SESSION

JUN 2024

BBA 2234
MANAGEMENT ACCOUNTING & FINANCE

MID-TERM ASSESMENT

LECTURER
PROF BARJOYAI

NO. NAME PROGRAM ID

1 SATHIYA A/L MAKANDERAN BBA B23020025

QUESTION 1

a) The board of directors want to know what is the level of break even
point for the company’s operation.
The break-even point for the company's operation is 0.514, which means
the company needs to generate approximately 51.4% of its revenue to
cover all its costs.

b) The board also want to know how safe is the operation level .
Given the break-even point and the actual operating profit, the margin of
safety can be calculated to assess the safety level of the operation.

c) The board want to know what is the degree of operating leverage

(DOL) of the company and what it means to the company .
A higher DOL indicates that a company's profits are more sensitive to
changes in sales. It means that for every percentage change in sales, the
operating income will change by the DOL percentage.

d) What is the Degree of Financial Leverage (DFL)

The DFL measures the percentage change in earnings per share (EPS)
for a percentage change in operating income. A higher DFL indicates that
a company has more financial risk.

e) What are the implication of the Safety margin, DOL, DFL and DCL to
the company prospect ?
Implication
 Safety Margin - A higher safety margin indicates a lower risk of not
covering costs, providing a buffer against unexpected downturns
 DOL - A higher DOL means that the company's profits are more
sensitive to changes in sales, which can magnify both positive and
negative effects on profits.
 DFL - A higher DFL means that the company has more financial
risk, as changes in operating income will have a larger impact on
EPS
 DCL - Degree of Combined Leverage (DCL) is the combined effect
of DOL and DFL, which magnifies the impact of changes in sales on
EPS.
QUESTION 2

a) Should the company accept the order ?. Show your workings?

To determine whether the company should accept the order, we can calculate
the contribution from the special order and compare it to the incremental
costs.
The contribution from the special order can be calculated as follows

[ \text{Contribution per unit} = \text{Selling price} - \text{Variable cost per unit}

- \text{Additional logistic cost per unit} ]
[ \text{Contribution per unit} = RM 23.00 - RM 20.83 - (RM 220,000 / 200,000)
= RM 1.17 ]
[ \text{Total contribution} = \text{Contribution per unit} \times \text{Number of
units} = RM 1.17 \times 200,000 = RM 234,000 ]
The incremental costs for the special order include the variable costs for
producing additional units and the additional logistic costs:
[ \text{Variable cost for 200,000 units} = RM 20.83 \times 200,000 = RM
4,166,000 ]
[ \text{Total incremental costs} = \text{Variable cost for 200,000 units} +
\text{Additional logistic cost} = RM 4,166,000 + RM 220,000 = RM 4,386,000 ]
Since the total contribution (RM 234,000) is less than the incremental costs
(RM 4,386,000), the company should not accept the order.

b) What are the qualitative consideration in considering the order?

Qualitative considerations in considering the order may include:

 Long-term relationship with the customer from Rwanda

 Potential for future orders or referrals from the customer
 Impact on the company's reputation and market presence in Rwanda
 Strategic implications for entering new markets

c) What will be the minimum price that the company must have in order to
consider a special order ?

To calculate the minimum price, we can use the same approach as in part a,
but instead of using the actual selling price, we use the minimum acceptable
price.
Let's denote the minimum acceptable price as ( P ). The equation for the
minimum acceptable price can be expressed as:
[ P - 20.83 - (220,000 / 200,000) = 1.17 ]
Solving for ( P ):
[ P = 20.83 + 1.17 + (220,000 / 200,000) = 22.00 ]
Therefore, the minimum price that the company must have in order to
consider a special order is RM 22.00 per unit.
QUESTION 3

a) What is the cost per unit for component 2?

To calculate the cost per unit for component 2, we can use the following
formula:
Total Cost = Direct Materials + Direct Labor + Mixed Overhead + Variable
Overhead + Fixed Overhead
Total Cost = $28,000 + $18,500 + $29,000 + $15,000 + $30,000 = $120,500
Cost per Unit = Total Cost / Number of Units
Cost per Unit = $120,500 / 150,000 = $0.80 per unit
Therefore, the cost per unit for component 2 is $0.80.

