BKAM3023 MA11 T5 SHORT TERM DECISION MAKING A221

QUESTION 1

PART A

Famay Sdn Bhd (FSB) is a manufacturing company that produces high-technology

electrical products. One of the items used in the product is component M-2712. Each
month, 10 units of M-2712 is required in production. Currently, component M-2712 is
produces internally with the following costs incurred:

Direct material RM500

Direct labor RM4,000
Manufacturing overhead 150% of direct labor
Material handling 20% from direct material

Additional information related to production of M-2712 are as below:

1. Material handling is a separate charge in addition to manufacturing overhead. It
involves the variable cost at Receiving Department that apply to direct material and
purchased components on the basis of their cost.

2. Manufacturing overhead cost consists of ⅓ variable cost, and ⅔ fixed cost.

Currently, there are one company approach FSB to supply components M-2712 at a unit
price of RM7,500. FSB has three options regarding the empty spaces if they choose to
accept the offer from outside supplier:

(i) The empty spaces will remain idle.

(ii) FSB able to rent out the empty space for RM12,500 per month.
(iii) FSB can use the empty space to manufacture new product that would contribute
RM26,000 every month.

REQUIRED:

(a) Evaluate each option for FSB regarding the empty spaces. Show all workings.
(b) Justify whether the decision to accept the offer from outside supplier on components
M-2712 is a correct decision made by FSB.

PART B

MFS Sdn Bhd (MFSSB) manufactures sports attire. The capacity of the production is 5,000
units each month. Currently, the normal production is at 75%. The price for one suit of
sport attire is RM175. Below are the costs incurred for the 75% current activity level:
BKAM3023 MA11 T5 SHORT TERM DECISION MAKING A221

Variable costs: Amount

Direct material RM131,250
Direct labor RM187,500
Marketing RM93,750
Total variable costs RM412,500

Fixed costs: Amount

Manufacturing RM137,500
Marketing RM87,500
Total fixed costs RM225,000

Last week, MFSSB receive an order from a new customer for 1,250 units of sports attire
with the price of RM100 per unit. For this order, no variable marketing costs will be
incurred.

REQUIRED:
(a) Determine whether MFSSB should accept the special order. Show all workings.
(b) Determine whether MFSSB should accept the special order’s price of RM100.
Show all workings.
(c) Discuss TWO (2) qualitative factors that MFSSB should include in the analysis of
the special order.

QUESTION 2
The following standard data are available for Atlas Sdn. Bhd.:
Rate per hour Product A Product B
Direct materials per unit RM10 RM30
Direct labor:
Grinding RM5.00 7 hours 5 hours
Finishing RM7.50 15 hours 9 hours
Selling price per unit RM206.50 RM168.00
Budgeted production units 1,200 units 600 units
Maximum sales units for the period 1,500 units 800 units

Notes:
(1) No closing stocks are anticipated.
(2) The skilled labor used for the grinding processes is highly specialised and in short supply.
It will not be possible to increase the supply for the budgeted period.

REQUIRED:
(a) Prepare a statement showing the total contribution from each product based on the
budgeted production.
BKAM3023 MA11 T5 SHORT TERM DECISION MAKING A221

(b) Prepare a statement showing the total contribution that could be obtained if the optimum
use was made of the skilled grinding labor.

(c) Consider briefly any qualitative factors which may be considered in making this decision
that will impact these products in the long term.

QUESTION 3
A. Wiwipro Enterprise (WE), produces several products from processing one (1) ton of Mint
Oil, a rare mineral. Material and processing costs total RM60,000 per ton, one-fourth
(1/4)
of which is allocated to product X15. Seven thousand (7,000) units of product X15 are
produced from each ton of Mint Oil. The units can either be sold at the split-off point for
RM9 each, or processed further at a total cost of RM9,500 and then sold for RM12 each.

REQUIRED:

Determine whether product X15 should be processed further or sold at the split-off point.

B. Bibinoty Enterprise (BE) produces three (3) product: A, B and C. Data per unit
concerning the three (3) products as follows:

Products
A B C
Selling price RM80 RM56 RM70
Variable costs:
Direct materials 24 15 9
Other variable costs 24 27 40
Total variable costs 48 42 49
Contribution margin 32 14 21
Contribution margin ratio 40% 25% 30%

Demand for the company’s products is very strong, with far more orders each month than
the company can produce with the available raw materials. The same material is used in
each product. The material costs RM3 per kilogram (kg) with a maximum of 5,000
kilograms (kgs) available each month.

