DISCONTINUATION DECISION

1) S&K Tiles Sdn Bhd has been in the business of producing tiles for Costo Construction.
There are three famous tiles which are 2D, 3D and 4D Tiles. Below are the
summarized financial data for its three tiles for the month of January 2017:

2D Tiles 3D Tiles 4D Tiles

RM RM RM
Total Sales 100,000 278,000 285,000
Total Cost:
Direct materials 10,000 50,000 70,000
Direct labour 15,000 30,000 50,000
Production overheads 10,000 20,000 30,000
Distribution cost 5,000 10,000 15,000
Selling cost 7,000 10,000 12,000
Administrative cost 8,000 8,000 8,000
Profits/ (loss) (45,000) 150,000 100,000

Due to the losses incurred by 2D Tiles, the Managing Directors asked the Finance Manager
to do a feasibility study on discontinuing product. The Finance Manager provides the
following information:
a) The cost of the material for tiles 2D can be avoided if 2 D Tiles is discontinued.
b) Labour consists of fixed and variable elements. 20% of each labour cost is fixed cost.
c) 30% of production cost is fixed cost and the balance is a variable cost
d) 50% of distribution cost is variable cost and the remaining is a fixed cost
e) 90% of selling cost for each tiles is variable cost
f) All administration overhead is fixed in nature.
g) All variable cost can be avoided if S&K Sdn Bhd chooses to eliminate 2 D Tiles.

Required:
A. Determine the contribution margin for each tiles
B. Should S&K Sdn Bhd discontinue the production of 2 D Tiles? Support your answer with
the analysis.
 2) Cabinet ABC Company has been in the business of producing kitchen cabinet
for 10 years. It is a famous for its 3 kitchen cabinet namely Alpha, Beauty and
Cute. Below are the summarized financial data for its three products for the
month of January 2015:

Cabinet Cabinet Cabinet

Alpha Beauty Cute
RM RM RM
Sales:
100 boxes @ RM 2,500 each 250,000
50 boxes @ RM 700 each 35,000
35 boxes @ RM 1,800 each 63,000
Total costs:
Direct material (40,000) (15,000) (20,000)

Direct Labour (10,000) (10,000) (10,000)

Production overhead (6,000) (6,000) (6,000)
Administration overhead (5,000) (5,000) (5,000)
Selling and marketing overhead (6,000) (3,000) (4,000)
Profits/ (loss) 183,000 (2,000) 18,000

Due to the losses incurred by Cabinet Beauty, the Managing Directors asked the
Finance Manager to do a feasibility study on discontinuing product. The Finance
Manager provides the following information:
a) The cost of the material can be avoided if Cabinet Beauty is discontinued.

b) Labour consists of fixed and variable elements. The fixed cost of labour is as
follows:
a. Cabinet Alpha RM 8,000
b. Cabinet Beauty RM 5,000
c. Cabinet Cute RM 6,000

c) If the company chooses to eliminate Cabinet Beauty, all fixed labour cost can be
eliminated, but the company has to pay the total amount of RM 50,000 as
compensation to the workers.

d) One-third of production overhead will still be incurred by the company even if the
production of Cabinet Beauty stops.

e) All administration overhead is fixed in nature.

f) Selling and Distribution Overheads are all fixed in nature.

Required:
A. Calculate the total contribution margin for each cabinet.
B. Based on the above situation, advise the company whether Cabinet Beauty
should be discontinued or not
C. Explain 3 qualitative factors that the company has to consider before
eliminating a product line