Prominent Sdn Bhd produces furniture at several factories. Its Seberang Prai factory produces office chairs. Management aims to increase production in the coming year to 800 units per month. Therefore, management is exploring two production strategies for the coming year. The first strategy is to continue operations with the existing machine, Machine A, and the second strategy is to rent a new machine, Machine B, to produce the office chairs. The monthly rental of Machine B is RM14,000. Machine B takes half an hour to produce one office chair. However, it requires a more skilled labour force with an hourly rate of RM30 per hour. Comparatively, continuing to use Machine A means that costs will remain the same. Machine A is 5 years old and is operating below capacity. The hourly labour rate is RM20 and the materials required for each unit is RM30. Each office chair is assembled within an hour. Each unit of the finished office chair is sold for RM120.The fixed monthly running costs of the factory is RM21,000. Additional information: break-even point in units, break-even point in RM, unit contribution margin for each strategy : Particulars First Strategy (Machine A) Second Strategy (Machine B) Sale Units 800 800 Selling price Per Unit 120 120 Variable Cost: Direct Material 30 30 Direct Labor cost 20 15 Total Variable Cost 50 45 Contribution Margin Per Unit 70 75 Total Contribution Margin 56000 60000 Total Fixed Cost 21000 14000 Total Profit 35000 46000 Break Even Point units = Fixed Cost________ Contribution Margin per Unit 300 186.67 Break-even point in RM = Break Even Point units X Selling price Per Unit 36000 22400.00 unit contribution margin 70 75 Calculation of the profit that can be generated at the target production level of 800 units. Particulars First Strategy (Machine A) Second Strategy (Machine B) Total Contribution Margin 56000 60000 Total Fixed Cost 21000 14000 Total Profit = (Total Contribution Margin- Total Fixed Cost) Total Profit = 56000- 21000= RM35,000 Total Profit = 60000-14000= RM46,000 Margin of safety in units and as a percentage of expected sales volume : Particulars First Strategy (Machine A) Second Strategy (Machine B) a Total Sales Units 800 800 b Break Even Point units 300 186.67 c= a-b. The margin of safety in units = Total Sale units - Break Even Sale units =800 - 300 = 500 = 800 - 186.67 = 613.33 c/a*100 Percentage of expected sales volume = Margin of Safety Sale units ×100 Total Sale units = 500 x100 800 = 62.5% 613.33 x 100 800 =76.67% Question: Which strategy will you recommend to management? Why? Explain your recommendation with reference to your assessment of the strategies.
Prominent Sdn Bhd produces furniture at several factories. Its Seberang Prai factory
produces office chairs. Management aims to increase production in the coming year to 800
units per month. Therefore, management is exploring two production strategies for the
coming year. The first strategy is to continue operations with the existing machine, Machine
A, and the second strategy is to rent a new machine, Machine B, to produce the office chairs.
The monthly rental of Machine B is RM14,000. Machine B takes half an hour to produce one
office chair. However, it requires a more skilled labour force with an hourly rate of RM30 per
hour.
Comparatively, continuing to use Machine A means that costs will remain the same. Machine
A is 5 years old and is operating below capacity. The hourly labour rate is RM20 and the
materials required for each unit is RM30. Each office chair is assembled within an hour. Each
unit of the finished office chair is sold for RM120.The fixed monthly running costs of the
factory is RM21,000.
Additional information:
break-even point in units, break-even point in RM, unit contribution margin for each strategy :
|
Particulars |
First Strategy (Machine A) |
Second Strategy (Machine B) |
|
Sale Units |
800 |
800 |
|
Selling price Per Unit |
120 |
120 |
|
Variable Cost: |
|
|
|
Direct Material |
30 |
30 |
|
Direct Labor cost |
20 |
15 |
|
Total Variable Cost |
50 |
45 |
|
Contribution Margin Per Unit |
70 |
75 |
|
Total Contribution Margin |
56000 |
60000 |
|
Total Fixed Cost |
21000 |
14000 |
|
Total Profit |
35000 |
46000 |
|
Break Even Point units = Fixed Cost________ Contribution Margin per Unit |
300 |
186.67 |
|
Break-even point in RM = Break Even Point units X Selling price Per Unit |
36000 |
22400.00 |
|
unit contribution margin |
70 |
75 |
Calculation of the profit that can be generated at the target production level of 800 units.
|
Particulars |
First Strategy (Machine A) |
Second Strategy (Machine B) |
|
Total Contribution Margin |
56000 |
60000 |
|
Total Fixed Cost |
21000 |
14000 |
|
Total Profit = (Total Contribution Margin- Total Fixed Cost) |
Total Profit = 56000- 21000= RM35,000 |
Total Profit = 60000-14000= RM46,000 |
Margin of safety in units and as a percentage of expected
sales volume :
|
|
Particulars |
First Strategy (Machine A) |
Second Strategy (Machine B) |
|
a |
Total Sales Units |
800 |
800 |
|
b |
Break Even Point units |
300 |
186.67 |
|
c= a-b. |
The margin of safety in units = Total Sale units - Break Even Sale units |
=800 - 300 = 500 |
= 800 - 186.67 = 613.33 |
|
c/a*100 |
Percentage of expected sales volume = Margin of Safety Sale units ×100 Total Sale units |
= 500 x100 800 = 62.5% |
613.33 x 100 800 =76.67% |
Question:
Which strategy will you recommend to management? Why? Explain your
recommendation with reference to your assessment of the strategies.
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