COST AND MANAGEMENT ACCOUNTING 2 (MAF251)

ADDITIONAL TUTORIAL FOR MAKE OR BUY DECISION; ACCEPT OR REJECT

SPECIAL ORDER & DISCONTINUATION

MAKE OR BUY DECISION: JANUARY 2012: QUESTION 5

Mahsuri Kimmi Bhd. produces an industrial product named 'Kimmco'. The selling
price of 'Kimmco' is RM10.00 per litre. The company produces its major components
called "Kimm'. The company incurred RM465,000 of costs to produce 60,000 litres of
'Kimm'. The detailed costs to manufacture 60,000 litres of 'Kimm' are as follows:
RM
240,000
90,000
60,000
75,000

Direct Materials
Direct labour
Variable overheads
Fixed overheads

The company is considering buying the product 'Kimm' from a vendor Panglima Bhd.
If the company agrees to buy 'Kimm' from the vendor, the following costs will be
incurred:

Cost of buying
Cost of repacking
Transportation costs
Other expenses

RM
3.90 per litre
2.10 per litre
54,000
45,000

If the company buys 'Kimm', fixed overhead costs can be reduced by RM30,000.
Required:
a)

Advise Mahsuri Kimmi Bhd whether the company should buy or make 'Kimm'.
(12 marks)

b)

Explain the meaning of the following terms:

i. opportunity cost
ii. sunk cost
(4 marks)

c)

Differentiate between relevant cost and irrelevant cost.

(3 marks)
(Total: 19 marks)

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ACCEPT OR REJECT SPECIAL ORDER: SEPTEMBER 2011: QUESTION 4 B

TeaTime Sdn Bhd, a company located in Muar, makes bottled fruit preserves. It has
an annual plant manufacturing capacity of 24,000 bottles. Its estimated operating
results for the year are as follows:
Production and sales of 20,000 bottles

Total sales
Manufacturing costs:
Fixed
Variable (per unit)
Selling and administrative expenses:
Fixed
Variable (per unit)

RM
180,000
60,000
2.60
30,000
1.00

Variable selling and administrative expenses will not be incurred for any special
order transaction.
Required:
If TeaTime accepts a special order for 5,000 bottles at a selling price of RM4 per
bottle, what would be the effect on the total net income for the year? Show the
changes to the net income.
(12 marks)

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MAKE OR BUY DECISION + ACCEPT OR REJECT SPECIAL ORDER: APRIL

2011: QUESTION 2
Abdan Prestige manufactures and sells varieties of souvenirs made from ceramic
and bought-in components. Recently, the company receives an order to make
specially designed corporate souvenirs from Tuah Berhad. This special order would
bring additional sales revenue of RM550.000 to the company. The accountant has
made the following cost estimates to produce 10,000 units of the specially designed
souvenirs to satisfy the customer order:
RM
120,000
300,000
15,000
180,000
615,000

Direct materials
Direct labour
Special equipment
Production overhead
Total

You are informed that the production overhead cost is 40% variable and the
remainder is fixed. The direct materials consist of the cost of ceramic material of
RM80,000 and the bought-in components of RM40,000. The company bought these
components from Lekir Berhad at RM4.00 each. In order to reduce cost, the
accountant has suggested that the bought-in components can be manufactured
internally. The production cost per unit of the component is as follows:

Direct material
Direct labour
Production overhead
Total production cost

RM
2.00
1.00
1.50
4.50

The production manager, however, disagrees with this suggestion because the
production cost per unit is higher than the purchase price of the bought-in
component.
Required:
a)

Analyse whether Abdan Prestige should make or buy the components for the
special order.
(3 marks)

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b)

Following the decision in (a) above, advise Abdan Prestige whether to accept
or reject the special order from Tuah Berhad.
(12 marks)

c)

Explain two (2) qualitative factors to be considered by the management of the

Abdan Prestige before deciding to make the bought-in components.
(4 marks)
(Total: 19 marks)

DISCONTINUATION: JANUARY 2013: QUESTION 3

Najjah Collection sells hijabs known as "Ann-Najjah" in three different branches
namely Shah Alam, Setia Alam and Bukit Tinggi. Puan Huzaifa, the owner of Najjah
Collection realized that the profit figure has shown decreasing trend ever since the
fourth quarter of 2012. "Ann-Najjah" hijabs show increasing demand in Shah Alam
and Bukit Tinggi. In contrast, Setia Alam branch has shown a decrease in demand
for "Ann-Najjah" hijabs. This might be due to the rigorous marketing promotion of
newly design hijabs from competitors in Bangi. Therefore Puan Huzaifa is
contemplating of whether to discontinue Setia Alam branch and concentrate on the
other two branches in Shah Alam and Bukit Tinggi.
Cik Umaira, the accountant of Najjah Collection prepares the following information
for the first quarter of the year 2013.

