Reference no: EM132954630
JR Sdn Bhd, a small business owned by Mr Joe Richie, involves in producing and selling automatic kitty litter boxes in Merbok, Kedah. Demand for the product increased from time to time due to the high-quality product and its reasonable price. The automatic self-cleansing design ensures comfortable and clean toilet for house pets such as cats. The company does not keep inventories of finished product. One-unit automatic sensor is installed inside the litter box to ensure its cleanliness at all times. This sensor is supplied by a nearby supplier at RM35 per unit excluding transportation cost of RM5 per unit.
In determining the selling price, JR uses full-cost plus 300% mark-up pricing method. Currently, JR Sdn Bhd is operating at about 80% capacity of its labour hours to produce the automatic kitty litter box.
Below is the Extract Income Statement of the company for current month:
Total RM
Sales Revenue 5,400,000
Less: Cost of goods manufactured 1,800,000
Gross margin 3,600,000
Less: Fixed administrative cost 100,000
Profit 3,500,000
The following is a standard cost data to manufacture a unit of the kitty litter box:
RM
Direct materials 85
Automatic Sensor (including transportation) 40
Direct wages (0.5 hour) 35
Production overhead (60% variable) 20
Total production cost 180
For the coming period, the company is planning to fully utilise the available capacity. During one meeting, Mr Kamal, the marketing manager, who has been with the company for more than 5 years, has suggested to increase the production of the kitty litter boxes to take opportunity of the increasing demand for the product. Recently, Mr Kamal received an order form Catville, to buy 3,000 units of automatic kitty litter box. However, the client is requesting for 30% discount. The printing cost of RM15 will be charged for placing Catville's logo outside the box.
Problem a. It is important to clearly distinguish costs that are either relevant or irrelevant so that managers are able to make critical business decisions. Irrelevant costs are costs that remain the same regardless of which alternative is chosen, thus, are often being excluded from consideration when reaching a decision. List 5 examples of irrelevant costs.
Problem b. Analyse the impact of accepting Catville's order on JR Sdn Bhd's profit. (Show all workings and explain your answer).
Problem c. i. Miss Lailer, one of the company's directors, does not agree with Mr Kamal's suggestion. In her opinion, it is more profitable for the company if they can produce an automatic sensor in order to fully utilise the capacity of the labour hours. Currently, there are 1250 idle labour hours in the company. After conducting a careful analysis, she came up with the following information: The total cost to produce one-unit sensor includes RM15 for materials, RM6 for labour cost and RM5 for variable production overhead. The standard time to produce one-unit sensor is 0.5 hour. JR Sdn Bhd also needs to pay freight inwards for the materials bought, which cost RM8 per box, whereby one box consists of 10 units of materials. Evaluate the suggestion made by Miss Lailer. (Show all workings and explain your answer).
Problem ii. Propose three (3) factors, other than price, that JR Sdn Bhd should consider before they decide to produce or purchase the automatic sensor.