Classic Image Sdn Bhd produces three types of outdoor furniture. Below is the Statement of Profit or Loss for the quarter ended 30 June 2019: Pixie Classic TWO- Round Coffee seat Table Set Bench RM RM RM Sales 208,800 278,500 230,000 Less: Manufacturing costs Direct materials 48,000 125,000 108,000 Direct wages 26,400 74,900 42,000 Variable manufacturing overhead 17,200 17,500 23,400 Fixed manufacturing overhead 41,000 34,700 11,470 Less: Non-manufacturing costs Administrative overhead 15,000 27,000 9,600 Variable selling and distribution overhead 10,500 19,495 17,600 Fixed selling and distribution overhead 11,880 5,440 2,700 Net profit (Loss) 38,820 (25,535) 15,230 The managing director of Classic Image Sdn Bhd has raised his concern regarding the performance of the company and he plans to eliminate the production of Classic Coffee Set. He discusses the matter with the marketing manager who then estimates the following changes if the respective production line is eliminated: i. The production and sales of Pixie Round Table and Two-seat Bench will increase by 6% and 9% respectively. ii. Administrative overhead cost represents the salary of administrative employees. If the production line of Classic Coffee Set is eliminated, two-thirds of the employees will need to be dismissed and the company has to pay a total of RM45,000 as compensation. The remaining employees will be relocated as administrative staff to the Pixie Round Table. iii. iv. Three quarters of the fixed manufacturing overhead cost of Classic Coffee Set represents the depreciation expense of machines used in that production line. None of those machines can be sold. The remainder is avoidable cost. One quarter of fixed selling and distribution overhead cost of Classic Coffee Set is unavoidable. The amount will be borne equally by the remaining production lines. It is estimated that the company will earn additional income of RM400 per month by renting out the area that is currently used to produce Classic Coffee Set. V. a. Required: Calculate the fixed costs that are avoidable if Classic Image Sdn Bhd eliminates the production of Classic Coffee Set. (3 marks) b. i. Prepare the Revised Statement of Profit or Loss for the quarter ended 30 June 2019 by using marginal costing approach if the production of Classic Coffee Set is eliminated (Round up the figure to the nearest RM). (10 marks) Based on your answer in part (b) () above, suggest to the managing director of Classic Image Sdn Bhd whether the production of Classic Coffee Set should be eliminated or not. (2 marks)
