Question

Matchless Corporation manufactures radios that it uses in several of its products. Osman Budi, the company’s financial manager, has been assigned the task of determining whether to continue manufacturing the radios or to buy them from an outside source. The following information is available: • The company needs 20,000 radios per year. The radios can be purchased from an outside supplier at a cost of RM60 per unit. • The cost of manufacturing the radios is RM85 per unit, detailed as follows: Direct materials RM400,000 Direct labor RM500,000 Variable manufacturing overhead RM350,000 Fixed manufacturing overhead RM450,000 Total manufacturing costs RM1,700,000 • Discontinuing the manufacture of radios will eliminate all the raw materials and direct labor cost but will eliminate only 80 per cent of the variable manufacturing overhead costs. The remaining amount of variable manufacturing costs will continue to be incurred. • If the radios are purchased from an outside supplier, machinery used in the production of radios will be sold at its book value. Accordingly, no gain or loss will be recognized. The sale of this machinery would also eliminate RM5,000 in fixed manufacturing costs associated with depreciation. No other reductions in fixed manufacturing will occur from discontinuing the production of radios. Mr. Saad, the production manager of Matchless Corporation, stopped by at Osman Budi’s office to voice his concern regarding the outsourcing of radios to outside supplier. Mr. Saad commented: “I am really concerned about outsourcing of the radios. I have a son-in-law and a nephew who work at our radios’ factory. They could lose their jobs if we buy the radios from the outside supplier. I really would appreciate anything you could do to make sure the cost analysis comes out right to show we should continue making the radios”. Required: a. Basing solely on the financial results, recommend whether Matchless Corporation should make the radios or purchase them from outside supplier. Prepare an analysis of relevant cost to support you answer. (7 marks) b. Assume that if the radios are purchased from the outside supplier, the factory space previously used to produce radios can be converted to a storage space and can be rented to generate a rental revenue amounted to RM185,000 per year. However, this requires a small renovation at cost of RM80,000. In addition, there will be a maintenance cost amounted to RM40,000 per year. Would this new assumption change your recommendation, as in requirement (a), as to whether to make or buy the radios? Explain and support your answer with relevant cost analysis. (6 marks) c. Is the production manager, Mr Saad, acting ethically? Explain your answer by referring to THREE standards of ethical conduct for managerial accountant. (7 marks) You haven't answer this question for a,b and c

Answer 1

a) The company needs 20,000 radios per your We need to decide whether to make or buy ra so Andlysing Particulars . Make the radios Total manufacturing d RM 17,00,000 - Direct material RM 4,00,000 Direct labour RM 5,00,000 - Variable manufacturing everhead RM 3,50,00 fined manufacturing overhe RM 4,50,000 Buy the radias Particulars RM cost is RM 60 per unit 12,00,000 60 x 20,000 diegu g this, we would think it is better to buy th Las cost is less, but if we discontinue manufacture of gadios it wie eliminate all the manmaterials and direct

2) Variable est but will eliminate conly 80 percent of the manufacturing overhead coats! RM 4,00,000 considering this make radios eliminated actiung cast to Direct labown cost well also be eliminated 00 percent manufacturing overhead of variable lost eliminated C 3,50,000X800). Fined manufactwung cost Total cost eliminated 5,00,000 2,80,000 so, cost incurred in making radio was 5,000 11,05 000 RM 17,00,000 hess Total cost eliminated e11,85,000) ad cost still to be mwvred. _ 520,000 5,15,000 so, post incurred in buying the radios is RM 18,00,000 Add- dost still to be ineworld - RM 520,000 5,15,000 Gotal lost to be incwered will be 1725,000 RM 17,15,000 se considering additional cost of RM 20,000 it is better to 15,000 make the leadia.

No, the production manager Me saad, is not acting ethically as - He was concerned because his son-in-law and a mephen who worked at their factory would now wose their jobs, if they bach the radios fpcom the outside supplier and so he was concerned to do anything to make sure the cost analysis comes out right so that they can continue making the radios so, this attempt of Me saad is unethical as there are standards of ethical conduct for manageriahraccountant which says, Managerial accountant should be follow 1.) COMPETENCE Perform professional duties in accordance with relevant lans, regulations and technical standards Maintain an appropriate level of professunal expertise by continually developing knowledge and skills. 2) CONFIDENTIALITY keep information confidential except when disclosure is aut ouded or legally sequvied 3) Pntegrity Refrain from engaging in any conduct that would prejudice cwoning out duties and ethically.