Stellar Manufacturing has been manufacturing its own lock for the steel cabinets that it manufactures. Normal...

 

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Stellar Manufacturing has been manufacturing its own lock for the steel cabinets that it manufactures. Normal production is 720,000 locks per year. The cost structure to produce 720,000 locks is as follows: Direct materials Direct labour Variable overhead Fixed overhead Total costs Cost RM4,320,000 1,080,000 432,000 648,000 RM6,480,000 Twins Sdn. Bhd. recently offered to supply the locks to Stellar Manufacturing at a price of RM8.50 per unit. Stellar would be able to avoid all variable manufacturing costs if the company accepts the offer. However, only 40% of the fixed overhead costs can be eliminated. Required (a) Prepare the incremental analysis for the decision to make or buy the locks. (b) Should Stellar Manufacturing buy the locks? (c) Would your answer be different in (b) if the productive capacity released by not making the locks could be used to produce income of RM25,000? Stellar Manufacturing has been manufacturing its own lock for the steel cabinets that it manufactures. Normal production is 720,000 locks per year. The cost structure to produce 720,000 locks is as follows: Direct materials Direct labour Variable overhead Fixed overhead Total costs Cost RM4,320,000 1,080,000 432,000 648,000 RM6,480,000 Twins Sdn. Bhd. recently offered to supply the locks to Stellar Manufacturing at a price of RM8.50 per unit. Stellar would be able to avoid all variable manufacturing costs if the company accepts the offer. However, only 40% of the fixed overhead costs can be eliminated. Required (a) Prepare the incremental analysis for the decision to make or buy the locks. (b) Should Stellar Manufacturing buy the locks? (c) Would your answer be different in (b) if the productive capacity released by not making the locks could be used to produce income of RM25,000?

Answer rating: 100% (QA)

a Incremental Analysis Make Direct materials RM4320000 Direct labor RM1080000 Variable overhead RM43... View the full answer