7. Zana, Rally and Engine Purr are three companies that need youadvice them on issues pertaining to accounting.
(a) Zana needs 1,000 motors in its manufacture of motorcar. Itcan buy the motors from Perjo Motor Company for RM1,250 each. TheZana factory can manufacture the motors for the following costs perunit: RM Direct materials 500 Direct manufacturing labour 250Variable manufacturing overhead 200 Fixed manufacturing overhead350 Total 1,300 If Zana buys the motors from Perjo, 70% of thefixed manufacturing overhead applied cannot be avoided.
Required:
(i) Decide whether the company should make or purchase themotors. [8 marks]
(ii) Describe other factors that Zana should consider indeciding whether or not to make or purchase the motors. [5marks]
(b) Rally Bicycles has been manufacturing its own wheels for itsbikes. The company is currently operating at 100% capacity, andvariable manufacturing overhead is charged to production at therate of 30% of direct labour cost. The direct materials and directlabor cost per unit to make the wheels are RM3.00 and RM3.60respectively. Normal production is 200,000 wheels per year. Asupplier offers to make the wheels at a price of RM8 each. If thebicycle company accepts this offer, all variable manufacturingcosts will be eliminated, but the RM84,000 of fixed manufacturingoverhead currently being charged to the wheels will have to beabsorbed by other products.
Required:
(i) Prepare an incremental analysis for the decision to make orbuy the wheels. [6 marks]
(ii) Decide with justification whether Rally Bicycles shouldoutsource or not. [4 marks]
(c) Engine Purr Company currently manufactures three differenttypes of motor oil. The firm is considering eliminating one of thethree products. Explain factors should be taken into account inmaking this decision [7marks]