b) Should Bagus Jaya Corp. manufacture the part or buy it from Timoran
Corp.?
To decide whether Bagus Jaya Corp. should manufacture the part or buy it
from Timoran Corp., we can compare the cost of manufacturing the part with
the cost of buying it.
Cost of manufacturing :
 Total Variable Manufacturing Costs = Total Variable Overhead + Total
Material Handling and Setup Costs
 Total Variable Manufacturing Costs = $15,000 + ($9,000 + $200 * 100)
 Total Variable Manufacturing Costs = $15,000 + $29,000
 Total Variable Manufacturing Costs = $44,000
Total Fixed Manufacturing Costs = Fixed Overhead Total Fixed Manufacturing
Costs = $30,000
Total Manufacturing Costs = Total Variable Manufacturing Costs + Total Fixed
Manufacturing Costs Total Manufacturing Costs = $44,000 + $30,000 Total
Manufacturing Costs = $74,000
Cost per Unit = Total Manufacturing Costs / Number of Units Cost per Unit =
$74,000 / 150,000 Cost per Unit = $0.4933 per unit.
Cost of buying : Cost per Unit from Timoran Corp. = $0.55 per unit
Based on the comparison, it is more cost-effective for Bagus Jaya Corp. to
manufacture the part as the cost per unit is lower than buying it from Timoran
Corp.
c) What are the qualitative consideration that must be taken into account in
the decision ?
In addition to the quantitative analysis, Bagus Jaya Corp. should consider
qualitative factors such as:
 Quality control and assurance of the purchased component
 Reliability and reputation of Timoran Corp. as a supplier
 Potential impact on production flexibility and lead times
 Long-term strategic implications of outsourcing vs. in-house production
  Potential for future cost fluctuations and supply chain risks

QUESTION 4

a) What is the contribution of each product per machine-hour?

To find the contribution of each product per machine-hour, we can use the
contribution margin per unit and the machine-hours required per unit for each
product.

For Product 1: Contribution per machine-hour = Contribution margin /

Machine-hours per unit Contribution per machine-hour = $1.70 / 7 machine-
hours Contribution per machine-hour = $0.2429

For Product 2: Contribution per machine-hour = Contribution margin /

Machine-hours per unit Contribution per machine-hour = $0.60 / 2 machine-
hours Contribution per machine-hour = $0.30

b) If the company can just focus on producing one product instead of two,
which product should the company produce and what will be the
maximum volume of production if the company operate 50 hours a week
and have 10,000 set of machine.
To determine which product the company should produce if it focuses on one
product, we can compare the contribution margin per machine-hour for each
product.
Product 1: $0.2429 per machine-hour Product 2: $0.30 per machine-hour
Since Product 2 has a higher contribution margin per machine-hour, the
company should produce Product 2
To find the maximum volume of production, we can use the available
machine-hours: Maximum volume of production = (Available machine-hours) /
(Machine-hours per unit) Maximum volume of production for Product 2 =
10,000 / 2 = 5,000 units

c) If the company can only sell 200,000 units of product 2 and 60,000 of
product 1.
If the company can only sell 200,000 units of Product 2 and 60,000 units of
Product 1, further information or a specific question is needed to provide a
relevant answer.
QUESTION 5

a) Evaluate the two proposal of replacing the company’s fleet of cars.

Proposal Evaluation
Toyota Prius

Cost Component Calculation Total Cost (RM)

RM 86,985 *4.18 364,097.30

Purchase Cost
(exchange rate)
24,000 km/year * RM0.20/km 48,000
Fuel Cost
* 10 years
Total Cost of 412,097.30
Ownership
Nissan Leaf

Cost Component Calculation Total Cost (RM)

$169,010 * 4.18 706,303.80

Purchase Cost
(exchange rate)
24,000 km/year * 33,600
Electricity Cost
RM0.014/km * 10 years
Total Cost of 739,903.80
Ownership
Based on the total cost of ownership, the Toyota Prius is more cost-effective
than the Nissan Leaf.

b) What are the qualitative consideration that must be taken into account in
the decision ?
Qualitative Consideration
1. Environmental Impact: Consider the environmental benefits of using
electric vehicles over traditional fuel-powered cars.
2. Infrastructure: Evaluate the availability and accessibility of charging
stations for electric vehicles in Kuala Lumpur.
3. Maintenance and Durability: Assess the maintenance and durability
differences between the two car models.

c) What will you recommend to the top management of the company on the
proposal above ?
Considering the cost-effectiveness and the current infrastructure, I
recommend the top management to replace the company's fleet of cars with
the Toyota Prius. However, they should also consider investing in
infrastructure for electric vehicles and monitor advancements in electric
vehicle technology for future considerations.
QUESTION 6

a) Should the sugar business be discontinued ? Give reason.

The sugar business should be discontinued due to the operating loss and low
profit margin. The segment's operating loss of ($34,549,000) indicates that the
business is not profitable. Additionally, the profit margin of $354,201,000 is
relatively low compared to the revenue of $2,361,340,000.

Furthermore, the direct operating expenses, including high rental and

depreciation costs, contribute to the segment's loss. The specialized nature of
the plant and machinery also implies a significant cost to scrap them.
Therefore, considering the low profitability and high operating expenses,
discontinuing the sugar business is a viable option.

b) An associate want to rent the space for 80,000,000. Should the company
decide to close the sugar business?

Renting the space for $80,000,000 to an associate should be considered in

the decision to close the sugar business. This additional revenue from renting
the space can offset some of the losses incurred by the sugar business.
However, the company should carefully evaluate the long-term financial
implications of renting the space, including the potential impact on future
ventures and the overall strategic direction of the company.