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MANAGEMENT ACCOUNTING AND CONTROL (MAF 420) Semester Sept 2013 - January 2014

Case Study
Panache Products Sdn Bhd manufactures arcylic-based household products at its three branches. One of the companys many well-known product is the salad set which is manufactured at the Samarahan Branch. It uses a combination of arylic formula and is moulded using a special moulding machine which cost RM210,000. This machine was purchased and installed in January 2010, having a useful life of 7 years with no scrap value after the 7th year. Concerned about the branchs profitability, the manager, Mr Adam Idris is considering the purchase of new improved processing machine from Xmechanix Bhd. RM7,000 was incurred sending the operation manager to look at the specifications and suitability of the machine for current operation system. This machine would help to improve companys profits through cost savings resulting from reduced costs of operations. The machine would cost RM130,000 having an estimated useful life of three years with a scrap value of RM10,000. The machine cost is inclusive of RM20,000 installation cost. Training of staffs will cost another RM15,000 but as agreed , will be borne by the supplier. The new machine would be manned by two operators instead of the current five operators. The machine would enable the use of less expensive arcylic formula costing RM70 per 1000 kilogram, compared to the current formula which costs RM75 per 1000kg. There would be reduction in overall power consumption by 40% if the machine is put into operation.

The Operation Manager is eager to replace the existing machine. What is more exicting to him is that Xmechanix Bhd is offering to purchase the existing machine for RM40,000, an amount so much higher than selling it as a second hand machine. Xmechanix Bhds offer is valid however, if the new machine is installed by 1 January 2014. Unfortunately, such immediate replacement would result in a significant amount of old inventory, that is sufficient to make 40,000 salad sets, as not useable. If not used, it is sealable at only RM0.025 per kilogram.

The Samarahan Branch is treated as a profit centre. Similar to last year, the current production operation is supporting the production and sales of 200,000 units of salad sets per annum. This production level is expected to continue in the next four years taking into consideration seasonal variation in sales in each quarter. Each Salad Set sells at RM1 each. Production of each set requires 2 kilograms of raw materials, 1 kilowatt (kw) hours of eletricity costing RM0.05 and direct labour cost of RM0.25 per set. Overhead costs total to RM60,000 per annum, inclusive of RM10,000 supervision costs which varies according to the number of employees. If the new

machine is purchased, Panache would terminate 3 operators. However the company would have to hire special maintanance team at a cost RM6,000 per annum.

The directors of Panache Products Sdn Bhd currently requires all investment to generate a positive net present value at a cost of capital of 12%. This policy is to be adhered strictly by all branches. All machines purchased by the company qualifies for Initial and Annual aloowances of 15% and 10% respectively and corporate tax is 25% payable in the same year.

Required:

a)

Determine the initial outlay for the purchase of the new machine. (4 marks)

b)

c)

Construct the Income Statement for each alternative for the years 2014, 2015 and 2016. Indicate how the Samarahans branch managers decision might be influenced by these figures ( 10 marks) Evaluate the proposal to replace the existing machine with the new model ( 6 marks) Explain if your analysis would be affected if the new machine had a longer useful life. ( 5 marks ) What other factors should be considered before making the decisions? Advise the management of Samarahan Branch on the investment decision. ( 5 marks) ( total : 30 marks)

d)

e)

Note:

This is a group case study. ( may be a in a group of 4 students). Students should submit a report (no presentation) within a week. ( 10 %)