module 6 incremental analysis basic concepts

Incremental Analysis

MODULE 6

INCREMENTAL ANALYSIS

Basic conceptsSteps in decision making process5. What is the first step in the decision making process?

A. Specify the criteria by which the decision is to be made.B. Consider the strategic issues regarding the decision context.C. Perform an analysis in which the relevant information is developed and analyzed.D. Compare the alternatives.

7. A major accounting contribution to the managerial decision-making process in evaluatingpossible courses of action is toA. assign responsibility for the decision.B. provide relevant revenue and cost data about each course of action.C. determine the amount of money that should be spent on a project.D. decide which actions that the management should consider.

8. An analysis of relevant costs and relevant revenuesA. Will enable the decision maker to assess a decision’s impact on profitB. Is useful in assessing a variety of alternative decisionsC. Provides sufficient and complete evidence with which to make a decisionD. Answers a. and b. are correct

Pitfalls in decision making1. When discussing the pitfalls to be avoided in decision-making, four reminders usually emerge.

Which is NOT one of those reminders?A. Ignore sunk costs.B. Beware of allocated fixed costs; identify the avoidable costs.C. Pay special attention to identifying and including opportunity costs.D. Do not overlook the time value of money in short-run decisions.

19. Which one of the following is not a common mistake in a decision-making process?A. Considering sunk costs as relevant.B. Considering opportunity cost, an imputed cost, being relevant.C. Considering fixed costs as avoidable fixed costs.D. Unitizing fixed costs.

24. One of the behavioral problems with relevant cost analysis is the overemphasis on short-termgoals, which can lead to neglect of:A. sales promotion C. quarterly net income resultsB. expense control D. long-term strategic goals

Incremental analysis25. Incremental analysis is the process of identifying the financial data that:

A. do not change under alternative courses of actionB. are mixed under alternative courses of actionC. change under alternative courses of actionD. no correct answer is given

48. Incremental analysis is most usefulA. in evaluating the master budget. B. in choosing between the net present value method and the internal rate of return method.C. in developing relevant information for management decisions.D. as a replacement technique for variance analysis.

Relevant information2. Predicted future cost and revenue data that will differ among alternative courses of action are

known asA. relevant information C. marginal costsB. direct information D. incremental costs

4. Which of the following is described as data that are pertinent to a decision?A. qualitative characteristics C. timely informationB. accurate information D. relevant information

6. Which of the following best describes relevant information?A. Focused on the past and differs between the alternatives under consideration.B. Focused on the past and not related to the decision under consideration.C. Focused on the future and differs between the alternatives under consideration.D. Focused on the future and not related to the decision under consideration.

Application of incremental analysis3. Incremental analysis would not be appropriate for

A. a make or buy decision.B. an allocation of limited resource decision.C. elimination of an unprofitable segment.

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D. analysis of manufacturing variances.

Irrelevant costsSunk costs9. The kind of cost that can be ignored in a short-term decision making is a(an)

A. differential cost C. sunk costB. incremental cost D. joint cost

30. Sunk costs areA. Costs that increase due to a higher volume of activity or the performance of an additional

activityB. Costs that a company must incur to perform an activity at a given level, but will not be

incurred if a company reduces or discontinues the activityC. The profits that a company forgoes by following a particular course of actionD. Costs that were incurred prior to making a decision

33. A sunk cost is:A. a cost incurred in the past and not relevant to any future course of action.B. an opportunity cost.C. useful in analysis of alternative courses of action.D. relevant to current decision making.

13. Which of the following is least likely to be a relevant item in deciding whether to replace an oldmachine?A. acquisition cost of the old machineB. outlay to be made for the new machineC. annual savings to be enjoyed on the new machineD. life of the new machine

Unit costs22. Unit costs can mislead decision makers. Which of the following situations dealing with unit

costs are not expected to result in a faulty analysis?A. Unit costs used in make-or-buy decisions might include costs such as avoidable fixed

costs.B. Variable unit cost directly varies with the changes in production units.C. Total fixed costs increase as more units are produced within the relevant range.D. Contribution margin on products that can be manufactured in using the freed capacity is

irrelevant in the decision.

Relevant costs16. Relevant costs are

A. all fixed and variable costsB. all costs that would be incurred within the relevant range of productionC. past costs that are expected to be different in the futureD. anticipated future costs that will differ among various alternatives

14. The Health Care Division of Piedmont Insurance employs three claims processors capable ofprocessing 5,000 claims each. The division currently processes 12,000 claims. The managerhas recently been approached by two sister divisions. Auto Division would like the HealthCare Division to process approximately 2,000 claims. Property Division would like the HealthCare Division to process approximately 5,000 claims. The Health Care Division would becompensated by Auto Division or Property Division for processing these claims. Assume thatthese are mutually exclusive alternatives. Claims processor salary cost is relevant forA. Auto Division alternative onlyB. Property Division alternative onlyC. both Auto Division and Property Division alternativesD. neither Auto Division nor Property Division alternatives

Differential costs31. The difference in cost between or among various alternative courses of action appropriately

describes a(an):A. differential cost C. constraintB. ad hoc discount D. scarce resource

Opportunity cost10. An important concept in decision making is described as “the contribution to income that is

forgone by not using a limited resource in its best alternative use.” This concept is calledA. Marginal cost C. Incremental costB. Cost outlay D. Opportunity cost

11. An “opportunity cost” isA. the difference in total costs that results from selecting one alternative instead of anotherB. the profit forgone by selecting one alternative instead of anotherC. a cost that may be saved by not adopting an alternativeD. a cost that may be shifted to the future with little or no effect on current operations

12. The best characterization of an opportunity cost is that it is A. relevant to decision making but is not usually reflected in accounting records

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B. not relevant to decision making and is not usually reflected in accounting recordsC. relevant to decision making and is usually reflected in accounting recordsD. not relevant to decision making and is usually reflected in accounting records

18. The potential benefit that may be obtained from following an alternative course of action iscalledA. opportunity benefit C. relevant costB. opportunity cost D. sunk cost

26. Opportunity cost is theA. cash outlay required to implement an alternative.B. difference in total costs between the alternatives.C. maximum available contribution to profit that is given up when using limited resources for

another purpose.D. fixed cost avoided when a product, department, or business unit is abandoned.

28. Opportunity costs areA. Costs that increase due to a higher volume of activity or the performance of an additional



27. Using opportunity cost to analyze the income effects of a given alternative is referred to asA. engineering analysis C. account analysisB. mixed-cost analysis D. differential analysis

Avoidable15. A fixed cost is relevant if it is

A. future cost C. avoidableB. sunk D. a product cost

17. Which of the following is (are) a true statement(s) about cost behaviors in incrementalanalysis?I. Fixed costs will not change between alternatives. II. Fixed costs may change between alternatives.III. Variable costs will always change between alternatives.A. I C. III

B. II D. II and III

29. Avoidable costs areA. Costs that increase due to a higher volume of activity or the performance of an additional



Out-of-pocket costs23. Which of the following is a cost that requires a future outlay of cash that is relevant for future

decision-making?A. Opportunity cost C. Out-of-pocket costB. Relevant benefits D. Incremental revenue

Sensitivity analysis20. Sensitivity analysis is useful in decision making when:

A. there is a degree of uncertainty about the relevant data.B. there is an opportunity cost included in the analysis.C. sunk cost is included in the analysis.D. the analysis is subject to a review by the management.

21. To determine the possible outcome in a decision analysis if a key prediction or assumptionproves to be wrong, managers will use:A. sensitivity analysis. C. incremental analysis.B. total analysis. D. regression analysis.

