SECTION A - CASE STUDY ANALYSIS

Merchant Company is a manufacturing company incorporated in Malaysia. The mission of the company is to produce and sell affordable and reliable printers for home and office use. Merchant Company offers three main models of electronic printers which are JT284, JT384 and JT484. The company was established since 2011 operating in Klang with its own manufacturing, services and administrative facilities. The financial year end for Merchant Company is December 31 every year.

Merchant Company keeps their financial records using cloud-based accounting. The following product-level operating data have been compiled for the year ended 31 December 2020. For the financial year 2021, the Sales Department is assigned to achieve the budgeted sales of RM500,000; RM200,000 and RM300,000 respectively for JT284, JT384 and JT484. It is also assumed that the selling price, direct material and direct labour cost remains the same as prior period. Total direct material and direct labour costs is RM300,000 for JT284; RM100,000 for JT384 and RM200,000 for JT484. Fixed overhead costs have been allocated to all the three products which include factory rent and depreciation, utilities, supervision and maintenance. Hence the following overhead costs have been identified for each product. Factory rent is RM25,000 for JT284; RM10,000 for JT384 and RM15,000 for JT484. Depreciation cost is RM30,000 for JT284; RM12,000 for JT384 and RM18,000 for JT484. It is identified that utilities cost for JT284 is RM20,000; JT384 is RM5,000 and JT484 is RM15,000. Supervision cost is RM15,000 for JT284; RM5,000 for JT384 and RM30,000 for JT484. Finally, Merchant Company pays maintenance costs of RM15,000 for JT284; RM6,000 for JT384 and RM9,000 for JT484. In addition, the administrative costs of RM30,000 is assigned to JT284; RM20,000 for JT384 and RM50,000 for JT484.

During the financial year, Mr Mukhlis, the CEO of the company, is considering dropping model JT484 from its product line because the company has experienced losses for this product for the previous years. The following information is also available for consideration:

Factory rent and depreciation will not be affected by a decision to drop model JT484.

Utility bills will be reduced by RM9,000 if JT484 is dropped.

Supervision costs for JT484 can be eliminated if dropped.

The maintenance department will be able to reduce the costs by RM7,000 if JT484 is dropped.

Elimination of JT484 will make it possible to eliminate two administrative staff positions with combined salaries of RM30,000 for year.

All other costs remain the same.

This year, Merchant Company will be celebrating its 10thyear anniversary. With that in mind, the Board of Directors propose Merchant Company to open a branch in Kota Kinabalu in January 2022 to offer the services and administrative facilities. In analysing this proposal, the Board has decided to use a 5-year time horizon. Merchant Company's hurdle rate for capital project is 18%. Other data is as follows:

Cost of acquiring additional computer & equipment

RM500,000

Cost of computer & equipment installation

RM489,500

Annual cost of maintaining Kota Kinabalu

RM480,000

Annual incremental revenue from Kota Kinabalu

RM800,000

Cost of commissioning

RM496,000

Annual operating cost

RM220,000

Cost of office facilities

RM2,000,000

Annual Net After Tax Cash flows for:

Year 5

RM550,000

Year 4

RM500,000

Year 3

RM450,000

Year 2

RM400,000

Year 1

RM350,000

QUESTIONS:

What is the total operating income/loss for Merchant Company and for each respective product? Prepare the data from the accounting records and present the relevant costing statement to reflect the budgeted profitability of Merchant Company for the financial year ending 31 December 2021.