Carmelia Manufacturer Berhad is currently mannfacturing Component ZT, producing 15,000 units annually. The component is used in the production of several products made by Carmelia. The cost per unit for ZT is as follows:
Direct materials RM 20.00
Direct labor 10.00
Variable overhead 5.00
Fixed overhead 3.00
Total RM 38.00
Of the total fixed overhead assigned to ZT, RM9,000 is direct fixed overhead (the annual lease cost of machinery used to manufacture Component ZT), and the remainder is common fixed overhead. An outside supplier has offered to sell the component to Carmelia for RM37.
There is no alternative use for the facilities currently used to produce the component.
Required:
a) Should Carmelia Manufacturer Berhad make or buy Component ZT? (Show your calculations using differential analysis).
b) What is the maximum amount per unit that Carmelia would be willing to pay to an outside supplier?
c) If Carmelia could otherwise rent the space for the production of ZT for RM25,000 per year, should it make or buy this component?
d) What additional factors should Carmelia consider in deciding whether it should make or buy the Component ZT.