Make-or-buy decisionQualitative Considerations38. Which of the following elements of the value chain should be considered when deciding

whether to make or buy a component needed for production?A. Marketing C. ManufacturingB. Distribution D. all of these choices

Make decision34. Manufacturing parts internally by a company causes:

A. the company to be dependent upon suppliers for timely delivery of parts B. the quality of the parts to be under the control of the company

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C. lower parts costs to be assured D. a company's operations to be more efficient than when the parts are purchased from

suppliers

44. A company should decide to make, rather than buy, a part required for their product, ifA. The company’s production facility is at full capacityB. The relevant cost per-unit of making the part exceeds the per-unit relevant costs of

purchasing the partC. The supplier of the part can produce a higher-quality partD. The supplier of the part has questionable reliability

Buy decision35. In any make or buy decision confronting a company, which of the following factors should be

considered? A. Can the supplier provide a sufficient quantity to meet the company's current and future

needs? B. Do the supplier's items meet product and quality specifications? C. Is the supplier reliable? D. All of the above should be considered.

41. Which of the following qualitative factors favors the buy choice in a make or buy decision for apart?A. maintaining a long-term relationship with suppliersB. quality control is criticalC. utilization of idle capacityD. part is critical to product

Relevant costsFixed costs36. Within the context of the make or buy decision, when are fixed costs relevant?

A. Fixed costs are always relevant B. Fixed costs are never relevant C. Fixed costs are relevant when they differ among alternatives D. It cannot be determined without closely examining each particular situation

37. In a make or buy decision:A. Only variable costs are relevant.B. Fixed costs that can be avoided in the future are relevant.C. Fixed costs that will continue regardless of the decision are relevant.

D. Only conversion costs are relevant.

Opportunity costs39. In a make-or-buy decision, which of the following is true?

A. Variable costs are the only relevant costs.B. Allocated fixed costs are relevant.C. Alternative uses of space and machinery are relevant.D. Making the product is the correct decision when there is idle capacity.

40. The opportunity cost of making a component part in a factory with excess capacity for whichthere is no alternative use isA. the total manufacturing cost of the component.B. the total variable cost of the component.C. the fixed manufacturing cost of the component.D. zero.

46. The cost of not receiving rent from a space because you decide to make the part rather thanbuying it from an outside supplier is considered a(an)A. sunk cost C. opportunity costB. future cost D. fixed cost

47. In a make-or-buy decision, an opportunity cost that should be considered is the:A. income that could be generated from idle production space.B. total costs to produce the itemC. variable costs to produce the itemD. fixed costs to produce the item

Decision rule42. Haribon Company is faced with a make-or-buy decision. Haribon should agree to buy the part

from a supplier provided the price is less than Haribon’sA. total costsB. variable production costs plus avoidable fixed production costsC. total manufacturing costsD. variable costs

84. A company owns equipment that is used to manufacture important parts for its productionprocess. The company plans to sell the equipment for P10,000 and to select one of thefollowing alternatives: (1) acquire new equipment for P80,000

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(2) purchase the important parts from an outside company at P4 per part. The company should quantitatively analyze the alternatives by comparing the cost ofmanufacture the partsA. Plus P80,000 to the cost of buying the parts less P10,000.B. to the cost of buying the parts less P10,000.C. Less P10,000 to the cost of buying the parts.D. To the cost of buying the parts.

Special order decisionProcess49. In making a special order decision, management should:

A. compute a reasonable sales price for items not normally produced.B. consider additional overhead cost.C. consider normal and relevant costs.D. All of the above.

52. Which of the following factors should be considered in deciding whether to accept a specialorder?A. the sales price of the product or serviceB. the production capacity of the companyC. the impact on regular customersD. all of these choices

Irrelevant cost83. In considering a special order that will enable a company to make a use of presently idle

capacity, which of the following costs would be irrelevant.A. Materials C. Direct laborB. Depreciation D. Variable OH

54. Given the following list of costs, which one should be ignored in a decision to produceadditional units of product for a factory that is operating at less than 100% capacity, and theadditional business will not use up the remainder of the plant capacity?A. Direct material cost per unit C. Fixed selling expensesB. Direct labor cost per hour D. Variable selling expenses

Relevant costsLong-run decision58. The sales price of a product, in the long run, must be enough to cover what type of costs?

A. Designing costs C. Servicing costs

B. Marketing costs D. All of the above

Opportunity costss50. An opportunity cost commonly associated with a special order is

A. the contribution margin on lost salesB. the variable costs of the orderC. additional fixed cost that is related to the increased outputD. any of the above

53. Operating at or near full capacity will require a firm considering a special order to recognizethe:A. opportunity cost arising from lost salesB. value of full employmentC. time value of moneyD. need for good management

Decision rule82. Production of a special order will increase gross profit when the additional revenue from the

special order is greater thanA. The nonvariable costs incurred in producing the order.B. The direct material and labor costs in producing the order.C. The fixed costs incurred in producing the order.D. The marginal cost of producing the order.

51. If the firm is operating under capacity, the minimum special order price should be high enoughto cover:A. all variable costs and incremental fixed costs associated with the special order minus

foregone contribution margin on regular units not produced.B. variable and incremental fixed costs associated with the special order and a profit margin.C. limited variable costs associated with the special order.D. neither variable nor fixed costs associated with the special order.

57. Green Giant Foods has some excess manufacturing capacity that it can leave idle, use toproduce its own boxes for frozen foods, or use to process another company’s frozen foods. Itwill be more profitable for Green Giant to process the competitor’s frozen foods as long as thenet cost isA. greater than both the cost to buy the boxes and the cost to leave the plant idle.B. less than the cost to leave the plant idle and greater than the cost to buy the boxes.C. greater than the cost to leave the plant idle and lower than the cost to buy boxes from a

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supplier.D. less than both the cost to leave the plant idle and the cost to make or buy the boxes.

Minimum acceptable priceWith excess capacity55. If there is excess capacity, the minimum acceptable price for a special order must cover

A. variable costs associated with the special order.B. variable and fixed manufacturing costs associated with the special order.C. variable and incremental fixed costs associated with the special order.D. variable costs and incremental fixed costs associated with the special order plus the

contribution margin usually earned on regular units.

At full capacity56. If a firm is at full capacity, the minimum special order price must cover

A. variable costs associated with the special order.B. variable and fixed manufacturing costs associated with the special order.C. variable and incremental fixed costs associated with the special order.D. variable costs and incremental fixed costs associated with the special order plus foregone

contribution margin on regular units not produced.

Product life cycle45. A product life cycle includes the phases of

A. research and development and design C. marketing and distributionB. purchasing and production D. all of the above

Product pricingVariable cost approach60. Managers who often make special pricing decisions are more likely to use which of the

following cost concepts in their work?A. Total cost. C. Variable cost.B. Product cost. D. Fixed cost.

Cost-plus approach59. In using the variable cost concept of applying the cost-plus approach to product pricing, what

is included in the markup?A. Total costs plus desired profit.B. Desired profit.C. Total selling and administrative expenses plus desired profit.D. Total fixed manufacturing costs, total fixed selling and administrative expenses, and

desired profit.

62. Which of the following is NOT a cost concept commonly used in applying the cost-plusapproach to product pricing?A. Total cost concept. C. Variable cost concept.B. Product cost concept. D. Fixed cost concept.

63. The cost-plus pricing formula that takes into consideration all costs -- fixed, variable, andmanufacturing, as well as selling and administrative costs -- is called the percentage ofA. full costs. C. total variable costs.B. variable manufacturing costs. D. absorption costs.

Target pricing43. The concept of target pricing is employed when:

A. a company wishes to set price in order to capture a predetermined market share.B. a price is pre-set by market conditions.C. a company wishes to meet marketing goals.D. All of the above.

Target cost approach61. In contrast to the total product and variable cost concepts used in setting seller's prices, the

target cost approach assumes that:A. a markup is added to total cost. C. a markup is added to variable cost.B. selling price is set by the marketplace. D. a markup is added to product cost.

