Hawa Dentistry Services operates in dental laboratory to produce porcelain and g

Question

Hawa Dentistry Services operates in dental laboratory to produce porcelain and gold crowns. The are as follows: a large metropolitan area. Currently, Hawa has its own unit cost to produce the crowns 12 5 G o0 Gold RM 70 27 8 RM Raw materials Direct labour Variable overhead Fixed overhead Total 130 27 8 127 187 Fixed overhead is detailed as follows: Salary (supervisor) RM26,000 5,000 32,000 Depreciation Rent (lab facility) Overhead is applied on the basis of direct labour hours. These rates were computed by using 5,500 direct labour hours. A local dental laboratory has offered to supply Hawa all the crowns it needs. Its price is RM125 for porcelain crowns and RM150 for gold crowns. However the offer is conditional on supplying both types of crowns. It will not supply just one type for the price indicated. If the offer is accepted, the equipment used by Hawa's laboratory would be scrapped (it is old and has no market value), and the lab facility would be closed. Hawa uses 2,000 porcelain crowns and 600 gold crowns per year. Required: (a) Analyse and determine whether Hawa should continue to make its own crowns, or to purchase from the external supplier. (11 marks) (b) Identify qualitative factors that Hawa should consider in making this decision. (3 marks) (c) With reference to the original data and assuming that the volume of crowns used are 3,400 porcelain and 600 gold, determine whether Hawa should make or buy the crowns. Explain the outcome.

Explanation / Answer

a) Hawa should purchase from the external supplier as total production costs has reduced from (309000 + 63000) - 340000 = $32000 Make Buy Variable costs (105*2000)+(165*600)=309000 (125*2000)+(150*600)=340000 Fixed costs 63000 0 Total costs 372000 340000 b) The qualitative factors which Hawa should consider in making the decision are: 1. the laboratory facilities and equipment would get scrapped 2. quality of the products supplied by outside supplier. 3. future costs of establishing the facility if agreement breaks. 4. urgent requirements needs fulfilment by supplier. c) Make Buy Variable costs (105*3400)+(165*600)=456000 (125*3400)+(150*600)=515000 Fixed costs 63000 0 Total costs 519000 515000 Yes, Hawa should continue buying the crowns as total costs is still lower on getting the crowns purchased from supplier. This is because in long run fixed costs has to be considered.

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