MAF 420

MANAGEMENT ACCOUNTING & CONTROL

CASE STUDY SHORT TERM DECISION MAKING
Adam Cruise Lines Bhd is a global cruise company and one of the largest vacation
companies in the Asian region. Their portfolios of leading cruise brands include Prince Adam
Cruise and Princess Aalia Cruises in Malaysia. These brands, which comprise the most
recognized cruise brands in Asia, offer a wide range of holiday and vacation products to a
customer that is broadly varied in terms of cultures, languages and leisure-time preferences.
The company also owns a tour company Imaan Tours that complements the cruise
operations Malaysia.
The companys main revenue is generated from passenger tickets, onboard services
(including cabins and suites, wellness and spa, beverages packages, fine dining &specialty
restaurants and honeymoon packages) and tours.

The chief management accountant Aidilputra is the person responsible for the management
accounting part of the company. Most of the decision pertaining costs and pricing are
determined through board meeting, after going scrupulous consideration at the management
accounting department level. The board has made it clear that profit in business comes from
repeat customers, customers that boast about the service and bring friends with them.
Nevertheless, the board has also elucidated that the company is not merely profit oriented.
The following are financial and non financial information pertaining to the companys
operation for the year 2014.

The engine of Symphony, one of the companys ships that are currently being used for
Langkawi Dubai route is having some technical issues. The company is considering as to
whether to repair or replace the existing engine with a new one. According to data prepared
by management team, the existing engine has a carrying value of RM3 million (cost: RM15
million) and two years of remaining useful life, whilst the disposal value is zero. The repair
cost is estimated at RM1.5 million. Should the repair take place, the useful life of the engine
shall be extended to the total of 4 years. On the other hand, should the company decided to
dispose-off the existing engine and buy a new one, another competitor agreed to buy at
price of RM2.5 million. The annual variable operation cost incurred for the engine was
RM200, 000. These include labour, fuel and maintenance.
1

Another option is to replace with a new engine that has a shorter useful life but with lower
cost. The new engine purchase price is RM8 million (10 years useful life, nil residual value)
must undergo intensive maintenance every year which costs RM400,000. The variable
operation cost incurred for the engine will be lessen by half from the old engine due to
SNAAR/MARCH-JULY 2014 | UiTM KELANTAN

efficient use of fuel and less direct labour involvement. Raisha, one of the junior executives
in the team is in the opinion that the company should replace the engine due to cost savings
on depreciation charged for new engine and variable operation cost cut off. Her opinion
however was refuted by Eskhan, the senior member by saying that her judgment on the
matter is unrefined. Eskhan asked Raisha to perform thorough cost comparison between
these two alternatives before presenting the matter to Aidilputra, their boss.

In the past two years, the wellness and spa onboard services for Prince Adam Cruise was
not doing very well for all destinations. Although located in a strategic venue on the ships,
the wellness and spa failed to arrest attention of the cruise passengers. Wellness and spa
services will only be occupied if passengers bought the sumptuous exclusive package. As a
result, most cruise passengers tend to exclude the wellness and spa services and part of
their activities during the cruise. Aidilputra is concerned about the profitability of the services
and he need to advise the Board as to whether the wellness and spa services should be
continued or closed down for Prince Adam Cruise. Aidilputra asked Mia, one of the
executives, to provide him a cost-benefits analysis pertaining to the matter.

Mia has collected some relevant data about wellness and spa onboard services for all ships
in operation under Prince Adam Cruise. The annual sales comprised of two main sources
which are revenue from purchase of exclusive package of RM150,000 and walk in cruise
passengers revenue of RM50,000. The annual costs information is as follows:

Cost items
Massages cost (massage oils, antiseptic hand gel and aromatic oils scent)
Massage therapists salary (5 persons, all started working 2 years ago)
Note: The company has a legal arrangement with the massage therapists, in case
of unexpected retrenchment within 5 years of employment the company will be
liable to pay RM100,000 compensation to each person, together with the monthly
salary for further 12 months after retrenchment.
Skin care products (cleansing soaps and gels, skin astringents and facial scrubs)
Nail products cost for manicures and pedicures (nail polish colors, extra nail
brushes, remover, cotton balls and toe separators)
Annual licenses
Supervisor salary
Total costs

RM
10,500

120,000
20,000
10,000
5,000
30,000
195,500

Apart from the cost items, Mia also gathered some information with marketing department
relating to the option of closure of wellness and spa onboard service. According to the
marketing manager, the company might lose contribution RM70,000 of passengers tickets
that would be attracted to the wellness and spa services to a competing cruise. Mia had
some discussion with the team members about the possible alternative income after all
premises for wellness and spa has been vacated. There are two options available, first they
can allow the fine dining and specialty restaurants to have an open caf which will increase
the revenue for the company amounting to RM210,000 or secondly, they can allow the
SNAAR/MARCH-JULY 2014 | UiTM KELANTAN

onboard crews to use the premises as relaxation and rejuvenation place for no charges.
Since business is about making money to Mia, she decided to ignore the second alternative
in her evaluation.
Aidilputra is scheduled to meet up with the Board next week, he needs to be ready with all
possible answers to the questions and inquiries about the two dilemmas that the companys
facing. He needs to make sure any proposed decision will ensure profitability whilst taking
into account the increasing awareness of business sustainability.
Required:
a) Prepare cost comparison report. Based on the results, advise Raisha on the
proposed plan to replace Symphonys engine.
(10 marks)
b)

Prepare cost benefit analysis for proposal to retain or close wellness and spa
onboard services. Conclude and rationalise your findings.
(8 marks)

c)

If the companys policy is to be a resposible corporate citizens towards achieving

business sustainability, would Mias analysis be different from what she propose
previously?
(6 marks)

d)

Discuss strategic issues that might be taken into consideration in deciding whether
or not to retain or close wellness and spa onboard services.
(6 marks)
(Total : 30 marks)

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%)

SNAAR/MARCH-JULY 2014 | UiTM KELANTAN