Sell-as-is-or-process furtherJoint products67. Two or more manufactured products that have significant sales values and are not uniquely

identifiable as individual products until the split-off point are calledA. common products. C. co-mingled products.B. joint products. D. cooperative products.

Relevant costsIncremental revenue32. Incremental revenue is:

A. a difference in costs between two decisions.B. a concession based on competitive influences.C. additional revenue across decision choices from potential sales.D. the difference between selling price and variable costs.

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Cost to process further65. Which of the following costs is relevant in deciding whether to sell joint products at split-off or

process them further?A. The unavoidable costs of further processing.B. The additional costs of further processing.C. The variable costs of operating the joint process.D. The cost of materials used to make the joint products.

68. What are the manufacturing costs incurred beyond the split-off point called?A. Separable costs. C. Severance costs.B. Joint costs. D. Common costs.

Decision rule64. How does a company determine whether to sell a product “as is” or process it further?

A. If the costs to process further exceed the costs of current production, the product shouldbe sold ‘as is.”

B. If the costs to process further exceed the costs of current production, the product shouldbe processed further.

C. If the increase in revenue from selling the product after further processing is greater thanthe additional costs incurred in further processing, the company should opt for furtherprocessing.

D. If the revenues generated by processing the product further exceed the revenues fromselling the product “as is,” the company should process further.

Keep-or-drop decisionStrategic considerations66. The decision to keep or drop products or services involves strategic consideration of the:

A. potential impact on remaining products or servicesB. impact on employee moraleC. growth potential of the firmD. All of the above answers are correct

Goal78. The goal in deciding whether to add or drop products, services, or departments is to obtain the

greatestA. reduction in total costs.B. contribution possible to cover unavoidable costs.C. increase in sales revenues.

D. decrease in direct fixed costs.

Irrelevant cost80. Which of the following should not enter into decision of whether to drop product?

A. Unavoidable costsB. Avoidable costsC. Revenue that would be lostD. Nonfinancial impacts of the decision

Decision rule79. As long as its marginal cost is lower than its marginal revenue, a company should

A. suspend additional production and sales activities.B. perform a cost-benefit balance analysis before producing and selling additional products.C. engage in additional production and sales activities.D. examine cost behaviors and develop a cost function to measure the cost of future

production.

Short-run profit maximizationFactors affecting sales mix70. Which of the following is an important factor affecting the sales mix of any company?

A. organizational advertising expendituresB. organizational sales force compensation planC. product selling priceD. All of the above

To relax a constraint73. Which of the following will relax a constraint?

A. Outsourcing all or part of the bottleneck operationB. Working overtime at the bottleneck operationC. Retraining employees and shifting them from the bottleneckD. A and B, only

Decision rule76. A product mix decision involves

A. Influencing the sales volume mix of the products to minimize cost.B. Influencing the sales volume mix of the products to maximize revenue.C. Producing the maximum amount of items that provide the highest contribution margin.D. Producing the maximum amount of items that carry the lowest per-unit cost.

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71. A useful device for solving production problems involving multiple products and limitedresources is:A. gross sales per unit of product C. net profit per unit of productB. contribution per unit of scarce resource D. total benefit

72. When there is only one production constraint and excess demand, it is generally best to focusproduction and sales on the product with the highest:A. Contribution per unit of scarce resource C. Contribution margin in pesosB. Margin of Safety D. Operating Leverage

69. When there is one scarce resource, the product that should be produced first is the productwith the highestA. contribution margin per unit of the scarce resource.B. sales price per unit of scarce resource.C. demand.D. contribution margin per unit.

74. Uranus Company has 2 products that use the same manufacturing facilities and cannot besubcontracted. Each product has sufficient orders to utilize the entire manufacturing capacity.For short-run profit maximization, Uranus should manufacture the product with theA. Lower total manufacturing costs for the manufacturing capacity.B. Lower total variable manufacturing costs for the manufacturing capacity.C. Greater gross profit per hour of manufacturing capacity.D. Greater contribution margin per hour of manufacturing capacity.

75. Profit can be maximized by producing products with the highestA. selling priceB. contribution marginC. contribution margin per unit of items that are best sellersD. contribution per unit of the constraining resource

77. A company should advertise those products thatA. Require the lowest commitment of resources to produceB. Have the largest total contribution marginC. Can be outsourcedD. Have the largest total contribution margin after deducting the cost of the ad campaign

Pitfall81. The major pitfall in the contribution margin approach to pricing is

A. its failure to recognize fixed costs.B. its failure to recognize depreciation expense.C. its inability to control waste.D. its inability to recognize financing costs of the production in question.

PROBLEMS:Incremental (decremental) cost1. For the year ended April 30, 2007, Salmo Company incurred direct costs of P800,000 based

on a particular course of action. Had a different course of action been taken, direct costswould have been P650,000. In addition, Salmo’s fixed costs during the fiscal year wereP110,000. The incremental (decremental) cost was:A. P 40,000 C. P 150,000B. P( 40,000) D. P(150,000)

Opportunity cost2. Luzon Fabricators, Inc. estimates that 60,000 special components will be used in the

manufacture of a specialty steel window for the whole next year. Its supplier quoted a price ofP60 per component. Luzon prefers to purchase 5,000 units per month, but its supplier couldnot guarantee this delivery schedule. In order to ensure availability of these components,Luzon is considering the purchase of all the 60,000 units at the beginning of the year.Assuming Luzon can invest cash at 8%, the company’s opportunity cost of purchasing all the60,000 units at the beginning of the year isA. P132,000 C. P144,000B. P150,000 D. P264,000

Defective/obsolete inventoryIncremental net income3. Sieney & Company has 24,000 defective units of a product that cost P8 per unit to

manufacture, and can be sold for P4 per unit. These units can be reworked for P2 per unit andsold at their full price of P12 each. If Sieney reworks the defective units, how muchincremental net income will result?A. P144,000 C. P 72,000B. P 96,000 D. P 48,000

Minimum price4. Joji Company manufactures and sell FM radios. Information on last year’s operations (sales

and production of the 2006 model) follows:Selling price P300

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Cost per unit: Direct materials 70 Direct labor 40 Overhead (50% variable) 60 Selling costs (40% variable) 100Production in units 10,000Sales in units 9,500

At this time (May 2007), the 2007 model is in production and it renders the 2006 model radioobsolete. A foreign firm is willing to purchase the obsolete products at a net price of P140each. If the remaining 500 units of the 2006 model radios are to be sold through regularchannels, what is the minimum price the company would accept for the radios?A. P300 C. P270B. P180 D. P 40

Special orderUnit relevant cost5. Venus Company, a manufacturer of lamps, budgeted sales of 400,000 lamps at P20 per unit

for the year. Variable manufacturing costs were budgeted at P8 per unit, and fixedmanufacturing costs at P 5 per unit. A special order offering to buy 40,000 lamps for P11.50each was received by Venus in April. Venus has sufficient plant capacity to manufacture theadditional quantity of lamps; however, the production would have to be done by the presentwork force on an overtime-basis at an estimated additional cost of P1.50 per lamp. Venuswill not incur any selling expenses as a result of the special order. Venus Company wouldhave a unit relevant cost ofA. P 8.00 C. P 9.50B. P13.00 D. P14.50

6. Wawa Enterprises has the capacity to produce 10,000 bearings, but operates at 90% ofcapacity. Bearings normally sell for P60 each, and cost an average of P50 to make, including ashare of the monthly fixed costs of P180,000. Ilog Corp has offered to buy 1,000 bearings atP40 each. What is the relevant cost per unit?A. P 20 C. P 40B. P 30 D. P 50

Total relevant cost7. Intellectual Co. recently received an order for a product that it does not normally produce.

Since the company has excess production capacity, management is considering accepting theorder. In analyzing the decision, the assistant controller is compiling the relevant costs ofproducing the order.

