EXERCISE CHAPTER 5

SHORT TERM DECISION MAKING

A. Rosco Sdn Bhd uses part A55 in one of its products. The company’s accounting
department reports the following costs of producing 4,000 units of the part that are needed
every year.

Per unit
(RM)
Direct materials 2.80
Direct labor 6.30
Variable overhead 8.50
Supervisor’s salary 2.60
Depreciation of special equipment 6.80
Allocated general overhead 6.10

An outside supplier has offered to make the part and sell it to the company for RM32.30
each. If this offer is accepted, the supervisor’s salary and all of the variable costs, including
direct labor, can be avoided (relevant). The special equipment used to make the part was
purchased many years ago and has no salvage value (not relevant) or other use. The allocated
general overhead represents fixed costs of the entire company.

If the outside supplier’s offer were accepted, only RM4,000 of these allocated general
overhead costs would be avoided. In addition, the space used to produce part A55 could be
used to make more of one of the company’s other products, generating an additional
segment margin of RM26,000 per year for that product.

REQUIRED:

(a) Show the effect on Rosco’s total net operating income for each alternative.
Per Unit (RM) Make Buy
DM 2.80 11,200
DL 6.30 25,200
VOH 8.50 34,000
SS 2.60 10,400
Depreciation of 6.80 -
special equipment
Allocated general 6.10 4,000
overhead

(b) Suggest the best alternative Rosco should choose.

B. ASB is the fan manufacturer. The management of ASB is trying to decide whether to
continue manufacturing the screw of the fan or to buy it from an outside supplier. The
screw, #108, is a component of the ASB’s finished product.

The following information was collected for the year ending June 30, 2021.

1. 7,000 units of screw #108 were produced in the Machining Department.

2. Variable manufacturing costs applicable to the production of each screw #108 unit
were: direct material RM4.75; direct labor RM4.80; indirect labor RM0.45 and utilities
RM0.35.
3. Fixed manufacturing costs applicable to the production of screw #108 were:

Cost items Direct (RM) Allocated (RM)

Depreciation 1,600 900
Property taxes 400 200
Insurance 900 600
2,900 1,700

All variable manufacturing and direct fixed costs will be eliminated if screw #108 is
purchased. Allocated costs will have to be absorbed by other production department.

4. The lowest quotation for 7,000 screw #108 units from a supplier is RM77,000.
5. If screw #108 is purchased, freight and inspection costs would be RM0.30 per unit, and
receiving costs totalling RM750 per year would be incurred by the machining
department.

REQUIRED:
(a) Analyse the decision that management must make.
Per Unit (RM) Make Buy
DM 4.75
DL 4.80
Indirect Labor 0.45
Utilies 0.35

(b) Discuss 2 non-financial factors should management consider in making their decision
either to make or buy from outside supplier.
C. Abby Sdn Bhd (ASB) is selling handmade songket from Terengganu. Recently the
company receives a special order from Malibu Enterprise to produce special songket with
specific pattern and colour that reflect their corporate image. Consequently, this
requirement has increased the variable costs by RM15 each. In addition, they also want the
songket to have their company’s logo. This will require a special stamping machine that
cost RM15,000. This machine has no other use after completing the order. Malibu
Enterprise asks for 300 pieces of songket with a special price of RM280 each. Information
related to normal production is as follows:

Total production capacity 1000 pieces per month

Normal production 600 pieces per month
Selling price RM350 per piece
Variable cost RM155 per piece
Fixed cost RM28,000 per month

REQUIRED:

(a) Evaluate the special order received from Malibu Enterprise and advise whether ASB
should accept the order, or not.

(b) Provide TWO (2) reasons why you would consider the above order as a special
order?
D. D’Cantik Sdn. Bhd. (DSB) makes three beauty products, Lawa, Anggun and Pesona in its
single facility. These products have the following unit product costs:

Products
Lawa Anggun Pesona

Direct materials RM23.50 RM20.20 RM17.60

Direct labour 14.10 16.00 18.50
Variable manufacturing overhead 3.10 3.60 3.60
Fixed manufacturing overhead 11.60 16.60 10.50
Unit product cost RM52.30 RM56.40 RM50.20

Additional data concerning these products are listed below:

Products
Lawa Anggun Pesona
Labour time per unit (minutes) 3.8 3.5 4
Selling price per unit RM79.90 RM75.20 RM70.60
Variable selling cost per unit RM5.70 RM3.20 RM2.50
Monthly demand in units 1200 1500 4000

DSB has constraint in labour time of 24,500 hours per month.

REQUIRED:

(a) Rank the products of which the combination will maximize DSB’s profit.
(b) Calculate the optimal production for each product to maximize net operating income.
(Round off to the nearest whole unit).
(c) Determine the maximum amount the company would be willing to pay for one
additional hour of labour time if the company has made the best use of the existing
labour capacity.