REQUIRED:
Identify ranking of the product and advice BE to decide which order to accept first,
second
and third. Show the computation.
C. For many years, Saleva Enterprise (SE) has purchased the electronic starters from
external supplier and installs them in its standard line of farm tractors. Due to a reduction
in output, company has idle capacity that could be used to produce the electronic starters.
BKAM3023 MA11 T5 SHORT TERM DECISION MAKING A221

The chief engineer has recommended against this move, however, pointing out that the
cost to produce the starters would be greater than the current RM8.40 per unit purchase
price. The information of cost per unit as follows:

Per unit Total

Direct materials RM 3.10
Direct labor 2.70
Supervision 1.50 RM 60,000
Depreciation 1.00 RM 40,000
Variable manufacturing overhead 0.60
Rent 0.30 RM12,000
Total production cost 9.20

A supervisor would have to be hired to oversee production of the starters. However, the
company has sufficient idle tools and machinery, no new equipment would have to be
purchased. The rent charge above is based on space utilized in the plant. The total rent on
the plant is RM80,000 per period. Depreciation is due to obsolescence rather than wear
and
tear.

REQUIRED:
Advice SE whether the company should make or buy the starters. Show the computation.

D. Every decision involves choosing from among at least two alternatives. To be successful
in decision making, managers must be able to tell the difference between relevant and
irrelevant data and must be able to correctly use the relevant data in analyzing
alternatives.

REQUIRED:

(a) To be relevant, a cost or revenue must not only be a future item but must also differ
from one alternative to another. Explain the statement.
(b) Explain why depreciation on an existing asset is always irrelevant.
(c) Explain whether direct materials never be relevant in a make or buy decision.

QUESTION 4
Nervana Soy Products (NSP) buys soybeans and processes them into other soy products. Each
ton of soybeans that NSP purchases for $350 can be converted for an additional $210 into 650
pounds of soy meal and 100 gallons of soy oil. A pound of soy meal can be sold at splitoff for
$1.32 and soy oil can be sold in bulk for $4.50 per gallon.

NSP can process the 650 pounds of soy meal into 750 pounds of soy cookies at an additional cost
of $300. Each pound of soy cookies can be sold for $2.32 per pound. The 100 gallons of soy oil
can be packaged at a cost of $230 and made into 400 quarts of Soyola. Each quart of Soyola can
BKAM3023 MA11 T5 SHORT TERM DECISION MAKING A221

be sold for $1.15.

Required:
1. Allocate the joint cost to the soy cookies and the Soyola using the following: Weighting Joint
a. Sales value at splitoff method
b. NRV method
2. Should NSP have processed each of the products further? What effect does the allocation
method have on this decision?

QUESTION 5
Fashion Fabrics makes pants from a special material. The fabric is special because of the way it
fits many body types. The pants sell for $142. A well-known retail establishment has asked
Fashion Fabrics to produce 3,000 shorts from the same fabric. The factory has unused capacity,
so Barbara Brooks, the owner of Fashion Fabrics, calculates the cost of making a pair of shorts
from the fabric. Costs for the pants and shorts are as follows:

Required:
1. Suppose Fashion Fabrics can acquire all the fabric that it needs. What is the minimum price
the company should charge for the shorts?
2. Now suppose that the fabric is in short supply. Every yard of fabric Fashion Fabrics uses to
make shorts will reduce the pants that it can make and sell. What is the minimum price the
company should charge for the shorts?

QUESTION 6
The following data refer to Clear Panes, a division of Global Corporation. Clear Panes makes
and sells residential windows that sell for $150 each. Clear Panes expects sales of 150,000 units
in 2017. Clear Panes’ annual fixed costs are $2,750,000 and their variable cost is $90 per
window.
Global evaluates Clear Panes based on residual income. The total investment attributed to Clear
Panes is $12 million and the required rate of return on investment is 16%.
BKAM3023 MA11 T5 SHORT TERM DECISION MAKING A221

Ignore taxes and depreciation expense. Answer each of the following parts independently, unless
otherwise stated.

Required:
1. What is the expected residual income in 2017?
2. Clear Panes receives an external special order for 10,000 units at $120 each. If the order
is accepted, Clear Panes will have to incur incremental fixed costs of $250,000 and invest an
additional $450,000 in various assets. What is the effect on Clear Panes’s residual income of
accepting the order?
3. The window latch Clear Panes manufactures for its windows has a variable cost of $20.
An outside vendor has offered to supply the 150,000 units required at a cost of $21 per unit. If
the component is purchased outside, fixed costs will decline by $100,000 and assets with a book
value of $150,000 will be sold at book value. Will Clear Panes decide to make or buy the
component? Explain your answer.
4. One of Clear Panes’s regular customers asks for a special window with stained glass
inserts. The customer requires 2,500 of these windows. Clear Panes estimates its variable cost for
these special units at $105 each. Clear Panes will also have to undertake new investment of
$300,000 to produce these windows. What is the minimum selling price that will make the deal
acceptable to Clear Panes?
5. Assume the same facts as in requirement 4. Also suppose that the customer has offered
$130 for each stained glass window. In addition, the customer has indicated that its purchases of
the existing product will drop by 1,500 units.
a. What is the net change in Clear Panes’s residual income from taking the offer, relative to
its planned 2017 situation?
b. At what drop in unit sales of the regular window would Clear Panes be indifferent to the
offer?