Fragrant Company produces young adult perfumes needs to determine if it would be cheaper to produce 100,000 bottles of its most popular perfume, Timmee, for sale in its college town shops or to purchase them from an outside supplier for RM25 each. Cost information on internal production includes the following:
Table 6: Production Costs
Total Cost
Unit Cost
RM
Direct materials
2,000,000
20.00
Direct labor
350,000
3.50
Variable manufacturing overhead
150,000
1.50
Variable marketing overhead
250,000
2.50
Fixed plant overhead
300,000
3.00
Total
3,050,000
30.50
Fixed overhead will continue whether Timmee is produced internally or externally. No additional costs of purchasing will be incurred beyond the purchase price.
Required:
a. Assume that Fragrant’s internal audit team learned through a special data analytics project that intellectual property theft is a significant threat for outsourced production. The team estimates that if Fragrant Company outsources its production, it will need to spend RM350,000 to manage intellectual property theft of its Timmee brand by competitors operating in the country where the outsourced production occurs. Propose an alternative that is more cost-effective decision with calculation details.
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