Sales
Variable cost:
Contribution Margin
Fixed cost:
Staff salary
General expenses
Miscellaneous
Managers salary
Net profit

Shah
Alam
RM
300,000
130,000
170,000

Setia
Alam
RM
70,000
21,520
48,480

Bukit
Tinggi
RM
151,000
38,211
112,789

RM
521,000
189,731
331,269

32,000
20,342
6,800
14,000
96,858

18,000
4,500
4,600
7,000
14,380

25,800
7,600
4,800
7,000
67,589

75,800
32,442
16,200
28,000
178,827

Total

Additional information:
1.

The sales in Shah Alam and Bukit Tinggi are expected to increase by 30%
and 20% respectively if the branch in Setia Alam is discontinued.

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2.

All the three workers in Setia Alam will be laid off but the branch will pay them
three months salary as redundancy payment.

3.

The general expenses are allocated according to sales revenue. If the branch
in Setia Alam is closed down, 30% of the total general expenses could be
avoided.

4.

70% of the Setia Alam branch's miscellaneous expenses are avoidable. The
remaining balance is absorbed by the branches in Shah Alam and Bukit
Tinggi with the apportionment of 60% and 40% respectively.

5.

If the sales in Shah Alam and Bukit Tinggi increase, there is a need to hire a
part time staff. The cost is estimated at 15% of the staff salary cost for the
branches in Shah Alam and Bukit Tinggi.

6.

En Salihin, the branch manager of Setia Alam's branch is to be transferred to

Bukit Tinggi branch.

Required:
a)

Advise Puan Huzaifa whether Setia Alam's branch should be closed down
and concentrates on the branches in Shah Alam and Bukit Tinggi.
(14 marks)

b)

Briefly discuss two (2) factors which you should consider in closing down a
branch.
(4 marks)
(Total: 18 marks)

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DISCONTINUATION: JUNE 2012: QUESTION 4

Cun Corporation manufactures high quality hand-made modern umbrella. Its
manufacturing plants are located in Arau, Kodiang and Ipoh. The company charges
a standard selling price of RM50 for each umbrella. The Statement of Profit or Loss
of Cun Corporation for the year ended 31 December 2012 is as follows:

Sales
Cost of sales
Gross profit
Less: Other expense
Rent
Miscellaneous
Manager salaries
Electricity
General expenses
Staff salaries
Net profit

Arau
RM
145,000
50,000
95,000

Kodiang
RM
90,000
40,000
50,000

Ipoh
RM
25,000
15,000
10,000

8,000
2,000
6,000
5,000
7,808
8,000
58,192

8,000
1,500
6,000
5,000
4,846
5,500
19,154

8,000
4,000
6,000
5,000
1,346
4,500
(18,846)

The Ipoh branch has been showing net losses for the last three years ever since the
opening of Lawa Gift shop, a competitor. The management of Cun Corporation feels
the operation of the branch should be discontinued to increase the company's net
profit.
The following information is available to you:
1.

The sales in Arau branch will increase by 20% when the Ipoh branch is closed
down.

2.

If Ipoh branch is closed down, its electricity and rent costs can be avoided.

3.

The manager of the Ipoh branch can be reassigned to the Arau branch.

4.

Half of the staff salaries for each branch are variable cost. The workers in the
Ipoh branch will be laid off and they will be paid RM5.000 as redundancy
payment in total.

5.

The general expenses are allocated based on sales revenue and they are
fixed in nature. If the Ipoh branch is closed, the total general expenses can be
reduced by 20%. The same basis will be used to allocate the general
expenses to remaining branches.
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6.

Miscellaneous expenses for each branch are 40% fixed in nature. If the Ipoh
branch is closed down, 75% of its fixed miscellaneous expenses are
avoidable. The remaining expenses will be absorbed by the Arau branch
(70%) and the Kodiang branch (30%). Meanwhile the variable miscellaneous
expenses of the Arau branch will increase by 10%.

Required:
a)

Advise the management of Cun Corporation, whether the company should

close down the Ipon branch. (Show your answers by preparing a marginal
costing income statement to the nearest RM)
(17 marks)

b)

Explain the "opportunity cost" concept.

(3 marks)
(Total: 20 marks)

THE END

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