Question : 1. 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 :
1. Which strategy will you recommend to management? Why? Explain your
recommendation with reference to your assessment of the strategies.
Step by step
Solved in 2 steps
