QUESTION 1 (15 MARKS)

1. Mr Azlan has attended an inventory management seminar where he was informed that most business entities have too much money tied up in inventory. He wonders if his business could be much profitable if the business reduced its inventory levels.

Required:

a. Advice Mr Azlan on his thought to reduce the inventory level. Justify your answer.

2. The management of Suria Berhad is discussing the companys present credit policy. The sales manager suggests that potential sales were being lost to competitors because of Surias tight restrictions on granting credit to customers. He states that if credit policies were loosened, the current years estimated credit sales of RM3 million could be increased by at least 20% next year with an increase in uncollectible account receivable of only RM10,000 over the currents year amount of RM37,500. He emphasizes that because the companys cost of sales is only 25% of revenues, the company would certainly be ahead of competitors.

However, the vice president suggests that a better alternative such as to ease credit terms by accepting customers credit card. She argues that this alternative could increase sales by 40%. The credit card issuer charges Suria Berhad 4% transactions fee on the additional sales.

At this point, the president interrupted by saying that he was not sure that increasing credit sales of any kind was a good thing. In fact, he suggests that the RM37,500 of uncollectible account receivables was altogether too high. He wondered whether the company should discontinue offering credit sales.

Required:

Comment on the proposals given by the sales manager and the vice president and give your recommendation to the management of Suria Berhad.

QUESTION 2 (15 MARKS)

The following is Saga Berhad contribution format statement of profit or loss for December 2020:

	RM000	RM000
		(Per Unit)
Sales	110	275
Variable costs	44	110
Contribution margin	66	165
Fixed costs	52.8
Net operating income	13.2

Required:

1. Determine the total contribution margin at the break-even point. Calculation is not required.

2. Management is considering the use of plastic-based material to replace metal-based material in its product. This change would reduce variable costs by RM15. The company's marketing manager predicts that this would reduce the overall quality of the product and thus would result in a decline in sales to a level of 350 units per month. Should this change be made?

3. Assume that the company is currently selling 400 units per month. Management wants to increase sales and feels this can be done by cutting the selling price by RM25 per unit and increasing the advertising budget by RM20,000 per month. Management believes that these actions will increase unit sales by 50%. Should these changes be made?

4. Assume that the company is currently selling 400 units. Management wants to automate a portion of the production process. The new robotic equipment would reduce direct labor costs by RM20 per unit but would result in a monthly rental cost for the new robotic equipment of RM10,000. Management believes that the new equipment will increase the reliability of its products thus resulting in an increase in monthly sales of 12%. Should these changes be made?

(15 marks)

QUESTION 3 (15 MARKS)

1. Wira Berhad has provided the following information concerning a proposed investment project:

RM000

Initial investment	480,000
Working capital required	17,000
Annual net cash inflows	168,000
Salvage value	72,000
Life of the project	7

The working capital would be released at the end of the project. The cost of capital of the company is 11%.

Required:

Compute the net present value. Should the company accept the project?

(7 marks)

2. Silau Berhad is considering purchasing a machine that would cost RM436,800 and have a useful life of 5 years. The machine would reduce cash operating costs by RM132,364 per year. The machine would have no salvage value.

Required:

1. Compute the payback period for the machine.
2. Compute the simple rate of return for the machine.
3. Based on your answer in (i) and (ii) above, should the company purchase the machine?

(8 marks)

QUESTION 4 (15 MARKS)

An-Nur Hospital uses patient-visits as its measure of activity. The hospital has provided the following report:

An-Nur Hospital (Comparison of Static Budget to Actual Results For the month ended 30 June 2020)

	Static Budget	Actual Results	Variances
Patient-visits	2,600	2,700
	RM	RM	RM
Revenues (RM52.90/patient)	137,540	145,190	7,650F
Expenses:
Personal expenses (RM35,100 + RM17.40/patient)	80,340	79,610	730F
Medical supplies (RM1,100 + RM6.40/patient)	17,740	18,660	920U
Occupancy expenses (RM9,700 + RM2.30/patient)	15,680	16,680	1,000U
Administrative expenses (RM5,200 + RM0.30/patient)	5,980	5,880	100F
Total expense	119,740	120,830	1,090U
Net operating income	17,800	24,360	6,560F

Required:

1. Prepare the An-Nurs flexible budget performance report for June 2020. Label each variance as favorable (F) and unfavorable (U)

2. Give your comment on the managements efficiency in controlling the cost.

3. Recommend the course of action(s) to management of An-Nur Hospital.

- END OF QUESTION PAPER -