Sweet Aromatics is a company incorporated in UK with the headquarters situated in London. Sweet Aromatics aims to produce and sell few range of affordable organic perfumes for women. Sweet Aromatics offers three main range of perfumes which are Geranium, Vanilla and Aquarius. The financial year end for Merchant Company is December 31 every year. Sweet Aromatics has provided its accounting records and operating data for the year ended 31 December 2021.

For the financial year 2022, the Sales Department is assigned to achieve the budgeted sales of RM300,000; RM200,000 and RM500,000 respectively for Geranium, Vanilla and Aquarius. 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 are RM200,000 for Geranium; RM100,000 for Vanilla and RM300,000 for Aquarius.

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 has been identified for each product.

Factory rent is RM15,000 for Geranium; RM10,000 for Vanilla and RM25,000 for Aquarius.

Depreciation cost is RM18,000 for Geranium; RM12,000 for Vanilla and RM30,000 for Aquarius.

It is identified that utilities cost for Geranium is RM20,000; Vanilla is RM5,000 and Aquarius is RM15,000. Supervision cost is RM30,000 for Geranium; RM5,000 for Vanilla and RM15,000 for Aquarius.

Finally, Sweet Aromatics pays maintenance costs of RM9,000 for Geranium; RM6,000 for Vanilla and RM15,000 for Aquarius.

In addition, the administrative costs of RM50,000 is assigned to Geranium; RM20,000 for Vanilla and RM30,000 for Aquarius.

Mrs James, the CEO of Sweet Aromatics, is considering dropping Geranium range from its product range 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 Geranium range.
• Utility bills will be reduced by RM10,000 if Geranium range is dropped.
• Supervision costs for Geranium range can be eliminated if dropped.
• The maintenance department will be able to reduce the costs by RM8,000 if Geranium range is dropped.
• Elimination of Geranium will make it possible to eliminate three administrative staff positions with combined salaries of RM30,000 for year.
• All other costs remain the same.

You have been asked by Board of Directors of Sweet Aromatics to prepare an analysis for the next Board meeting:

i) Summarise the data from the accounting records for each product and prepare the relevant costing statement to show the budgeted operating profit for Sweet Aromatics in total and for each product for the financial year ending 31 December 2022.

ii) Should Sweet Aromatics eliminate Geranium? Justify your opinion with the relevant costing statement and calculate the new operating profit for Sweet Aromatics.

iii) Sweet Aromatics’s sales manager believes that it is important to continue producing Geranium to maintain a full range of their organic perfumes. He expects the elimination of Geranium will reduce the budgeted sales of Vanilla by 5% and Aquarius by 10%. All other costs remains the same. Will this information change your answer to part (ii)? Explain & justify by showing the relevant costing statement.

iv) At this stage, the Board of Directors decided to drop Geranium range with the effect stated in Question (iii).

In addition, the production manager suggests for Sweet Aromatics to introduce one new organic perfume range for men called Jaguar. For this new production, it is expected that the budgeted sales for Jaguar to be more than the budgeted sales for Vanilla by 75%.

Sweet Aromatics also need to buy additional fixed asset specifically for the production of Jaguar which cost RM500,000. Total direct materials and direct labour costs are RM200,000. The depreciation for Jaguar will be RM62,000. All other fixed costs will be the same as Vanilla. By showing the relevant costing statement, what will be the new operating profit for Sweet Aromatics?

Answer rating: 100% (QA)

i Costing statement for each product Geranium Sales RM300000 Direct materials RM200000 Direct labour RM200000 Overhead costs Factory rent RM15000 Depr... View the full answer