MAF551: The competition has become intense recently with the influx of leather products from Thailand, The managing director of the company is concerned about the company’s performance: Management Accounting And Control, Case Study, UiTM, Malaysia

Question 1

The competition has become intense recently with the influx of leather products from Thailand. The managing director of the company is concerned about the company’s performance, and he plans to drop the loss – making product line to improve the company profit. The following annual income statement shows the profit of each product: –

PrestigeLeather Sdn Bhd
Income Statement for the year ended 30 April 2024

The following would take place if the shoes product line were closed:

1) Production workers from shoes product line with total annual salaries RM300,000 will have to be laid off and total compensation of RM100,000 will have to paid. The remaining workers can be reassigned to belts product line. The labour force released from the shoes product line could be used to increase production in belts product line. This will result in an increase in production and sales of belts will increase by 20% at the current level.

2) Some customers prefer to purchase matching handbags and shoes. Eliminating shoes will result in the sales of handbags declining by 15%.
3) 30% of the shoes general fixed manufacturing overhead are avoidable. The
balance of the expenses will be absorbed by the handbags (80%) and belts (20%). Meanwhile the general fixed manufacturing overhead of the belts will increase by 10% and handbags will be reduced by 5%, when shoes are closed.

4) The shoes’ general fixed selling expenses are allocated based on sales revenue. If the shoes product line is closed, the total general fixed selling expense can be reduced to RM110,000.

5) The administration expenses are allocated based on ratio. If the shoes product line is closed, the total administration expenses can be reduced by 20% and the new ratio will be 7:3 for handbags and belts respectively

6) Direct fixed manufacturing overhead comprises of depreciation on plants and machinery dedicated to each of the product lines. None of the plants and machinery can be sold.

Question 2

PrestigeLeather Sdn Bhd is now facing some problem in meeting the customer demands. The company faces some difficulty in obtaining the raw material used due to government strict regulation regarding importing the material. Currently the material can be bought at RM50 per meter, and it is estimated to remain constant over the next period. Due to this, the whole demand for their well-known three products cannot be satisfied.

From the feedback of the suppliers, the company can only manage to obtain 10,000 meters imported from China and 5,000 meters from India.

Required:
a. Determine the shortage of raw materials.

b. Advice the production manager about the most optimum production plan, taking all factors into consideration.

c. Based on your advice, calculate the possible income

Question 3

An international company XIKO Sdn Bhd from Japan approached PrestigeLeather Sdn Bhd to buy 5,000 units of handbag at a price lower than normal selling price. Both companies agreed to the following conditions: –

i. The brand of PrestigeLeather Sdn Bhd will be replaced by the label of XIKO but the cost will be boned by PrestigeLeather Sdn Bhd.

ii. The handbag will be sold for oversea market only especially for Japan and South Korea market.

Required:

a. Explain any FIVE (5) possible internal or external reactions that the company
should consider before making any decision on the acceptance of a special order.

b. Identify THREE (3) qualitative factors that should be considered when deciding to accept the special order.

c. Briefly describe the following terms: –
i. Sunk cost.
ii. Opportunity cost.

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