SEMESTER A221

BKAM 3023 MANAGEMENT ACCOUNTING II

EXERCISE 7

QUESTION 1
Arja Sdn. Bhd. (ASB) is currently manufactures the wheels that it uses for its in-line skates. The
annual costs to manufacture the 150,000 wheels needed each year are as follows:

(RM)

Direct Material 165,000

Direct Labor 45,000

Variable Overhead 60,000

Fixed Overhead 300,000

Total 570,000

Kasba Rubber Sdn. Bhd. (KRSB) has offered to provide ASB with all of its annual wheel needs for
RM3.50 per wheel. If ASB accepts this offer, 75% of the fixed overhead above could be totally
eliminated. Also, ASB would be able to rent out the freed up space and could generate RM72,000 of
income annually.

REQUIRED:

Decide whether ASB should accept or reject the offer been made by KRSB.

QUESTION 2
The operations of Bunga Raya Sdn. Bhd. (BRSB) are divided into the Fix Division and the Split
Division. The extracted income statement for the last financial year is as follows:

Fix Division Split Division Total

Items
(RM) (RM) (RM)
Sales revenue 80,000 47,000 127,000
Variable expense 30,000 29,000 59,000
Fixed cost:
Allocated common costs 7,000 6,500 13,500
Line supervisor 12,000 11,000 23,000
Maintenance of equipment 2,000 1,500 3,500
Depreciation of equipment 7,500 7,000 14,500
Office rental 2,000 3,000 5,000

1
 Profit (Loss) 19,500 (11,000) 8,500

This is the third year in a row that Split Division is making a loss. Therefore, the management
is considering of discontinuing this division. If the division is closed, the equipment and office
used for Split Division will not be utilised for other purpose.

REQUIRED:

(a) Evaluate whether it is worthwhile for BRSB to drop Split Division.

(b) Discuss THREE (3) examples of qualitative factors that any organization should
consider before dropping any of their division.