QUESTION

Matchless Corporation manufactures radios that it uses in several of its products. Osman, the

company's financial manager, has been assigned the task of determining whether to continue

manufacturing the radios or to buy them from an outside source. The following information is

available:

The company needs $20,000$ radios per year. The radios can be purchased from an outside

supplier at a cost of RM$60$ per unit.

The cost of manufacturing the radios is RM$8$S per unit, detailed as follows:

Discontinuing the manufacture of radios will eliminate all the raw materials and direct labor

cost but will eliminate only $80$ per cent of the variable marnufacturing overhead costs. The

remaining amount of varlable manufacturing costs will continue to be incurred.

If the radios are purchased from an outside supplier, machinery used in the production of

radios will be sold at its book value. Accordingly, no gain or loss will be recognized. The sale

of this machinery would also eliminate RM$5,000$ in fixed manufacturing costs associated with

depreciation. No other reductions in fixed manulacturing will occur from discontinuing the

production of radios.

Mr$.$ Saad, the production manager of Matchless Corporation, stopped by at Osman office to volce his

concern regarding the outsourcing of radios to outside supplier. Mr$.$ Saad commented:

$7$ am really concerned about outsourcing of the radios. I have a son$-$in$-$law and a nephew who

work at our radios' factory. They could lose their jobs if we buy the radios from the outside

supplier. I really would appreciate anything you could do to make sure the cost analysis comes

out right to show we should continue making the radios". Aequired:

a$.$ Basing volely on the financial rewults, recommend whether Matchless Corporation should make

the radios or purchase them from outside supplier. Prepare an analysis of relevant cost to support

you answer,

$(7$ marks$)$

b$.$ Assume that if the radios are purchased from the outside supplier, the factory space previously

used to produce radios can be converted to a storage spoce and can be rented to generate a rental

revence amounted to RM$185,000$ per year. However, this requires a small rencvation at cost of

RMSO,$000.$ In addition, there will be a maintenance cost amounted to RM$40,000$ per year. Would

this new assumption change your recommendation, as in requirement $($a$),$ as to whether to make

or buy the radios? Explain and support your answer with relevant cost analys.

$(6$ marks$)$

c$.$ Is the production manager, Mr Saad, acting ethically? Explain your answer by referring to THAEE

Standards of ethical conduct for managerial accountant.

$(7$ marks$)$

$[$Total: $20$ marks$]$