Module Name: Accounting for Business Decision Making

OPEN UNIVERSITY MALAYSIA

FACULTY OF BUSINESS MANAGEMENT

BMAC5203

Accounting for Business Decision Making

Master of Business Administration

Name: Adam Khaleel

Lecturer: Mohamed Shafeeq

Learning Centre: Villa College

Trimester:  January 2015

Contents

QUESTION – 1   

QUESTION – 2   

QUESTION – 3   

References    



QUESTION – 1

(c) Traditional costing method: Based on traditional method the selling prices with a mark-up of 25% are $91.50 for Basic and $134.13 for Super. The costs are $73.2 for Basic and $107.3 for Super.

Activity Based Costing Method: Based on this method the selling prices with a mark-up of 25% are $80.16 for Basic and $178.91 for Super. The costs are $64.13 for Basic and $143.13 for Super.

ABC method gives a low cost for Basic, hence selling price is decreased and can be reduced further to attract customers. However this method gives a higher cost for Super and selling price must be increased to cover the cost. Although increasing the selling price covers the cost, it is not a good strategy because the customers will switch to other suppliers whose selling prices are lower.

Hence it seems that Super is being sold less than they cost to produce. If the price cannot be increased, there may be a strong case for abandoning the product.  At the same time, Basic is very profitable to the extent that it may be worth considering lowering the price to attract more sales revenue.     However, abandoning Super cannot be done drastically as other factors may come into play such as resistance from staff related to the production of Super.

Therefore my advice is to follow traditional costing method because they will be able to continue both products with profit without increasing selling prices. Hence the customers and reputation can be maintained if traditional method is used.      



QUESTION – 2 

                    

   





QUESTION – 3

(a).

Depreciation cost of $10000 is not relevant because it represents an allocation of a sunk cost. All variable costs are relevant. Relevant fixed costs associated with this line include $10000 in advertising and $35000 in salaries. The dropping tile product line will bring a $35000. The Tiles Segment before dropping has a loss of $45000 and the total operating income is $210000.  However, after dropping the Tiles Segment shows $35000 product margin and the total operating income of $290000 assuming that common fixed expenses of $125000 remains the same. Therefore, this decision will bring an increment to total profit by $80000. So, based on this scenario it is better to discontinue the Tiles segment.       

(b). since the business is a diversified company, closing a division could adversely affect the company’s overall reputation. Divisions that are not profitable can still provide a benefit to the overall company by making other divisions more profitable (Hoque, 2005).

Before deciding to discontinue a product line management should carefully consider what resources would be required to turn the product line around and consider the long-term ramifications of product line elimination. For example, elimination of a product line shrinks market assortment, which could cause some customers to seek other suppliers that maintain a broader market assortment. Individual customers also should be u assessed (in the same manner as product lines) for profitability. When necessary, ways to improve the cost-benefit relationship should be determined (Hoque, 2005).

Effects on customers if that product was no longer available and effect on competition need to be considered. Also, the opportunity costs that would be involved in producing the product would also need to be incorporated into this decision making (Hoque, 2005).

(C).

Previous contribution margin of blocks was $250,000. A 10% decreases in sales implies a 10% decrease in total variable costs, so the contribution margin decreases by 10%. New contribution margin for blocks is $225,000. The reasoning is the same for the brick line but the decrease is 8%. New contribution margin for bricks is $294,400. The total contribution margin is $519,000. Advertising and supervision remain relevant across these alternatives. Now the analysis favors keeping the tiles line. In fact company income will be $15,600 higher if all three are kept as opposed to dropping the tiles line. 

 

References

Hoque, Z. (2005). Handbook of Cost and Management Accounting. London: Spiramus Press.