The special order requires 1,000 kilograms of powdered Nitrocide, a solid chemical regularlyused in the company’s products. The current stock of Nitrocide is 8,000 kilograms at a bookvalue of P8.10 per kilogram. If the special order is accepted, the firm will be forced to restockpowdered Nitrocide earlier than expected, at a predicted cost of P8.70 per kilogram. Withoutthe special order, the purchasing manager predicts that the price will be P8.30, when normalrestocking takes place. Any order of the Nitrocide must be in 5,000 kilograms. What is the relevant cost of powdered Nitrocide to be included in the special order?A. P 8,700 C. P10,300B. P 8,300 D. P43,500

Incremental cost8. Balagtas & Company expects to incur the following costs at the planned production level of

10,000 units:Direct materials P100,000Direct labor 120,000Variable overhead 60,000Fixed overhead 30,000

The selling price is P50 per unit. The company currently operates at full capacity of 10,000units. Capacity can be increased to 13,000 units by operating overtime. Variable costsincrease by P14 per unit for overtime production. Fixed overhead costs remain unchangedwhen overtime operations occur. Balagtas has received a special order from Florante, Inc.who has offered to buy 2,000 units at P45 each. What is the incremental cost associated with this special order?A. P42,000 C. P31,000B. P84,000 D. P62,000

Minimum acceptable price9. Brace Co. has considerable excess manufacturing capacity. A special job order’s cost sheet

includes the following applied manufacturing overhead costs:Variable costs P56,250Fixed costs 45,000

The fixed costs include a normal P6,800 allocation for in-house design costs, although no in-house design will be done. Instead, the special job will require the use of external designerscosting P13,750. What is the minimum acceptable price for the job?A. P 63,050 C. P101,250B. P 70,000 D. P108,200

10. The cost to produce 24,000 units at 70% capacity consists of:

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Direct materials P360,000Direct labor 540,000Factory overhead, all fixed 290,000Selling expense (35% variable, 65% fixed) 240,000

What unit price would the company have to charge to make P22,500 on a sale of 1,500additional units that would be shipped out of the normal market area?A. P 51 C. P 41B. P 56 D. P 50

11. Kaila Company’s unit cost of manufacturing and selling a given item at an activity level of10,000 units per month are:

Manufacturing costs Direct materials P39 Direct labor 6 Variable overhead 8 Fixed overhead 9Selling expenses Variable 30 Fixed 11

The company desires to seek an order for 5,000 units from a foreign customer. The variableselling expenses will be reduced by 40%, but the fixed costs for obtaining the order will beP20,000. Domestic sales will not be affected by the order.The minimum break-even price per unit to be considered on this special sale isA. P 71 C. P 69B. P 75 D. P 84

12. Chrisy Company sells a product for P18 per unit and the standard cost card for the productshows the following costs:

Direct materials P 1.00Direct labor 2.00Overhead (80% fixed) 7.00 Total P10.00

Chrisy received a special order for 1,000 units of the product. The only additional cost toChrisy would be foreign import taxes of P1 per unit. If Chrisy is able to sell all of the currentproduction domestically, what would be the minimum sales price that Chrisy would consider forthis special order? A. P 18 C. P 17B. P 19 D. P 11

13. De Silva Co. is a manufacturer of industrial components. One of their products that is used asa subcomponent in auto manufacturing is KB69. This product has the following financialstructure per unit:

Selling price P150Direct materials P 20Direct labor 15Variable manufacturing overhead 12Fixed manufacturing overhead 30Variable shipping and handling 3Fixed selling and administrative 10 Total P 90

De Silva is operating at full capacity. It has received a special, one-time, order for 1,000 KB69parts. The next best alternative use of the excess capacity is to produce LB46, resulting in acontribution margin of P10,000. The minimum price that is acceptable for this one-time specialorder isA. P 60 C. P 70B. P 87 D. P100

14. Sylvania Company. is currently operating at a loss of P15,000. The sales manager hasreceived a special order for 5,000 units of product, which normally sells for P35 per unit. Costsassociated with the product are: direct material, P6; direct labor, P10; variable overhead, P3;applied fixed overhead, P4; and variable selling expenses, P2. The special order would allowthe use of a slightly lower grade of direct material, thereby lowering the price per unit by P1.50and selling expenses would be decreased by P1. If Sylvania wants this special order toincrease the total net income for the firm to P25,000, what sales price must be quoted for eachof the 5,000 units?A. P18.50 C. P29.00B. P24.50 D. P26.50

Maximum lost regular sales15. Chua Company sells a product for P20 with variable cost of P8 per unit. Chua could accept a

special order for 1,000 units at P14. If Chua accepted the order, how many units could it loseat the regular price before the decision become unwise?A. 1,000 units C. 500 unitsB. 200 units D. 0 units

16. Filamer Company currently sells 1,000 units of product M for P2 each. Variable costs areP1.50. A discount store has offered P1.70 per unit for 400 units of product M. The managersbelieve that if they accept the special order, they will lose some sales at the regular price.

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Determine the number of units they could lose before the order become unprofitable. A. 200 units. C. 400 units.B. 160 units. D. 500 units

Effect on profit of accepting the order17. You have been approached by a foreign customer who wants to place an order for 15,000

units of Product C at P22.50 a unit. You currently sell this item for P39 a unit, and the item hasa cost of P29 a unit. Further analysis reveals that you will not be paying sales commission ofP2.50 a unit on this sales and its packaging requirement will save you an additional P1.50 perunit. However, the additional graphics required on this job will cost you P30,000. Note also thatfixed costs amounting to P400,000 for the production of 50,000 of such products by the firmwill not change. You decide to accept this order, but another customer who buys an average of2,000 units for the period wants to pay you P22.50 rather than the regular price of P39 a unit.Profit willA. increase profit by P19,500 C. increase profit by P52,500B. increase profit by P16,500 D. decrease profit by P52,500

18. The Thermo Company has received a special order for 300 units of product X for P6 a unit. Itusually sells for P9.50 a unit with a cost of P7.50 a unit inclusive of 75 cents a unit as salescommission that will not be paid on this order. The cost also includes P3 in manufacturingoverhead, was two-third of which is for the fair share of depreciation, rent, utilities andsupervisor's salary. The latter’s (supervisor's salary) accounts for one-half of this amount.Assuming that excess capacity is available, and this order requires a mold that costs P150,accepting the order will increaseA. loss by P225 C. gain by P225B. loss by P375 D. gain by P375

19. Alejar Company manufactures a product with a unit variable cost of P50 and a unit sales priceof P88. Fixed manufacturing costs were P240,000 when 10,000 units were produced and sold.The company has a one-time opportunity to sell an additional 3,000 units at P70 each in aforeign market. This special sale would not affect its present sales. If the company hassufficient capacity to produce the additional units, acceptance of the special order would affectnet income as follows:A. Income would decrease by P 12,000.B. Income would increase by P 12,000.C. Income would increase by P210,000.D. Income would increase by P 60,000.

20. KC Industries manufactures a product with the following costs per unit at the expected

production of 30,000 units.Direct materials P 4Direct labor 12Variable manufacturing overhead 6Fixed manufacturing overhead 8

The company has the capacity to produce 40,000 units. The product regularly sells for P40. Awholesaler has offered to pay P32 a unit for 2,000 units.If the firm accepts the special order the effect on its operating income would be aA. P20,000 increase C. P4,000 increase B. P16,000 decrease D. P 0 effect

21. Louderhead Company makes bull-repellent scent according to a traditional Western recipe,which normally sells at P90 per unit. Normal production volume is 10,000 ounces per month.Average cost is P50 per ounce, of which P20 is direct material and P10 is variable conversioncost. This product is seasonal. After July, demand for this product drops to 6,000 ouncesmonthly. In November, Garrison Co. offers to buy 1,500 ounces for P60,000. If Louderheadaccepts the order, it must design a special label for Garrison at a cost of P5,000. Each labelwill cost P2.50 to make and apply. Louderhead should:A. accept the order, at a gain of P6,250B. reject the order, at a loss of P18,750C. reject the order, at a loss of P23,750D. accept the order, at a gain of P11,250

Question Nos. 68 and 69 are based on the following information:The Disk Division of Systems Specialist Company produces a high quality computer disks. Unitproduction costs (based on capacity production of 100,000 units per year) follow:

Direct materials P50Direct labor 20Overhead (20% variable) 10Other information: Sales price 100 SG & A costs (40% variable) 15

The Disk Division is operating at a level of 70,000 chips per year.

