Tutorial 9

Question 1

Parksern Sdn. Bhd. operates three stores in Pahang. A segmented income statement for the company for the last quarter is given below:

Parksern Sdn. Bhd Income statement For the Quarter ended March 31

Angsana Store Mega Store Jaryen Store Total

RM RM RM RM

Sales 150,000 100,000 105,000 355,000

Less variable cost:

Direct Material 30,000 25,300 32,700 88,000

Direct Labour 50,000 30,000 27,300 107,300

Overhead 17,100 24,500 35,000 76,600

Contribution Margin 52,900 20,200 10,000 83,100

Less fixed cost 39,900 10,500 20,000 70,400

Net operating income/(loss) 13,000 9,700 ( 10,000) 12,700

The Jaryen Store has recently shown losses over the past two years. For this reason, management is giving consideration to close the store. The company has asked you to make recommendation as to whether the store should be closed or kept open. The following additional information is available for you to use:

(i) All production is sold. Closing the Jaryen Store will result in a 5 percent decrease in the sales of the Angsana Store and Mega Store.

(ii) A study indicates that RM5,500 of the fixed expenses being charged to Jaryen store are sunk costs or allocated costs that will continue even if the Jaryen Store is closed. Required:

(a) Prepared a statement showing the change in revenues and expenses and the impact on the company's overall net operating income if the Jaryen Store were closed.

(b) Determine whether the Jaryen Store should be closed or kept open, giving reason for your decision.

(c) Explain briefly any THREE (3) reasons for qualitative factors that may affect Parksern's decision.

Question 2

Syarikat Boytoy Jaya (SBJ) manufactures and sells a single product called a Ret. Operating at capacity; the company can produce and sell 30,000 Rets per year. Costs associated with this level of production and sales are given below.

Unit Total

RM RM

Direct labour 15 450,000

Direct materials 8 240,000

Variable manufacturing overhead 3 90,000

Fixed manufacturing overhead 9 270,000

Variable selling expenses 4 120,000

Fixed selling expenses 6 180,000

Total cost 45 1,350,000

The Rets normally sells for RM50 each. Fixed manufacturing overhead is constant at RM270,000 within the range of 25,000 through 30,000 Rets per year. Due to recession, SBJ expect to sell only 25,000 rets through channels next year. A large retail chain had offered to purchase 5,000 Rets if SBJ is willing to accept a 16% discount off the regular price. There will be no sales commissions on this order, thus, variable expenses would be slashed by 75%. Required:

(a) Evaluate the offer made by the distributor and advise whether SBJ should accept the offer.

(b) Comment briefly on two (2) factors which management has to consider and which may influence their decision to accept the offer.

Question 3

Adhond Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 8,000 units per year is:

RM

Direct materials 2.50

Direct labor 3.00

Variable manufacturing overhead 0.50

Fixed manufacturing overhead 4.25

Variable selling and administrative expenses 1.50

Fixed selling and administrative expense 2.00

The normal selling price is RM15.00 per unit. The company' capacity is 10,000 units per month. An order has been received from an overseas source for 2,000 units at the special price of RM12.00 per unit. This order would not affect regular sales.

Required: If the order is accepted, how much will monthly profits increase or decrease? (The order will not change the company's total fixed costs)

Question 4

Perabot Bhd manufactures three garden furniture products - chairs, benches and tables. The budgeted selling price, unit cost and resource requirements of each of these items are detailed below:

Chair Bench Table

(RM) (RM) (RM)

Selling price 20.00 50.00 40.00

Timber cost 5.00 15.00 10.00

Direct labour cost 4.00 10.00 8.00

Variable overhead cost 3.00 7.50 6.00

Fixed overhead cost 4.50 11.25 9.00

Budgeted volumes per annum 4,000 2,000 1,500

These volumes are believed to equal the market demand for these products. The fixed overhead costs are attributed to the three products on the basis of budgeted direct labour hours of 12,000 hours per annum. The labour rate is RM4.00 per hour and the cost of timber is RM2.00 per square metre The products are made from a specialist timber. A memo from the purchasing manager advises you that because of a problem with the supplier it is to be assumed that this specialist timber is limited in supply to 20,000 square metres per annum.

Required:

Determine the optimum production plan and calculate the net profit that this plan would yield per annum.

Question 5

Toy-4-Us Company (T4UC) manufactures a line of toy miniature based on the box-office movie and now concentrating on miniature of Amazing-Spiderman and Iced-Aged 4. Demand for the two toy miniatures are increasing, with far more orders each week than the company can produce with the available raw materials. The same material is used in both products. T4UC only have 1,500 pounds of raw material in hand and will not able to obtain more of it for several weeks due to the problem in the supplier's chain. The company provided the following information:

Amazing-Spiderman Iced-Aged 4

Selling Price RM240 RM180

Direct Material 32 24

Direct Labour 148 102

Demand Next Week (units) 200 300

The materials cost is RM8 per pound. The top management request the assistance from you in determining an economical sales and production mix for the coming week.

Required:

(a) Determine the mix of product that should be produced during the next week.

(b) Assuming T4UC does not want to reduce sales of any product, identify ONE (1) way in which the company could obtain the additional output.

Question 6

Cooking-Is-Easy Manufacturing (CIEM) produces and sells a successful line of kitchen appliances. One of the products is microwave oven. During the production meeting, Ainurina; managing director expressed her opinion; "We ought to stop making our own microwave oven and accept that outside supplier's offer. At the price RM180 per oven, we would be paying RM50 less than it costs to manufacture in our factory." Cost data relating to production for last year, when 30,000 units were manufactured are given below:

RM RM

Direct Materials 103.50

Direct labour 60.00

Variable Overhead 15.00

Fixed Overhead:

Supervision 7.50

Depreciation 16.00

General company overhead 28.00 51.50

Total cost per oven RM230.00

If the oven is purchased from the outside supplier, all variable manufacturing cost will be eliminated but all the fixed overhead currently being charged to the ovens will have to be absorbed by other products.

Required:

(a) Prepare a make-or-buy analysis comparing the unit costs of manufacturing oven with the unit costs if purchasing it. Recommend the course of action to management.

(b) Would your action be different if the cost of supervision and depreciation can be eliminated if CIEM buy the oven from outside supplier?

(c) List TWO (2) qualitative factors should management consider in reaching a final decision?