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Sample STDM 6 management accounting deleting segment

Sample STDM 6 management accounting deleting segment

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205 views

Sample STDM 6 management accounting deleting segment

Sample STDM 6 management accounting deleting segment

Uploaded by

2023402896
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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QUESTION 1

Jack-Kale Bhd, a home furnishing company which specialises in producing curtains, blinds and
wallpapers. Financial report of the company is prepared quarterly. The management notices the
declining sales of the wallpaper for the last three quarters and considering closing the wallpaper
segment.

Below are the information relating to Jack-Kale Bhd’s performance for the last quarter.

Curtains Blinds Wallpapers


(RM) (RM) (RM)
Sales 190,000 230,000 70,000
Variable costs 114,000 161,000 56,000
Fixed costs 28,000 37,500 22,500
Operating profits 48,000 31,500 (8,500)

If the wallpaper segment is closed, the space will be used for the expansion of curtain segment.
Several changes are expected if the company decide to proceed with the closure of the
wallpaper segment.

1. Closure of the wallpaper segment will reduce RM8,500 of the company’s total fixed cost.

2. Renovation cost of converting the wallpaper segment to suit curtain segment will be
incurred. The estimation cost is 40% of the current wallpapers’ fixed costs.

3. Extensive promotion will have to be done, resulting in advertising expenses of RM11,000.


From this promotion, the company intends to increase the curtains’ selling price. This will
lead to an increase in the sales revenue of the curtains by RM65,000 and increase in
contribution margin ratio by 5%.

4. Sales of blinds would be slightly affected from the cancellation of wallpaper segment. A
reduction of 15% in sales are expected, as in the past, purchases of wallpapers often
leads to purchases of blinds.

You are required to:

a. Advise the management on whether the proposal to close wallpaper should be


implemented.
(15 marks)

b. Discuss the qualitative and strategic issues that management should consider before
making any decision on closure of business unit or segment.
(3 marks)

c. Assume that at the time of closure of the wallpaper segment, the company realized that
they have inventory amounting to RM9,500. How will this information affect the decision
made earlier in (a) above.
(2 marks)
(Total: 20 marks)
Suggested Solutions

d. Advise the management on whether the proposal to close Wallpaper should be implemented.
Curtains Blinds Wallpaper
Sales 190,000 230,000 70,000
Less variable costs 114,000 161,000 56,000
Contribution margin 76,000 69,000 14,000

Cost benefit analysis if company closes wallpaper:


RM
Relevant costs:
Loss contribution from wallpaper 14,000
Renovation 9,000
Decrease in contribution margin from blinds (69,000 x 15%) 10,350
Increased advertising 11,000
Relevant benefits:
Increased contribution in curtain** 38,750
Savings in Fixed costs 8,500

Net gain 2,900

** current contribution ratio = 76,000/190,000 = 40%

New contribution = (190,000 + 65,000) x 45% = 114,750

Therefore increase in contribution = 114,750 – 76,000 = 38,750

Decision: The wallpaper segment should be closed as company is able contribute additional
gain of RM3,900. 
(15 X 1 = 15)

e. Discuss the qualitative and strategic issues that management should consider before
making any decision on closure of business unit or segment.

- Will we loose customers if that particular line or product is discontinued


- Is it preferable to maintain the loss making segments in order to ensure continued
sales of the other products offered
- What impact the closure decision would have on the morale of the workers handling
the other business segment 
(1 x 3 = 3)
f. Assume that at the time of closure of the wallpaper segment, the company realized that
they have inventory amounting to RM9,500. How will this information affects the
decision made earlier in (a) above.
Whether the information has any effects on the decision depends on whether there is revenue
or any cost or benefits arriving from the inventory. If the inventory can be sold, then, any
revenue arising will be considered as benefits. If the total benefits exceed the cost, then its best
to close the segment.  However, if the inventory has no resale value, then that information
is of no irrelevance as it is considered as sunk cost. 
(4 x ½ = 2)

(Total: 20 marks)

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