An assembling company of sport bikes in Qatar called Qatar bicycles Company has

Question

An assembling company of sport bikes in Qatar called Qatar bicycles Company has an issue with its production of sport bikes parts; currently, the company produce 40000 parts per year. Mr. Tamim Al-Mohannadi is the owner of the company. He addresses that “the current equipment for producing the parts has worn out”. He asks his employers that “we need to make a decision quickly to continue our assembling production”. Mr. Mohammed Al-Hajri is the managerial accountant of the company. He lends his hand to help on the issue, he argued “Mr. Al-Mohannadi, we have two options to decide whether we buy a new equipment and continue our production of the parts internally, or we purchase the parts from a foreign supplier”. Mr. Al-Mohannadi asks for further clarifications with figures, Mr. Al-Hajri summaries the two alternatives as follows:

1- Buy a new equipment costs $80000 and continue the production internally.

2- Do not buy the new equipment (stop the production) and purchase the parts from a foreign supplier for $11 per part.

Mr. Al-Hajri also provided further information to the company’s owner about the costs per part:

Direct Materials

$4.75

Direct Labor

4.00

Manufacturing Overhead Costs (Variable)

0.60

Total Variable Costs

9.35

Manufacturing Overhead Costs (Fixed):

Supervision

$0.75

Deprecation

0.90

General Costs

4.00

Total Manufacturing Overhead Costs (Fixed):

5.65

Total Cost per part

15.00

Mr. Al-Hajri provided further information as follows:

The new equipment would be more efficient to produce 100000 parts instead of 40000 parts per year. It also reduces direct labor costs and variable overhead costs by 35%. However, Mr. Al-Mohannadi argued that the Supervision cost and direct materials cost per part as well as the total general fixed costs would not be affected by this decision (alternative 1)

.Required:

a. Mr. Al-Mohannadi is unsure what the company should do. He asks for an analysis (on an excel sheet) for each of the two alternatives per part and in total costs; using the current level of production (40000 parts). Which alternatives do you recommend to the owner (Mr. Al-Mohannadi)? Why?

b. Mr. Al-Mohannadi is planning to increase the production to (i) 70000 parts and (ii) 100000 parts per year. Using an excel sheet that shows the relevant formulas, which alternative do you recommend to the owner (Mr. Al-Mohannadi) for each level of activity to the two alternatives per part and in total costs? Why?

c. What other factors would you recommend to the owner (Mr. Al-Mohannadi) to consider before making any decision?

Direct Materials

$4.75

Direct Labor

4.00

Manufacturing Overhead Costs (Variable)

0.60

Total Variable Costs

9.35

Manufacturing Overhead Costs (Fixed):

Supervision

$0.75

Deprecation

0.90

General Costs

4.00

Total Manufacturing Overhead Costs (Fixed):

5.65

Total Cost per part

15.00

Explanation / Answer

Exist. Cost 35% reduction Direct Materials                              4.75                              4.75 Direct Labor                              4.00                              2.60 Manufacturing Overhead Costs (Variable)                              0.60                              0.39 Total Variable Costs                              9.35                              7.74 Manufacturing Overhead Costs (Fixed): Supervision                         30,000                          30,000 Deprecation                         36,000                          36,000 General Costs                      1,60,000                      1,60,000 Total Manufacturing Overhead Costs (Fixed):                      2,26,000                      2,26,000 a Total requirement 40,000 units                         40,000 If internally Manufacture Total variable cost 7.74*40000                      3,09,600 Total Fixed Cost                      2,26,000 Total cost of production                      5,35,600 If buy overseas Total cost =11*40000                      4,40,000 It is better to buy overseas at $11 per part b If requirement is 70000 units & 100000 Total requirement                      70,000.0                  1,00,000.0 If internally Manufacture Total variable cost                      5,41,800                      7,74,000 Total Fixed Cost                      2,26,000                      2,26,000 Total cost of production                      7,67,800                    10,00,000 If buy overseas Total cost                      7,70,000                    11,00,000 Decision Buying Cost & manufacture cost are more or less same so can be bought or can be manufacture Here manafacture cost is lesser than the buying cost part must be manufactured internally c Other factors keep in mind while taking the decision At the of internally manufacture keep into mind that sufficient and skilled manpower locally available, service & spare part of the machine should be locally available at the time of take buy decision it should kept in mind that manufacturer have sufficient capacity to meet his demand on time and there is no ban between two countries import/export of such spare part etc.

Exist. Cost 35% reduction Direct Materials 4.75 =D2 Direct Labor 4 =D3*65% Manufacturing Overhead Costs (Variable) 0.6 =D4*65% Total Variable Costs =SUM(D2:D4) =SUM(E2:E4) Manufacturing Overhead Costs (Fixed): Supervision =0.75*40000 =D7 Deprecation =0.9*40000 =D8 General Costs =4*40000 =D9 Total Manufacturing Overhead Costs (Fixed): =SUM(D7:D9) =SUM(E7:E9) a Total requirement 40,000 units 40000 If internally Manufacture Total variable cost 7.74*40000 =D13*E5 Total Fixed Cost =E10 Total cost of production =SUM(D15:D16) If buy overseas Total cost =11*40000 =11*40000 It is better to buy overseas at $11 per part b If requirement is 70000 units & 100000 Total requirement 70000 100000 If internally Manufacture Total variable cost =E5*D26 =E5*E26 Total Fixed Cost =E10 =E10 Total cost of production =SUM(D28:D29) =SUM(E28:E29) If buy overseas Total cost =D26*11 =E26*11 Decision Buying Cost & manufacture cost are more or less same so can be bought or can be manufacture Here manafacture cost is lesser than the buying cost part must be manufactured internally c Other factors keep in mind while taking the decision At the of internally manufacture keep into mind that sufficient and skilled manpower locally available, service & spare part of the machine should be locally available at the time of take buy decision it should kept in mind that manufacturer have sufficient capacity to meet his demand on time and there is no ban between two countries import/export of such spare part etc.

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