QUESTION OF MANAGEMENT ACCOUNTING : Answer all the question with reference to relevant models.

Cost-Profit-Volume make or buy decisions Motor-Bike Parts for Africa (Pty) Ltd, manufactures parts for three makes of motorbikes and supplies motorbike manufacturers and repair shops throughout South Africa.

Management need to decide whether to buy-out or manufacture an exhaust pipe which was previously imported by the above consumers and has become expensive because of the weakening R/US$ exchange rate.

The company estimates that it can sell 1000 units per annum and can obtain the exhaust pipes from Specialized Engineering Products (Pty) Ltd., at a cost of R100 per unit. This price will remain fixed for 12 months.

The following information has been presented to you:

Cost of manufacturing 1000 units:

Direct labour R40 000

Direct material R20 000

Variable costs R15 000

*Fixed costs R20 000

* This is the existing total fixed cost allocated by management.

You also ascertain the following:

1) The company is currently leasing a portion of its factory for R2 000 per month. If the manufacturing of the exhaust pipes is undertaken, the above portion will be utilised. The tenant is using the portion concerned for storage purposes and in terms of the lease agreement, will vacate the premises when required to do so.

2) In the event that management decides to manufacture, it can lease the required equipment for R1 000 per month.

3) It will be necessary to utilise the existing cutting machine for 10 hours a month. The capacity of the cutting machine is 100 hours a month and at the present time is used in the manufacture of 100-wheel-rims per month. The contribution of the wheel-rims is R70 per unit.

4) The company will need to employ direct workers if management decides to go ahead with the manufacturing of the exhaust pipes.

REQUIRED a) Please advise management whether it should manufacture or buy-out the exhaust pipes. Show your workings and comment where required. b) What issues should management be aware whether they decide to make or buy the exhaust pipes? What advice would you give to management?