Description
Question 1: Answer the following case study (10 Marks)
Jeddah Industrial Company is facing losses in its operational activities. As a result, senior management is studying the reasons behind these losses by analyzing financial data provided by the accounting department to help them make an informed decision, as shown below:
Al-Shetawi Company
Income Statement
For the Year Ending December 31, 2023
Description | Oil Production Line | Confectionery Production Line | Beverage Production Line | Poultry Production Line | Meat Production Line | Total |
Sales Revenue | 7,460,000 | 8,678,000 | 6,568,945 | 5,879,064 | 3,900,000 | 32,486,009 |
Less: Variable Costs | (3,290,000) | (3,798,000) | (3,302,765) | (2,245,084) | (2,679,000) | (15,314,849) |
Gross Profit | 4,170,000 | 4,880,000 | 3,266,180 | 3,633,980 | 1,221,000 | 17,171,160 |
Less: Fixed Industrial Costs | (1,326,980) | (1,439,890) | (1,598,793) | (1,324,793) | (750,000) | (6,440,456) |
Less: Fixed Administrative & Selling Costs | (1,198,704) | (1,879,748) | (1,695,765) | (1,768,048) | (650,000) | (7,192,265) |
Net Operating Income | 1,644,316 | 1,560,362 | (28,378) | 541,139 | (179,000) | 3,538,439 |
Scenario:
The company is considering shutting down the unprofitable production lines, which would allow it to avoid 92% of fixed administrative and selling costs and 87% of fixed industrial costs in these departments.
Required:
1. Prepare a differential analysis to assist the company in making a decision regarding whether to shut down the unprofitable production line or continue its operation. Justify your decision.
2. Calculate the cost savings if the company decides to shut down the unprofitable line.