22. What is the minimum price that the division would consider on a “special order” of 1,000 disksto be distributed through normal channels? A. P 72 C. P 81B. P 78 D. P 6

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23. Assuming that that the Disk Division is producing and selling at capacity. What is the minimumselling price that the division would consider on a “special order” of 1,000 chips on which novariable period costs would be incurred? A. P100 C. P 94B. P 72 D. P 90

Make-or-buy decisionRelevant costs24. For the past 12 years, the JLO Company has produced the small electric motors that fit into its

main product line of dental drilling equipment. As materials costs have steadily increased, thecontroller of the JLO Company is reviewing the decision to continue to make the small motorsand has identified the following facts:1) The equipment which is used to manufacture the electric motors has a book

value of P1,500,000.2) The space being occupied now by the electric motor manufacturing department

could be used to eliminate the need for storage space which is presently being rented.3) Comparable units can be purchased from an outside supplier for P597.50.4) Four of the people who work in the electric motor manufacturing department

would be terminated and given eight weeks of separation pay.5) A P750,000 unsecured note is still outstanding on the equipment that is being

used in the manufacturing process.Which of the items above are relevant to the decision that the controller has to make?A. 1, 2, 4, and 5 C. 1, 3, 4, and 5B. 1, 3, and 4 D. 2, 3, and 4

Relevant cost to make25. ELM Electronics has the following standard costs and other data:

Part Beta Part ZetaDirect materials P 4.00 P80.00Direct labor 10.00 47.00Factory overhead 40.00 20.00Unit standard cost P54.00 P147.00Units needed per year 6,000 8,000Machine hours per unit 4 2Unit cost if purchased P50.00 P150.00

In the past years, ELM has manufactured all of its required components; however, this yearonly 30,000 hours of otherwise idle machine time can be devoted to the production ofcomponents. Accordingly, some of the parts must be purchased from outside suppliers. In

producing the parts, factory overhead is applied at P10 per standard machine hour. Fixedcapacity costs that will not be affected by any make-or-buy decision represent 60% of theapplied overhead.The available 30,000 machine hours are to be scheduled so that ELM realizes maximumpotential cost savings. The relevant unit production costs that should be considered in thedecision to schedule machine time are:A. P54.00 for Beta and P147.00 for Zeta C. P14.00 for Beta and P127.00 for ZetaB. P50.00 for Beta and P150.00 for Zeta D. P30.00 for Beta and P135.00 for Zeta

Maximum buy price26. The following are a company’s monthly unit costs to manufacture and market a particular

product.Manufacturing Costs: Direct materials P2.00 Direct labor 2.40 Variable indirect 1.60 Fixed indirect 1.00

Marketing Costs: Variable 2.50 Fixed 1.50

The company must decide to continue making the product or buy it from an outside supplier.The supplier has offered to make the product at a level of quality that the company prescribes.Fixed marketing costs would be unaffected, but variable marketing costs would continue at30% if the company were to accept the proposal. What is the maximum amount per unit that the company can pay the supplier withoutdecreasing its operating income?A. P8.50 C. P7.75B. P6.75 D. P5.25

27. Sinta Company can make 1,000 units of a necessary component with the following costs:Direct Materials P64,000Direct Labor 16,000Variable Overhead 8,000Fixed Overhead ?

The company can purchase the 1,000 units externally for P104,000. An analysis shows that atthis external price, the company is indifferent between making or buying the part. SintaCompany could avoid P6,000 in fixed overhead costs if it acquires the components externally.If cost minimization is the major consideration and the company would prefer to buy the

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components, what is the maximum external price that Sinta Company would accept to acquirethe 1,000 units externally?A. P102,000. C. P 96,000.B. P 94,000. D. P 88,000.

28. Almeda's Shop can make 1,000 units of a necessary component with the following costs:Direct Materials P64,000Direct Labor 16,000Variable Overhead 8,000Fixed Overhead ?

The company can purchase the 1,000 units externally for P104,000. None of AlmedaCompany's fixed overhead costs can be reduced, but another product could be made thatwould increase profit contribution by P16,000 if the components were acquired externally. Ifcost minimization is the major consideration and the company would prefer to buy thecomponents, what is the maximum external price that Almeda Company would be willing toaccept to acquire the 1,000 units externally?A. P 86,000. C. P 96,000.B. P110,000. D. P104,000.

Effect of make decision29. A business is operating at 90% of capacity and is currently purchasing a part which is being

used in its manufacturing operations for P15 per unit. The unit cost for the business to makethe part is P20, including fixed costs, and P12, not including fixed costs. If 30,000 units of thepart are normally purchased during the year but could be manufactured using unused capacity,what would be the amount of differential cost, increase or decrease, from making the partrather than purchasing it?A. P150,000 cost increase C. P150,000 cost decreaseB. P 90,000 cost decrease D. P 90,000 cost increase

30. Alfaro's Manufacturing Company can make 100 units of a necessary component part with thefollowing costs:

Direct Materials P80,000Direct Labor 13,000Variable Overhead 40,000Fixed Overhead 27,000

If Alfaro's Manufacturing Company can purchase the component externally for P145,000 andonly P4,000 of the fixed costs can be avoided, what is the correct “make or buy” decision?A. Make and save P8,000 C. Make and save P20,000B. Buy and save P8,000 D. Buy and save P20,000

Effect of buy decisionOn fixed overhead cost31. Sisa's Shop can make 1,000 units of a necessary component with the following costs:

Direct Materials P64,000Direct Labor 16,000Variable Overhead 8,000Fixed Overhead ?

The company can purchase the 1,000 units externally for P104,000. The unavoidable fixedcosts are P5,000 if the units are purchased externally. An analysis shows that at this externalprice, the company is indifferent between making or buying the part. What are the fixedoverhead costs of making the component?A. P21,000. C. P11,000.B. P16,000. D. Cannot be determined.

On income32. Sylvan Processing Company is considering whether to make 2,000 units of product Whirl

which costs P16 a unit or buy it from outside for P15 a unit. A further analysis shows that ifproduct Whirl is outsourced, fixed costs of P8,000 attributable to this product will be reducedby 25%. If the product is outsourced, Sylvan willA. Decrease profit by P2,000 C. Increase profit by P2,000B. Decrease profit by P4,000 D. Increase profit by P4,000

33. Sylvan Processing Company is considering whether to make 2,000 units of product Whirlwhich costs P16 a unit or buy it from outside for P15 a unit. A further analysis shows that ifproduct Whirl is outsourced, fixed costs of P8,000 attributable to this product will be reducedby 25%. If Sylvan Processing Company purchased the product Whirl, the space could berented out for P6,000. If the product is outsourced, profit wouldA. decrease, P2,000 C. increase, P2,000B. decrease, P4,000 D. increase, P4,000

34. It costs P450,000 to make 15,000 units of a part in this plant. This cost includes material ofP90,000, direct labor of P120,000, variable overhead of P15,000, and P225,000 in fixedoverhead inclusive of P45,000 in depreciation and common overhead allocation of P150,000.The balance is for the section supervisor's salary. The part can be purchased for P20 a unit. Ifthe part is purchased, the space released can be rented for P65,000. If the part is purchased,the company willA. lose P20,000 C. gain P20,000

