KL Mobile is a major producer of automobiles in Kuala Lumpur. One of the divisions within...

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KL Mobile is a major producer of automobiles in Kuala Lumpur. One of the divisions within KL Mobile is currently negotiating with another supplier regarding outsourcing component X that it manufactures. The division currently manufactures 12,000 units per annum of the component. The costs currently assigned to the component are as follows. Total costs of producing 12,000 components Unit cost (RM) (RM) Direct materials 144,000 12 Direct labour 120,000 10 Variable manufacturing overhead 12,000 1 (power and utilities) Fixed manufacturing overhead 96,000 8 Share of non-manufacturing overhead 60,000 5 Total cost 432,000 36 Note: The above costs are expected to remain unchanged in the foreseeable future if KL Mobile continues to manufacture the components. Required: a. Recently, a supplier has offered to supply 12,000 components per annum at a price of RM30 per unit guaranteed for three years. If KL Mobile outsources component X, fixed manufacturing overhead costs would reduce by RM10,000 per annum but non-manufacturing overhead would remain unchanged. The capacity that is required for component X has no alternative use. Should the division of KL Mobile make or buy the component? Support your answers by giving necessary computations. (9 marks) b. Assume now that the extra capacity that will made available from outsourcing component X can be used to manufacture and sell 12,000 units of component Z at a price of RM34 per unit. All the labour force required to manufacture component X would be used to make component Z. The variable manufacturing overhead, the fixed manufacturing overheads and non- manufacturing overhead would be the same as the costs incurred for manufacturing component X. The material required to manufacture component X would not be required but additional materials required for making component Z would cost RM13 per unit. Should KL Mobile outsource component X and produce component Z? Justify your answers by giving necessary computations. (12 marks) c. Briefly explain TWO (2) examples of costs that are not relevant in decision making process. (4 marks) KL Mobile is a major producer of automobiles in Kuala Lumpur. One of the divisions within KL Mobile is currently negotiating with another supplier regarding outsourcing component X that it manufactures. The division currently manufactures 12,000 units per annum of the component. The costs currently assigned to the component are as follows. Total costs of producing 12,000 components Unit cost (RM) (RM) Direct materials 144,000 12 Direct labour 120,000 10 Variable manufacturing overhead 12,000 1 (power and utilities) Fixed manufacturing overhead 96,000 8 Share of non-manufacturing overhead 60,000 5 Total cost 432,000 36 Note: The above costs are expected to remain unchanged in the foreseeable future if KL Mobile continues to manufacture the components. Required: a. Recently, a supplier has offered to supply 12,000 components per annum at a price of RM30 per unit guaranteed for three years. If KL Mobile outsources component X, fixed manufacturing overhead costs would reduce by RM10,000 per annum but non-manufacturing overhead would remain unchanged. The capacity that is required for component X has no alternative use. Should the division of KL Mobile make or buy the component? Support your answers by giving necessary computations. (9 marks) b. Assume now that the extra capacity that will made available from outsourcing component X can be used to manufacture and sell 12,000 units of component Z at a price of RM34 per unit. All the labour force required to manufacture component X would be used to make component Z. The variable manufacturing overhead, the fixed manufacturing overheads and non- manufacturing overhead would be the same as the costs incurred for manufacturing component X. The material required to manufacture component X would not be required but additional materials required for making component Z would cost RM13 per unit. Should KL Mobile outsource component X and produce component Z? Justify your answers by giving necessary computations. (12 marks) c. Briefly explain TWO (2) examples of costs that are not relevant in decision making process. (4 marks)

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a Make or Buy Decision for Component X To determine whether KL Mobile should make or buy component X we need to compare the cost of outsourcing the co... View the full answer