QUESTION CHAPTER 3

CHAPTER 3 : RELEVANT COSTS AND
SHORT TERM DECISION MAKING

LIMITING FACTOR

Fasola Bhd is currently able to produce 4 types of product and planning to mix it’s production
next month. Below are the information regarding the estimated cost, sales and it’s
production.

Do Re Mi Fa

Maximum production (unit) 4,500 5,000 7,000 3,000

RM RM RM RM

Sales price /unit 30.00 35.00 50.00 45.00

Labour cost / unit (RM5/hour) 15.00 10.00 15.00 10.00

Material cost / unit (RM2.50/kg) 5.00 10.00 12.50 5.00

Variable overhead cost / unit 1.00 1.50 2.00 2.50

Fixed overhead cost / unit 3.00 4.00 5.00 5.00

The company decides to allocate 51,000 labour hours per month and 64,000 kilogram raw
material per month.

Required :
(a) Prove that there is shortage either in raw materials or labour hours.
(b) Determine the priority of the product to be produced.
(c) Determine the company’s maximum profit.

MAKE OR BUY

The management of Qurata Sdn Bhd plan to buy the component TX from Aryanni Sdn Bhd.
The component TX has a budgeted manufacturing cost as follows:

Direct material RM
Direct labour (4 hours at RM3 per hour) 14.00
Variable overhead (4 hours at RM2 per hour) 12.00
Fixed overhead (4 hours at RM5 per hour) 8.00
Total Cost 20.00
54.00

Aryanni Sdn Bhd has offered to supply the above component at price of RM50.00 per unit.
Budgeted production is 1,000 units per annum.

Answer the questions below :

(a) Considering cost criteria, advise the management of Qurata Sdn Bhd whether the above
component should be purchased from Aryanni Sdn Bhd.

(b) As a result of recent government legislation, if Qurata Sdn Bhd continues to
manufacture the component TX, the company will incur additional inspection and
testing expenses of RM56,000 per annum.

What is the new decision for Qurata Sdn Bhd?

(c) If Qurata Sdn Bhd. decided to buy component TX, state THREE (3) qualitative factors
that need to be considered.

SPECIAL ORDER

Syarikat Kira-Kira manufactures calculators and is considering expanding the production.
Abacus Sdn Bhd, a distributor has asked the company to produce a special order of 3,000
calculators to be sold at overseas. The calculators should be sold under a different brand name
and would not influence Syarikat Kira-Kira’s current sales.

Total production at this moment is 8,000 units per year and the maximum capacity to produce
calculator is 10,000 units per year. Syarikat Kira-Kira would have to reduce the production of
units sold under its own brand name by 1,000 units if the special order is accepted. The
company’s Income Statement for the previous year is presented as follows:

Syarikat Kira-Kira
Income Statement For The Year Ended 31st December 2018

Sales (8,000 units) RM320,000

(-) Cost of Sales :

Direct Material RM80,000

Direct Labour RM72,000

Manufacturing Overhead RM64,000 (RM216,000)

Gross Profit RM104,000

Selling Expenses RM25,000

Administrative Expenses RM9,600 (RM34,600)

Net Profit RM69,400

 Variable manufacturing overhead is RM3.00 per unit and the variable selling expenses is
RM2.00 per unit.

 The administrative expenses is completely fixed and would increase by RM2,500 if the
special order is accepted.

 There is no variable selling expenses if the special order accepted.

 Direct labour cost per unit for the special order would increase by 5%, while direct material
cost per unit for the special order would increase by 10%.

 Fixed manufacturing overhead and fixed selling expenses would not change.

Required :

(a) Determine whether special order should be accepted or rejected if the offered price for
special order is RM35.00 per unit.

(b) State THREE (3) factors that should be considered in determine whether special order
should be accepted or rejected.

CONTINUE OR DISCONTINUE

Merchant Company manufactures and sells 3 models of electronic printers. Ken Gail,
President of the company, is considering dropping model JT484 from its product line because
the company has experienced losses for this product over the last three quarters. The
following product-level operating data have been compiled for the most recent quarter.

CATEGORY TOTAL JT284 JT384 JT484
RM RM RM RM
Sales
Variable costs 1,000,000 500,000 200,000 300,000
Contribution Margin (600,000) (300,000) (100,000) (200,000)
Fixed costs : 400,000 200,000 100,000 100,000

Rent 50,000 25,000 10,000 15,00
Depreciation 60,000 30,000 12,000 18,000
Utilities 40,000 20,000 5,000 15,000
Supervision 50,000 15,000 5,000 30,000
Maintenance 30,000 15,000 6,000 9,000
Administrative 100,000 30,000 20,000 50,000
Total fixed costs (330,000) (135,000) (58,000) (137,000)
Operating income / (loss) 70,000 65,000 42,000 (37,000)

In addition, the following information is also available:

 Factory rent and depreciation will not be affected by a decision to drop model JT484.

 Quarterly utility bills will be reduced from RM40,000 to RM31,000 if JT484 is dropped.

 Supervision costs for JT484 can be eliminated if dropped.

 The maintenance department will be able to reduce quarterly costs by RM7,000 if
JT484 is dropped.

 Elimination of JT484 will make it possible to eliminate two administrative staff
positions with combined salaries of RM30,000 per quarter.

Required :

(a) Should Merchant Company eliminate JT484?

(b) Give THREE (3) qualitative factors when considering about dropping a production of a
product.