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B. lose P45,000 D. gain P45,000

35. Lane Co. manufactures ballpoint pens. Another manufacturer has offered to supply Lane withthe 5,000 ink cartridges that it needs annually. The cost to buy the cartridges would be P15each. In producing its own cartridges, Lane has incurred P10 in fixed costs and P8 in variablecosts. If Lane buys the cartridges, its net income will:A. not change C. increase by P35,000B. decrease by P35,000 D. increase by P25,000

36. The Rainbow Company manufactures Part No. 498 for use in its production cycle. The costper unit if 20,000 units of Part No. 498 are manufactured are as follows:

Direct materials P 6Direct labor 30Variable overhead 12Fixed overhead applied 16 Total unit cost P64

The Reeves Company has offered to sell 20,000 units of part No. 498 to Rainbow for P60 perunit. Rainbow will make the decision to buy the part from Reeves if there is a savings ofP25,000 for Rainbow. If Rainbow accepts Reeves’s offer, P9 per unit of the fixed overheadapplied would be totally eliminated. Furthermore, Rainbow has determined that the releasedfacilities could be used to save relevant costs in the manufacture of part No. 575. In order tohave a savings of P25,000, the amount of the relevant costs that would be saved by using thereleased facilities in the manufacture of Part No. 575 would have to beA. P 80,000 C. P125,000B. P 85,000 D. P140,000

37. Leis Manufacturing Co. uses 10 units of Part Number WS73 each month in the production ofcomputer printer. The unit cost to manufacture one unit of WS73 is presented below.

Direct materials P 1,000Materials handling (20% of direct material cost) 200Direct labor 8,000Manufacturing overhead (150% of direct labor) 12,000 Total manufacturing cost P21,200

Material handling represents the direct variable costs of the Receiving Department that areapplied to direct materials and purchased components on the basis of their cost. This is aseparate charge in addition to manufacturing overhead. Leis’ annual manufacturing overheadbudget is one-third variable and two-thirds fixed. Garland Company, one of Leis’ reliablevendors, has offered to supply part WS73 at a unit price of P15,000.If Leis purchases the WS73 units from Garland, the capacity being used by Leis to

manufacture these parts would be idle. Should Leis decide to purchase the parts fromGarland, the unit cost of WS73 wouldA. Increase by P4,800 C. Decrease by P6,200B. Decrease by P3,200 D. Increase by P1,800

38. The Rural Cooperative, Inc. produces 1,000 units of Part M per month. The totalmanufacturing costs of the part are as follows:

Direct materials P10,000Direct labor 5,000Variable overhead 5,000Fixed overhead 30,000Total manufacturing cost P50,000

An outside supplier has offered to supply the part at P30 per unit. It is estimated that 20% ofthe fixed overhead being assigned to Part M will no longer be incurred if the companypurchases the part from the outside supplier. If Rural Cooperative purchases 1,000 units of Part M from the outside supplier, its monthlyoperating income willA. decrease by P 4,000 C. increase by P 1,000B. decrease by P20,000 D. increase by P20,000

39. Migs Corporation currently manufactures all component parts used in the manufacture ofvarious hand tools. A steel handle is used in three different tools. The budgeted costs per unitbased on 20,000 units are:

Direct material P6.00Direct labor 4.00Variable overhead 1.00Fixed overhead 2.00 Total unit cost P13.00

Sans Steel, Inc. has offered to supply 20,000 units of the handle to Migs for P12.50 eachdelivered. If Migs currently has idle capacity that cannot be used, accepting the offer will A. Decrease the handle unit cost by P0.50.B. Increase the handle unit cost by P1.50.C. Decrease the handle unit cost by P1.50.D. Increase the handle unit cost by P0.50.

40. The Minolta, Inc. produces 1,000 units of Part M per month. The total manufacturing costs ofthe part are as follows:

Direct materials P10,000Direct labor 5,000

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Variable overhead 5,000Fixed overhead 30,000Total manufacturing cost P50,000

An outside supplier has offered to supply the part at P30 per unit. It is estimated that 20% ofthe fixed overhead assigned to Part M will no longer be incurred if the company purchases thepart from the outside supplier. If Minolta purchases 1,000 units of Part M from the outside supplier per month, then itsmonthly operating income will A. decrease by P 4,000 C. increase by P 1,000B. decrease by P20,000 D. increase by P20,000

41. Bulacan Company manufactures part G for use in the production of its principal product. Thecosts per unit for 10,000 units of part G are as follows:

Direct materials P 3Direct labor 15Variable overhead 6Fixed overhead 8 Total P32

Pampanga Company has offered to sell Bulacan 10,000 units of part G for P30 per unit. IfBulacan accepts Pampanga’s offer, the released facilities could be used to save P45,000 inrelevant costs in the manufacture of part H. In addition, P5 per unit of the fixed overheadapplied to part G would continue.What alternative is more desirable and by what amount?

A. B. C. D.Alternative Manufacture Manufacture Buy BuyAmount P10,000 P15,000 P15,000 P10,000

42. Blade Division of Dana Company produces hardened steel blades. One-third of the BladesDivision’s output is sold to the Lawn Products Division of Dana; the remainder is sold tooutside customers. The Blade Division’s estimated sales and standard costs data for the fiscalyear ending June 30 are as follows:

Lawn Products OutsidersSales P15,000 P40,000Variable costs (10,000) (20,000)Fixed costs (3,000) (6,000)Gross margin P 2,000 14,000 Unit sales 10,000 20,000

The Lawn Products Division has an opportunity to purchase 10,000 identical quality blades

from an outside supplier at a cost of P1.25 per unit on a continuing basis. Assume that theBlade Division cannot sell any additional products to outside customers.Should Dana allow its Lawn Products Division to purchase the blades from the outsidesupplier, and why?A. Yes, because buying the blades would save Dana Company P500.B. No, because making the blades would save Dana Company P1,500.C. Yes, because buying the blades would save Dana Company P2,500.D. No, because making the blades would save Dana Company P2,500

43. The Connell Company uses 5,000 units of Part 501 each year. The cost of manufacturing oneunit Part 501 at this volume is as follows:

Direct materials P2.50Direct labor 3.50Variable overhead 1.50Fixed overhead 1.00Total P8.50

An outside supplier has offered to sell Connell unlimited quantities of Part 501 at a unit cost ofP7.75. If Connell accepts this offer, it can eliminate 50 percent of the fixed costs assigned topart 501. Furthermore, the space devoted to the manufacture of Part 501 would be rented toanother company for P6,000 per year. If Connell accepts the offer of the outside supplier,annual profits willA. Increase by P13,500 C. Increase by P 7,250B. Increase by P11,000 D. Increase by P 1,250

Point of indifference - Units44. Mars Industries is a multi-product company that currently manufactures 30,000 units of Part

QS42 each month for use in the production of its main product. The facilities now being usedto produce Part QS42 have fixed monthly cost of P150,000 and a capacity to produce 84,000units per month. If Mars were to buy Part QS42 from an outside supplier, the facilities wouldbe idle, but 60 percent of its fixed costs would not continue. The variable production costs ofPart QS42 are P11 per unit.If Mars Industries is able to obtain Part QS42 from an outside supplier at a unit purchase priceof P12.875, the monthly usage at which it will be indifferent between purchasing and makingPart QS42 isA. 30,000 units C. 80,000 unitsB. 32,000 units D. 48,000 units

Point of indifference - price45. Calero Manufacturing Company can make 100 units of a necessary component part with the

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following costs:Direct Materials P80,000Direct Labor 13,000Variable Overhead 40,000Fixed Overhead 27,000

If Calero Manufacturing Company purchases the component externally, P20,000 of the fixedcosts can be avoided. At what external price for the 100 units is the company indifferentbetween making or buying?A. P160,000. C. P153,000.B. P113,000. D. P133,000.

