Fragrant Company produces young adult perfumes needs to determine if it would be cheaper to produce 100,000 bottles of its most popular perfume, Timmee, for sale in its college town shops or to purchase them from an outside supplier for RM25 each. Cost information on internal production includes the following: Table 6: Production Costs Total Cost Unit Cost RM RM Direct materials 2,000,000 20.00 Direct labor 350,000 3.50 Variable manufacturing overhead 150,000 1.50 Variable marketing overhead 250,000 2.50 Fixed plant overhead 300,000 3.00 Total 3,050,000 30.50 Fixed overhead will continue whether Timmee is produced internally or externally. No additional costs of purchasing will be incurred beyond the purchase price. Required: a. Assume that Fragrant’s internal audit team learned through a special data analytics project that intellectual property theft is a significant threat for outsourced production. The team estimates that if Fragrant Company outsources its production, it will need to spend RM350,000 to manage intellectual property theft of its Timmee brand by competitors operating in the country where the outsourced production occurs. Propose an alternative that is more cost-effective decision with calculation details.
Fragrant Company produces young adult perfumes needs to determine if it would be cheaper to produce 100,000 bottles of its most popular perfume, Timmee, for sale in its college town shops or to purchase them from an outside supplier for RM25 each. Cost information on internal production includes the following:
Table 6: Production Costs
|
Total Cost |
Unit Cost |
|
|
RM |
RM |
|
|
Direct materials |
2,000,000 |
20.00 |
|
Direct labor |
350,000 |
3.50 |
|
Variable manufacturing |
150,000 |
1.50 |
|
Variable marketing overhead |
250,000 |
2.50 |
|
Fixed plant overhead |
300,000 |
3.00 |
|
Total |
3,050,000 |
30.50 |
Fixed overhead will continue whether Timmee is produced internally or externally. No additional costs of purchasing will be incurred beyond the purchase price.
Required:
a. Assume that Fragrant’s internal audit team learned through a special data analytics project that intellectual property theft is a significant threat for outsourced production. The team estimates that if Fragrant Company outsources its production, it will need to spend RM350,000 to manage intellectual property theft of its Timmee brand by competitors operating in the country where the outsourced production occurs. Propose an alternative that is more cost-effective decision with calculation details.
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