QUESTION 5 [TOPIC 7:TOTAL 14 MARKS]

James Band Sdn Bhd produces milk at a total cost of RM66,000. The production generates 60,000 gallons of milk which can be sold for RM60 per gallon to a pasteurization company, and 50,000 gallons of yogurt drink which can be sold for RM80 per gallon to retailers. The milk can be processed further into 50,000 gallons of ice cream and then sold for RM100 per gallon. The yogurt drink can be processed further into 40,000 gallons yogurt ice cream and sold for RM120 per gallon.It costs RM750,000 more to turn the annual milk supply into ice cream and RM900,000 additional cost to process yogurt drink into yogurt ice cream.

Required:

a)If James Band Sdn Bhd processes the milk into ice cream, how much is the incremental profit or loss?

(3.5 marks)

b)If James Band Sdn Bhd processes the yogurt drink into yogurt ice cream, how much is the incremental profit or loss?

(3.5 marks)

c)Which products should James Band sell at split off point and sell after processed further?

(4 marks)

d)What are the important costs used in incremental analysis?(3 marks)

A B C D E Cream Skim Milk 3 Incremental Revenue 8,000* 15,000 4 - Incremental Cost 10,000 8,000 5 Incremental Net Income (2,000) 7,000 6 RM27,000 - RM19,000* 8 RM26,000 -RM11,000** 9 10 Decision: 11 12