Profit maximizationPoint of indifference46. Dipsum Soft Drinks makes three products: iced tea, soda, and lemonade. The following data

are available:Iced Tea Soda Lemonade

Sales price per unit P9.00 P6.00 P5.00Variable cost per unit 3.00 1.50 1.00Contribution margin per unit P6.00 P4.50 P4.00

Dipsum is experiencing a bottleneck in one of its processes that affects each product asfollows:

Iced Tea Soda LemonadeBottleneck process hours per unit 3 3 4

What price for lemonade would equate its profitability to that of soda?A. P8.00. C. P6.00.B. P7.00. D. P5.50.

Optimal mix47. Product A sells for P12 per unit and its variable cost per unit is P10. Product B sells for P15

per unit and its variable cost per unit is P12. The plant capacity is 350,000 machine hours andboth products require one machine hour to manufacturer. Which of the following will providethe best sales mix of Product A and Product B assuming the market limitation of Product A is200,000 units and the market limitation of Product B is 250,000 units?A. 250,000 units of Product A, 100,000 units of Product BB. 50,000 units of Product A, 300,000 units of Product BC. 100,000 units of Product A, 250,000 units of Product BD. 150,000 units of Product A, 200,000 units of Product B

48. The Hingis Corporation manufactures two products: X and Y. Contribution margin per unit isdetermined as follows:

Product X Product YRevenue P130 P80Variable costs 70 P38Contribution margin P 60 P42

Total demand for X is 16,000 units and for Y is 8,000 units. Machine hour is a scarceresource. 42,000 machine hours are available during the year. Product X requires 6 machinehours per unit while product Y requires 3 machine hours per unit.How many units of X and Y should Hingis Corporation produce?

A. B. C. D.Product X 16,000 8,000 7,000 3,000Product Y zero 4,000 zero 8,000

49. Mary Manufacturing has assembled the following data pertaining to two popular products.Blender Electric mixer

Direct materials P 6 P11Direct labor 4 9Factory overhead @ P16 per hour 16 32Cost if purchased from an outside supplier 20 38Annual demand (units) 20,000 28,000

Past experience has shown that the fixed manufacturing overhead component included in thecost per machine hour averages P10. Mary has a policy of filling all sales orders, even if itmeans purchasing units from outside suppliers.If 50,000 machine hours are available, and Mary Manufacturing desires to follow an optimalstrategy, it shouldA. produce 25,000 electric mixers, and purchase all other units as neededB. produce 20,000 blenders and 15,000 electric mixers, and purchase all other units as

neededC. produce 20,000 blenders and purchase all other units as neededD. produce 28,000 electric mixers and purchase all other units as needed

Decision50. A company can sell all the units it can produce of either Product A or Product B but not both.

Product A has a unit contribution margin of P36 and takes two machine hours to make andProduct B has a unit contribution margin of P45 and takes three machine hours to make. Ifthere are 1,000 machine hours available to manufacture a product, income will beA. P3,000 more if Product A is made. C. P3,000 less if Product A is made.

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B. P3,000 less if Product B is made. D. the same if either product is made.

51. The Baco Company produces three products with the following costs andselling prices:

A B CSelling price per unit P16 P21 P21Variable cost per unit 7 11 13Contribution margin per unit P 9 P10 P 8Direct labor hours per unit 1.0 1.5 2.0Machine hours per unit 4.5 2.0 2.5

In what order should the three products be produced if either the direct labor-hours or themachine hours are the company’s production constraint?

A. B. C. D.Direct labor hours A, B, C B, C, A B, C, A A, B, CMachine hours B, C, A B. C. A A, C, B A, C, B

52. Scarce Company has been producing two types of bearings, Plastic and Metal, for its own usein the production of main products. The data regarding these two bearings follow:

Plastic MetalMachine hours required per unit 3.0 4.5Standard cost per unit Prime costs P 8.00 P 9.00 Variable overhead* 3.00 4.00 Fixed overhead** 4.50 6.75 Total P15.50 P19.75

*Variable manufacturing overhead is applied on the basis of direct labor hours. **Fixed manufacturing overhead is applied on the basis of machine hours.

Scarce’s annual requirements for these bearings is 7,000 units of Plastic and 11,000 units ofMetal. Recently, Scarce’s management decided to devote additional machine hours to otherproduct lines resulting to only 48,000 machine hours per year that can be dedicated to theproduction of the bearings. An outside company has offered to sell Scarce the annual supplyof the bearings at prices of P15.50 for Plastic and P17.50 for Metal. Scarce wants to schedulethe otherwise idle 48,000 machine hours to produce bearings so that the company canminimize its costs (maximize its net benefits).Scarce Company will maximize its net benefits by purchasisngA. 7,000 units of Plastic and manufacturing the remaining bearings.

B. 11,000 units of Metal and manufacturing 7,000 units of Plastic.C. 6,000 units of Plastic and manufacturing the remaining bearings.D. 5,000 units of Metal and manufacturing the remaining bearings.

53. HILO Company manufactures electric carpentry tools. The production department had met allproduction requirements for the current month and has an opportunity to produce additionalunits of product with its excess capacity. Unit selling prices and unit costs for three differentdrill models are as follows:

Home Model Deluxe Model Pro ModelSelling price P58 P65 P80Direct material 16 20 19Direct labor (P10 per hour) 10 15 20Variable overhead 8 12 16Fixed overhead 16 5 15

Variable overhead is applied on the basis of direct-labor pesos, while fixed overhead is appliedon the basis of machine hours. There is sufficient demand for the additional production of anymodel in the product line. If it has excess machine capacity but a limited amount of labor time,to which product or products should HILO Company devote its excess production?A. Home model C. Deluxe modelB. Pro Model D. Equally

54. Product A sells for P12 per unit and its variable cost per unit is P10. Product B sells for P15per unit and its variable cost per unit is P12. The plant capacity is 350,000 machine hours andProduct A requires 48 minutes to complete while Product B requires 75 minutes. Which of thefollowing will provide the best sales mix of Product A and Product B assuming the marketlimitation of Product A is 200,000 units and the market limitation of Product B is 250,000 units?A. 46,875 units of Product A, 250,000 units of Product BB. 200,000 units of Product A, 152,000 units of Product BC. 152,000 units of Product A, 200,000 units of Product BD. 100,000 units of Product A, 250,000 units of Product B

55. Dimasalang Company has only 25,000 hours of machine time each month to manufacture itstwo products. Product X has a contribution margin of P50 and Product Y has a contributionmargin of P64. Product X requires 5 machine hours and Product Y, 8 hours. If Dimasalangwants to dedicate 80% of its machine time to the product that will provide the most income, itwill have a total contribution margin ofA. P250,000 C. P210,000B. P240,000 D. P200,000

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Sell-as-is-or-process-furtherMinimum sales56. Snow Clean Corporation produces cleaning compounds and solutions for industrial and

household use. While most of its products are processed independently, a few are related.Grit 337, a coarse cleaning powder with many industrial uses, costs P16 a pound to make andsells for P20 a pound. A small portion of the annual production of this product is retained forfurther processing in the Mixing Department, where it is combined with several otheringredients to form a paste, which is marketed as a silver polish selling for P40 per jar. Thisfurther processing requires ¼ pound of Grit 337 per jar. Costs of other ingredients, labor, andvariable overhead associated with this further processing amount to P25 per jar. Variableselling costs are P3 per jar. If the decision were made to cease production of the silver polish,P56,000 of Mixing Department fixed costs could be avoided. Snow Clean has limitedproduction capacity for Grit 337, but unlimited demand for the cleaning powder.What is the minimum number of jars of silver polish that would have to be sold to justify furtherprocessing of Grit 337.A. 8,000 C. 7,000B. 5,600 D. 4,667

Decision57. Beal Company is starting business and is unsure of whether to sell its product assembled or

unassembled. The unit cost of the unassembled product is P40 and Beal Company would sellit for P90. The cost to assemble the product is estimated at P18 per unit and Beal Companybelieves the market would support a price of P116 on the assembled unit.What is the correct decision using the sell or process further decision rule?A. Sell before assembly, the company will be better off by P18 per unit.B. Sell before assembly, the company will be better off by P26 per unit.C. Process further, the company will be better off by P26 per unit.D. Process further, the company will be better off by P8 per unit.

