Refer to your answers in Requirement (a). "I worked all night to prepare the statements! How

could Encik Hakim say that. This is so upsetting!" says the bookkeeper. Assuming you are the bookkeeper, explain to Encik Hakim on the declining operating income in Year 2.

QUESTION 2 Majestic Canine Bhd. is a small business that has been operating for just two years, producing and selling dry cat food for senior cats. The cat food is sold at RM19 per kilogram. The company uses an absorption costing system for internal reporting purposes. As a startup company, Majestic Canine is struggling to stay in business due to lack of cash flow. The owner, Encik Hakim, suspected that the bookkeeper is on to something. He told one of his managers, "Well, it takes money to make money. That's understandable. We spent a lot of money on brand advertising. Our sales have increased, so why might our operating income have declined? Accounting is not rocket science. We have got off to a good start, but look at us now! The bookkeeper definitely has something up his sleeves." Information for the company's first two years of operation is as follows: Year 1 6,500 10,000 Year 2 9,000 10,000 Sales (in kilograms) Production (in kilograms) Production costs: Variable manufacturing costs Fixed manufacturing overhead Selling and administrative expenses: Variable (per kilogram) Fixed RM80,000 RM40,000 RM80,000 RM40,000 RM2 RM20,000 RM2 RM40,000