Advise to the Management of Delcom Ltd. in Adopting New Production System (Coursework Sample)

Problem 1.0
Delcom Ltd specialises in the production of laptop computers. The management of the company is concerned about the rising production costs and have proposed the introduction of a just-in-time production system where production will be undertaken on an order basis.
The data below relates to the budgeted production activities of the 3 laptop computer models for the financial year ending 31 December 2021.
Model 1 Model 2 Model 3 Total
Production units 1,000 1,000 2,000 4,000
Number of production runs 1,000 1,000 2,000 4,000
Number of orders 4,000 5,000 6,000 15,000
Machining hours 50,000 10,000 90,000 150,000
Direct labour hours 600000 600,000 800,000 1,200,000
Direct materials per unit (kg) 5 6 8
Annual overheads Fixed (¥) Variable
Set-up costs 4,300,000 ¥13,000/ production run
Material handling costs 9,500,000 ¥700/ order
Quality control costs 6,000,000 ¥1,800/ production run
Machining costs 15,000,000 ¥75/hour
Additional information:
1. The proposed just-in-time production system would have the following impact on costs:
Decrease in direct labour costs by 40%
Decrease in set-up costs by 20%
Decrease material handling, assembling and distribution costs by 25%
Decrease quality control and machining costs by 15% and 20% respectively
2. The direct labour cost per hour is ¥25.
3. The direct material cost per unit of model 1, 2 and 3 are ¥1,500, ¥1200 and ¥1,000 per kg respectively.
4. Adoption of the new system of production would result in a loss of quantity discount on bulk purchase of direct materials of 2% on all models of laptop computers.
5. Assume all fixed costs are direct costs.
6. The selling price per unit of laptop computer models 1, 2 and 3 are ¥56,000, ¥62,000 and ¥53,325 respectively.
Required:
a. Advise the management of Delcom Ltd whether they should adopt the new production system.
b. Assuming a sales mix of 1:1:2, determine the breakeven sales in units for all the laptop computer models under the current production system. Interpret your result.