Rxintree Berhad Decided To Reorganize A Manufacturing Facility

Rxintree Berhad decided to reorganize a manufacturing facility during November 2021 and commissioned a consulting engineer to carry out a feasibility study.A provizion for the reorganization was created at 31 December 2021. Staff functions will change following the reorganization, so in December 2021, Raintree Berhad contracted with a training company to provide retraining to take place in January 2022.A provision for this expenditure was created at 31 December 2021.Raintree Berhad hopes that reorganizing its manufacturing facility will improve quality control. It gives a one-year warranty with all products and the rate of retums under warranty is 12%. Rxintree Berhad Decided To Reorganize A Manufacturing Facility

 

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5% of the returned items can be repaired at a cost of RM 5 per unit (free of charge to the customer). The other 95% are scrapped and a full refund of RM 30 per unit is given. Raintree Berhad sold 525,000 units during the year to 31 December 2021. In five years’, time Raintree Berhad will have to dismantle its factory and retum the site to the local authority. A provision was set up for the present value of the dismantling costs when the factory was first acquired. The opening balance on the provision at 1 January 2021 was RM 2.63 million.Raintree Berhad has a cost of capital of 8%.

Calculate the amount of the provision that should be created at 31 December 2021 for retums under warranty. Rxintree Berhad Decided To Reorganize A Manufacturing Facility

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