- 20 Marks
Question
a) i)
Moree Engineers LTD (MEL) makes electrically-driven disability scooters aimed at elderly and/or disabled customers. At present, wheels and tyres are bought from external suppliers but all other parts are manufactured in-house. The scooters have a strong reputation due mainly to innovative designs, special power units that can be recharged at home and seats that enable easy access for a wide range of disabilities. MEL also sells power units to other firms.
Current monthly costs are as follows:
| Seating Department | Power Unit Department | |
|---|---|---|
| Costs | GH¢ | GH¢ |
| Direct Materials | 9,300 | 4,140 |
| Direct Labour | 12,600 | 9,450 |
| Apportioned overheads | 26,700 | 17,200 |
| 48,600 | 30,790 | |
| Production level | 60 units | 90 units |
The power unit department currently produces 90 units a month, 60 units are used in MEL’s own scooters while 30 units are sold externally at GH¢376 each.
A contract has been won to supply an additional 10 scooters per month. However, the directors are considering how best to meet the additional demand.
Sufficient capacity exists for the company to increase its monthly production to 70 scooters, except that making an extra 10 seating assemblies would require reallocation of labour and other resources from the power unit to the seating department. This would cut power unit output by 20 units per month.
The alternative course would be to buy 10 seating assemblies from an outside supplier and fit the 10 power units from the present production of 90 units. The cheapest quote for seating assemblies is GH¢610 per assembly.
Required:
Based on the figures given, show whether Moree Engineers LTD should make or buy the extra seats.
a) ii) Discuss FOUR other factors that should be considered before a final decision is taken to make or to buy the extra seats.
b) i). Bambo LTD produces three medical products namely, gloves, bandages and syringes. The budgeted sales in the coming year for the three products is GH¢4,530,000. The company accordingly projected GH¢750,000 post-tax profit on the three products for the period.
Detailed budgeted Cost and sales data for the coming year are as follows:
| Gloves | Bandages | Syringes | |
|---|---|---|---|
| Sales Volume (%) | 40% | 25% | 35% |
| Variable cost to Sales ratio | 60% | 67.5% | 54.5% |
The fixed cost for Bambo LTD amounted to GH¢1,330,000.
Other information:
Corporate tax rate is 25%
Required:
Calculate margin of safety in percentage (%) terms.
b) ii) Calculate post-tax revenue to achieve the projected profit.
Answer
(ai)
| Buy v Make Decision | |
|---|---|
| GH¢ | |
| The buy alternative | |
| Cost of bought-in seats: 10 × GH¢610 | 6,100 |
| 6,100 | |
| The make alternative | |
| Sales of power units forgone: 20 × GH¢376 | 7,520 |
| Cost savings of making fewer batteries: | |
| (4,140 + 9,450) / 90 × 20 | (3,020) |
| Increase in cost of making seats: | |
| (9,300 + 12,600) / 60 × 10 | 3,650 |
| 8,150 |
Alternative calculation for in-house seating production
Relevant costs
| Seating unit | |
|---|---|
| Direct material | 9,300 |
| Direct Labour | 12,600 |
| 21,900 | |
| Number of units | 60 |
| Unit cost | 365 |
| Power unit | |
|---|---|
| Direct material | 4,140 |
| Direct Labour | 9,450 |
| 13,590 | |
| Number of units | 90 |
| Unit cost | 151 |
| External price | 376 |
| Contribution | 225 |
Cost of in-house production
| Seating (365*10) | 3,650 |
| Opportunity cost (20*225) | 4,500 |
| 8,150 |
External price 6,100.00
Note: In either case, 10 external sales of power units will be lost as these are now used internally. You could have included the cost of these lost sales in both of the above calculations. It is quicker to recognise they are a common cash flow and hence not relevant to the decision.
On the basis of the information given the required seats should be bought in rather than made.
(ii). The following factors should also be considered before a final decision is made:
- The external supplier can produce seats of the same quality as MEL.
- Customers will not view bought-in seats as inferior.
- Dependence on an external supplier of extra seating assemblies does not lead to difficulty in maintaining sales volume in the future.
- The average variable costs of production calculated above are constant over the relevant range of output, i.e. no economies of scale or learning effects result from the increased production.
- No goodwill is lost by the reduction in sales of power units to the existing external clients.
- No additional transport costs are encountered.
- Demand will be maintained at the increased level
(ii). (1,330,000 + (750,000 / 1 – 0.25)) / 0.4005 = GH¢5,825,218.477
- Tags: CVP Analysis, Multi-product, Post-tax revenue, Profit Calculation, Tax adjustment
- Level: Level 2
- Topic: Cost-Volume-Profit (CVP) Analysis
- Series: MAR 2025
- Uploader: Samuel Duah