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Case 2 (Chapter 12 Topic: Make or Buy) Qatar Bicycle Company is faced with an issue with its production of parts of sport bikes; currently, the company produce 40,000 parts per year. Mr. Tameem Al-Mohannadi, the owner of the company, expressed his concern to his management team about the worn out equipment and asked them for a quick input so the company could carry on with the production. Mr. Mohammed Al-Hajri, the managerial accountant, presented two options: (i) buy new equipment to continue production internally, or (ii) purchase the parts from a foreign supplier. Mr. Al-Mohannadi asks for further clarifications with figures, Mr. Al-Hajri summaries the two alternatives as follows: 1- Buy a new equipment for $80,000 to continue production 2- Purchase the parts from a foreign supplier for $11 per part Mr. Al-Hajri also provided further information to the companys owner about the costs of production per part:

Direct Materials	$4.75
Direct Labor	4.00
Manufacturing Overhead Costs (Variable)	0.60
Total Variable Costs	9.35
Manufacturing Overhead Costs (Fixed):
Supervision	$0.75
Deprecation	0.90
General Costs	4.00
Total Manufacturing Overhead Costs (Fixed):	5.65
Total Cost per part	15.00

Mr. Al-Hajri provided further information as follows: The new equipment would be more efficient and produce 100,000 parts instead of 40,000 parts (current production with the old equipment) per year. It also reduces direct labor costs and variable overhead costs by 35%. However, Mr. Al-Mohannadi argued that the Supervision cost and direct materials cost per part as well as the total general fixed costs would not be affected by this decision (alternative 1). Required: b. Mr. Al-Mohannadi is planning to increase the production to (i) 70,000 parts and (ii) 100,000 parts per year. Using an excel sheet that shows the relevant formulas, which alternative do you recommend to the owner (Mr. Al-Mohannadi) for each level of activity to the two alternatives per part and in total costs? Why? (4 Marks)

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