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.
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.
| a) Calculate break-even point in units, break-even point in RM (round to the nearest RM), unit contribution margin for each strategy. |
| b) For each strategy, what is the profit that can be generated at the target production level of 800 units? |
c) For each strategy, calculate the margin of safety in units and as a percentage of expected
sales volume.
d) Which strategy will you recommend to management? Why? Explain your
recommendation with reference to your assessment of the strategies.
Note: Pelase State all relevant formulas of the strategies.
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