Reference no: EM132550793

NRS SB manufactures pumps for garden fountains. Currently it buys in the component for its 'Shah' pump at a price of RM120.00. A suggestion has been made that the company should manufacture the component itself, and to support this view, the following estimated weekly costs have been prepared:

Estimated production (component)      150

RM

Direct materials    5,100

Direct labor         3,300

Variable overheads 2,850

Fixed overheads    1,950

Fixed overheads are allocated on the basis of floor area. If the 'Shah' component is produced, existing production of the 'Alam' component will have to be discontinued, since the 'Shah' component will occupy the 'Alam' production bays. The 'Alam' pump sells for RM48.00 per unit, of which 80 percent is attributable to the component. Currently, 200 units of the 'Alam' pump are manufactured with a total fixed overheads costs of RM1,920. Other variable cost is estimated at RM3 per unit.

Required:

Question a. State with reasons, whether the company should cease making the 'Alam' component in order to produce the 'Shah' component.

Question b. Explain three (3) qualitative factors that management needs to consider in a make or buy decision.