SOLUTIONS MANUAL

CHAPTER Relevant Costs and

12 Short-term Decision-
making

Question 1
Relevant cost is cost that will make a difference on any alternative courses of action and will have an
influence on the decision made. Only costs that are relevant are incorporated for consideration in the
decision-making process.

Question 2
The effective steps to make a decision:
Step 1: Identify the problem
The problem needs to be clarified and defined with specific terms.

Step 2: Find solution options

Accurate, good and complete information should be collected when finding solution
options.

Step 3: Pick the best option

The company must provide some good options or alternatives for the development
process, and they need to pick the best option available.

Step 4: Implement the option chosen

The company must implement the option they have chosen.

Step 5: Review, monitor and check outcome

This step is to ensure the achievement of the objectives of company. It is exercised through
monitor and control process.

Step 6: Provide feedback and rectification

Company will get the feedback and make rectification from every decision taken.

Question 3
The types of short-term decision-making:
(i) Make or buy
(ii) Drop or continue with departments or products
(iii) Accept or reject special order
(iv) Decision-making with limiting factors
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Question 4
Special order is where a company receives an order to produce goods which are slightly different from
its normal product, such as different packaging and pricing. The special order depends on the excess
of the product, if any. At the same time, the company will continue with normal production.

Question 5
Make Buy Difference
RM RM RM
Direct materials 500,000 — 500,000
Direct labour 300,000 — 300,000
Variable overhead 200,000 — 200,000
Machine hired 50,000 — 50,000
Machine maintenance 3,000 — 3,000
Additional worker 6,000 — 6,000
Quality control manager 5,000 — 5,000
Purchasing price — 1,800,000 (1,800,000)
Total cost 1,064,000 1,800,000 736,000

Conclusion: Usaha Jaya Company Ltd should make component XXY because the cost can be
decreased by RM736,000.

Question 6
Without Special Order With Special Order Difference
Units 30,000 30,000 + 5,000 5,000
RM RM RM
Sales 4,800,000 4,800,000
+  700,000 700,000
5,500,000
Direct materials 900,000 900,000
+  142,500 142,500
1,042,500
Direct labour 750,000 750,000
+  137,500 137,500
887,500
Variable overhead 450,000 450,000
+   75,000 75,000
525,000
Fixed costs 300,000 300,000
25,000
25,000
Total cost (2,400,000) (2,780,000) (380,000)
Net profit 2,400,000 2,720,000 320,000
Conclusion: Kaya Raya Company should accept the special order to increase their profit by
RM320,000.
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Question 7
Continue Drop Difference
Sales 1,500,000 1,100,000 400,000
(–) Sales variable cost (660,000) 380,000 280,000
Contribution margin 840,000 720,000 120,000
(–) Fixed cost:
Salaries (275,000) (176,000) (99,000)
Rent & utilities (36,000) (36,000) —
Insurance (15,000) (15,000) —
Profit / (loss) 514,000 493,000 21,000
Conclusion: Syadini Bhd should continue with Department A3 because profit will be reduced by
RM21,000 if the department is closed. Department A3 has positive contribution, therefore it should
be continued.

Question 8
(a)
Without Special Order With Special Order Difference
Units 34,000 30,000 + 10,000 10,000
Selling 47,600,000 42,000,000
+  9,500,000 3,900,000
51,500,000
Direct materials 8,500,000 7,500,000
+  2,250,000 1,250,000
9,750,000
Direct labour 11,900,000 10,500,000
+  2,975,000 1,575,000
13,475,000
Variable production 3,400,000 3,000,000
overhead +  1,000,000 600,000
4,000,000
Variable selling and 3,400,000 3,000,000
400,000
distribution
Fixed production 3,400,000 3,400,000
—
overhead
Fixed selling and 3,000 3,000
—
distribution
Fixed 2,000 2,000
—
administration
Net profit 16,995,000 17,870,000 875,000
Conclusion: Teguh Jaya Bhd should accept the special order to increase their profit by RM875,000.
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(b) Non-quantitative factors:

(i) Job opportunities
(ii) Elevate the company’s image
(iii) Better relationship with suppliers
(iv) Reduce crime (due to employment)

Question 9
(a)
Direct labour Machine hours
Machine A 12 hours × 4,000 units = 48,000 20 hours × 4,000 = 80,000
Machine B 8 hours × 6,000 units = 48,000 12 hours × 6,000 = 72,000
Machine C 4 hours × 7,000 units = 28,000 14 hours × 7,000 = 98,000
Total needed 124,000 hours 250,000 hours
Total allocated 120,000 hours 280,000 hours
Status Limiting factor Not limiting

(b)
Machine A Machine B Machine C
RM RM RM
Selling price 570 480 350
Direct materials 70 60 50
Direct labour 180 120 60
Variable overhead 40 40 40
Contribution margin 280 260 200
Limiting factor 12 8 4
Contribution margin/limiting factor 23.33 32.50 50.00
Ranking 3 2 1

(c)
Total allocated 120,000 hours
Ranking 1 (7,000 units × 4 hours) 28,000 hours
Balance 92,000 hours
Ranking 2 (6,000 units × 8 hours) 48,000 hours
Balance 44,000 hours
Ranking 3 (44,000 hours / 12 hours) 44,000 hours
(3,667 units only can be produced in
44,000 hours)
Balance —

Conclusion: The company used 28,000 hours for Ranking 1, 48,000 hours for Ranking 2 and only
44,000 hours for Ranking 3. Ranking 3 cannot fulfill production because there are not enough direct
labour hours. Only 3,667 units of machine can be produced in 44,000 hours.
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Question 10
Rambutan Durian Banana
RM RM RM
Sales 1,200,000 900,000 344,000
Variable cost:
Direct materials 360,000 300,000 128,000
Direct labour 240,000 180,000 64,000
Variable overhead 120,000 60,000 32,000
Contribution margin 480,000 360,000 120,000
Limiting factor 60 kg 35 kg 25 kg
Contribution margin/limiting factor 8,000 10,286 4,800
Ranking 2 1 3

Production plan:
Total allocated 50,000 acres
Durian: 700,000 kg (700,000/35 kg) 20,000 acres
Balance 30,000 acres
Rambutan: 1,320,000 kg (1,320,000/60 kg) 22,000 acres
Balance 8,000 acres
Banana: 200,000 kg only (8,000 acres × 25 kg) 8,000 acres
Balance —

Conclusion: The company used 20,000 acres for durian, 22,000 acres for rambutan and 8,000 acres for
banana. The company cannot fulfill their production for banana due to land shortage.