Sofiyya Cosmetics Sdn Bhd (SCSB) is producing variety of skin care products. One of it is face cream. Every year, SCSB produces 30,000 units of face cream. Due to increasing production costs, SCSB is considering of buying the product from Original Equipment Manufacturer (OEM) that produces similar product but in a larger scale. Below is the production costs information related to the face cream: Items Amount (RM) Direct material 120,000 Direct labour 65,000 Product inspections 56,000 Utilities 25,000 Supervision 50,000 Material handling 20,000 Depreciation of equipment 15,000 Total 351,000 If SCSB does not produce face cream, some of product inspectors and supervisors can be transferred to other product division. This will reduce both costs by 50% and 30% respectively. Besides that, cost of utilities can be reduced to 30% and no cost should be incurred for material handling. Equipment used for this product can also be used to produce other products. The product price offered by the OEM is RM10 per unit. REQUIRED: Evaluate the impact on profit if SCSB decided to purchase face cream from OEM. Suggest whether SCSB should buy from OEM or produce in-house.
Sofiyya Cosmetics Sdn Bhd (SCSB) is producing variety of skin care products. One of it is face cream. Every year, SCSB produces 30,000 units of face cream. Due to increasing production costs, SCSB is considering of buying the product from Original Equipment Manufacturer (OEM) that produces similar product but in a larger scale. Below is the production costs information related to the face cream: Items Amount (RM) Direct material 120,000 Direct labour 65,000 Product inspections 56,000 Utilities 25,000 Supervision 50,000 Material handling 20,000 Depreciation of equipment 15,000 Total 351,000 If SCSB does not produce face cream, some of product inspectors and supervisors can be transferred to other product division. This will reduce both costs by 50% and 30% respectively. Besides that, cost of utilities can be reduced to 30% and no cost should be incurred for material handling. Equipment used for this product can also be used to produce other products. The product price offered by the OEM is RM10 per unit. REQUIRED: Evaluate the impact on profit if SCSB decided to purchase face cream from OEM. Suggest whether SCSB should buy from OEM or produce in-house.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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- Sofiyya Cosmetics Sdn Bhd (SCSB) is producing variety of skin care products. One of it is face cream. Every year, SCSB produces 30,000 units of face cream. Due to increasing production costs, SCSB is considering of buying the product from Original Equipment Manufacturer (OEM) that produces similar product but in a larger scale. Below is the production costs information related to the face cream:
|
Items |
Amount (RM) |
|
Direct material |
120,000 |
|
Direct labour |
65,000 |
|
Product inspections |
56,000 |
|
Utilities |
25,000 |
|
Supervision |
50,000 |
|
Material handling |
20,000 |
|
Depreciation of equipment |
15,000 |
|
Total |
351,000 |
If SCSB does not produce face cream, some of product inspectors and supervisors can be transferred to other product division. This will reduce both costs by 50% and 30% respectively. Besides that, cost of utilities can be reduced to 30% and no cost should be incurred for material handling. Equipment used for this product can also be used to produce other products. The product price offered by the OEM is RM10 per unit.
REQUIRED:
- Evaluate the impact on profit if SCSB decided to purchase face cream from OEM.
- Suggest whether SCSB should buy from OEM or produce in-house.
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