Relevant cost - Make or Buy

RELEVANT COST – MAKE OR BUY

The MotorGo Corporation makes steering wheel covers for cars. These steering wheel covers have the following cost structure.

Units produced	5,000 units
Variable cost per unit	12.00
Fixed cost per unit	4.00

The Auto Fun Corporation has offered to make the steering wheel covers for RM15.00 each. If the offer is accepted, the variable costs will be eliminated but the fixed costs will remain.

Required:

Should MotorGo accept the offer? How much additional income will be materialize by taking the offer?






RELEVANT COST – MAKE OR BUY

Teha Kasut manufactures a variety of athletic shoes. The company always produced all necessary parts for its shoes, including laces. Lita Tali, an outside supplier has offered to produce and sell laces to Teha Kasut at a cost of RM0.20 per lace.

To evaluate this offer, Teha Kasut has gathered the following information relating to its own cost of producing laced internally:

	Per Unit RM	26,000 laces per year RM
Direct materials	0.06	1,560
Direct labour	0.07	1,820
Variable manufacturing overhead	0.02	520
Fixed manufacturing overhead, traceable	0.03	780
Fixed manufacturing overhead, allocated	0.06	1,560
Total Cost	0.24	6,240

One-third of the traceable fixed manufacturing overhead relates to supervisory salaries. The supervisor would be fired if Teha Kasut chose to purchase from outside supplier. Two-thirds of the traceable fixed manufacturing overhead relates to depreciation of lace-making equipment that has no resale value.

Required:

1. Assuming that the company has no alternative use for the facilities that are now being used to produce the laces, should the outside supplier’s offer be accepted? (Show your workings)
2. Suppose that if the laces were purchased, the company could use the freed capacity to make a new product. The segment margin of the new product is expected to be RM1,000 per year. Should the company accept the offer to buy the laces for RM0.20 per lace? (Show your workings)