufacturing industry. The company plans to launch a new formula for its famous series bar soap, Dial Spring. After the announcement, the company has already received astonishing huge pre-orders from its existing consumers. The estimated sales for the year are 35,000 pieces.

Original proposal: The production of new soap will incur the following costs: Direct labor RM 5 per unit, Direct materials RM4 per unit, Variable overheads RM2 per unit, Fixed costs RM250,000. Current selling price is RM25 per piece.

Proposal 1: The production manager feels that if the production system is overhauled then total variable costs per unit could be reduced by RM2, however the overhaul would incur an additional fixed cost of RM50,000.

Proposal 2: The managing director wants to reduce the wastage by installing a new machine in the storage department. He calculates that both the unit costs of direct material and variable overheads could be reduced to RM3 and RM1.5 simultaneously. The new machine will most likely cost the company RM60,000.

Required:

Analyze the scenario above and advise the management the best course of action should be taken.

(Support your analysis with relevant calculation)

(Total: 16 marks)