A.    Assuming that Fonus Ltd will continue to produce 300 000 phones each year, should the plastic casings be made by Fonus or bought?

B.    If Fonus Ltd produces 500 000 phones each year, would your decision be different? If so, why?

C.    If the space involved in the production of the plastic casings can be leased for 3 years at an annual rent of $100 000, how would this affect your decision?

D.   What non-financial considerations should be taken into account in the decision to make or buy the plastic casings?

Fonus Ltd produces mobile phones. The machine used to manufacture the plastic casings for the phones is increasingly producing twisted and deformed casings and is in urgent need of replacement. You are the accountant for Fonus Ltd, and have investigated the possibility of either replacing the machine with an updated version or buying in the casings from an outside supplier that produces plastic parts for other manufacturers. You have summarised your findings thus far.

Make the plastic casings. The new machine required to manufacture the plastic casings costs $720000 and has a useful life of 3 years. The equipment will have no final resale value. The machine can manufacture all the different-shaped casings needed for Fonus Ltd’s range of mobile phones by simply changing the mould that is used. The cost of the various plastic casings is estimated to be the same regardless of the shape or size. Each year, Fonus Ltd makes 300000 mobile phones that all require one plastic casing each. The company’s costs incurred in producing a plastic casing with the old machine were:

Direct materials Direct labour Factory overhead: Variable portion Fixed portion		$1.20 6.40			$  4.20 3.00   7.60
Total cost per unit					$14.80

Included in the fixed factory overhead costs is depreciation of the old plastic casings moulding machine of $0.75 per unit. The new equipment will be more efficient and will reduce direct labour costs and variable overhead cost by 30%. The direct materials cost will be reduced by $0.20 per unit but fixed factory overhead will not change, except for the depreciation, if the new equipment is purchased. The new plastic casings moulding machine has a capacity of 500000 casings per year and Fonus Ltd has no other use for the space involved.

Buy the plastic casings. You have found a supplier who is prepared to produce the plastic casings for the company for $7.60 each. The supplier will sign a contract fixing that price for the next 3 years.