Rex Ltd manufactures chips used in Delco computers. Its installed capacity is 2000 chips per week. The selling price is RM100 per chip. Production this quarter is 1600 chips per week. Total
costs of production this week at 80% of capacity level comprise RM75,000 of fixed costs and
RM80,000 of variable costs.
(a) At what level of activity will the plant break even? Explain your answer.
(b) What will the plant’s profit be if it operates at full capacity?
(c) If the plant’s accounting system reports fixed cost per unit using its installed capacity level as the base, what is the reported cost per unit?
(d) Suppose that a new customer offers RM80 per chip for an order of 200 chips per week for delivery beginning this quarter. If this order is accepted, production will increase from 1600 chips at present to 1800 chips per week. Should the company accept the order?
Support your answer with calculations.
(e) What qualitative considerations are relevant in a make or buy decision?