58. Sales of 25,000 units at P7.20 per unit are made monthly. The unit cost is P5.90. Incrementalcosts of P1.35 per unit to further process the units will result in the 25,000 units being sold forP8.75 each. Which course of action should the company take?A. Commit its resources to a different productB. Sell the units at the current stage of completion C. Do further processing and sell the units at P8.75D. Do further processing on only one-half of the units

59. Aaron Company produces a product that can be sold for P250,000 at an intermediate stage. If

Aaron finishes the product, they will incur P75,000 of additional material costs and anotherP15,000 in labor and overhead costs. When finished, Aaron will be able to sell the product forP350,000.Which of the following answers is correct?A. Sell nowB. Finish the product because profits will increase by P25,000C. Finish the product because profits will increase by P12,500D. Finish the product because profits will increase by P10,000

Effect of decision60. Ottawa Corporation produces two products from a joint process. Information about the two

joint products follows:Product X Product Y

Anticipated production 2,000 lbs 4,000 lbsSelling price per pound at split-off P30 P16Additional processing costs/pound after split-off (all variable)

P15 P30

Selling price/pound after further processing P40 P50The joint cost is P85,000. Ottawa currently sells both products at the split-off point. If Ottawamakes decision which maximizes profit, its profit will increase byA. P16,000 C. P 4,000B. P50,000 D. P10,000

61. The cost to manufacture an unfinished unit is P40 (P30 variable and P10 fixed). The sellingprice per unit is P50. The company has unused production capacity and has determined thatunits could be finished and sold for P65 with an increase in variable costs of 40%. What is theadditional net income per unit to be gained by finishing the unit?A. P 3 C. P10B. P15 D. P12

Total processing cost62. Matador Manufacturing schedules a weekly production of 15,000 units of

Product M and 30,000 units of N for which P800,000 common variable costsare incurred. These two products can be sold as is or processed further.Further processing of either product does not delay the production ofsubsequent batches of the joint products. Below are some of the information:

M NUnit selling price without further processing P25 P19

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Unit selling price with further processing P31 P23Total separate weekly variable costs of further processing P100,000 P110,000

To maximize Matador’s manufacturing contribution margin, the total separate variable costs offurther processing that should be incurred each week areA. P105,000 C. P110,000B. P100,000 D. P210,000

Keep-or-drop decisionAnalysis63. A company is deciding whether or not to eliminate a segment of its business. The segment

generates total sales of P104,000, its direct expenses are P22,000, and its indirect expensesare P26,000. Its cost of goods sold is P64,000. Six thousand pesos of the direct expensesand P8,000 of its indirect expenses are avoidable expenses. Which of the following is nottrue?A. This segment has a net loss of P8,000.B. This segment's revenue is greater than its avoidable costs.C. This segment is a good candidate for elimination.D. This segment's avoidable costs are greater than unavoidable costs.

Effect of drop decision64. Banahaw Company plans to discontinue a department that has a contribution margin of

P240,000 and P480,000 in fixed costs. Of the fixed costs, P210,000 can be avoided. Theeffect of this discontinuance on Banahaw’s overall net operating income would be a(an)A. decrease of P30,000 C. increase of P30,000B. decrease of P10,000 D. increase of P10,000

65. Mina Co. mines three products. Gold Ore sells for P1,000,000 per ton, variable costs areP600,000 per ton, and fixed mining costs are P6,000,000. The segment margin for 2007 wasP1,200,000. The management of Mina Co. was considering dropping the mining of Gold Ore.Only one-half of the fixed expenses are direct and would be eliminated if the segment wasdropped. If Gold Ore were dropped, net income for Mina Co. wouldA. Increase by P2,000,000 C. Decrease by P2,000,000B. Increase by P1,200,000 D. Decrease by P1,200,000

66. Agimat Company plans to discontinue a segment with a P32,000 segment margin. Commonexpenses allocated to the segment amounted to P45,000, of which P20,000 cannot beeliminated if the segment were closed. The effect of closing down the segment on AgimatCompany’s before tax profit would beA. P12,000 decrease C. P12,000 increase

B. P 7,000 decrease D. P 7,000 increase

Shutdown point67. Bulusan Company normally produces and sells 30,000 units of E14 each month. E14 is a

small electrical relay used in the automotive industry as a component part in various products.The selling price is P22 per unit, variable costs are P14 per unit, fixed manufacturing overheadcosts total P150,000 per month, and fixed selling costs total P30,000 per month.

Employment-contract strikes in the companies that purchase the bulk of the E14 have causedBulusan Company’s sales to temporarily drop to only 9,000 units per month. BulusanCompany estimates that the strikes will last for about two months, after which time sales ofE14 should return to normal. Due to the current low level of sales, however, BulusanCompany is thinking about closing down its own plant during the two months that the strikesare on. If Bulusan Company does close down its plant, it is estimated that fixed manufacturingoverhead costs can be reduced to P105,000 per month and that fixed selling costs can bereduced by 10%. Start-up costs at the end of the shutdown period would total P8,000. SinceBulusan Company uses just-in-time production method, no inventories are on hand.

At what level of unit sales for the two-month period should Bulusan Company be indifferentbetween temporarily closing the plant or keeping it open?A. 11,000 C. 10,000B. 24,125 D. 8,000

Equipment replacement68. MNL Company has an opportunity to acquire a new machine to replace one of its present

machines. The new machine would cost P90,000, have a 5-year life and no estimated salvagevalue. Variable operating costs would be P100,000 per year. The present machine has abook value of P50,000 and a remaining life of 5 years. Its disposal value now is P5,000, but itwould be zero after 5 years. Variable operating costs would be P125,000 per year. Ignoreincome taxes. Considering the 5 years in total, what would be the difference in profit beforeincome taxes by acquiring the new machine as opposed to retaining the present one?A. P10,000 decrease C. P35,000 increaseB. P15,000 decrease D. P40,000 increase

Lease69. Darren Co. is considering disposing an equipment that costs P50,000 and has P40,000 of

accumulated depreciation to date. Darren Co. can sell the equipment through a broker forP25,000 less 5% commission. Alternatively, Minton Co. has offered to lease the equipment forfive years for a total of P48,750. Darren will incur repair, insurance, and property tax expenses

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estimated at P10,000. At lease-end, the equipment is expected to have no residual value. Thenet differential income from the lease alternative is:A. P15,000. C. P25,000.B. P 5,000. D. P12,500.

ComprehensiveQuestions 70 through 74 are based on the following information:Adrenal Company has a single product called a CAD. The company normally produces and sells60,000 CADS each year at a selling price of P32 per unit. The company’s unit costs at this level ofactivity are given below:

Direct materials P10.00Direct labor 4.50Variable manufacturing overhead 2.30Fixed manufacturing overhead 5.00Variable selling expenses 1.20Fixed selling expenses 3.50 Total cost per unit P26.50

70. Assume that Adrenal Company has sufficient capacity to produce 90,000 CADS each yearwithout any increase in fixed manufacturing overhead costs. The company could increase itssales by 25% above the present 60,000 units each year if it were willing to increase the fixedselling expenses by P80,000. The increase in income if the production is increased by 25% isA. P130,000 C. P 25,000B. P108,333 D. P 20,800

71. Assume again that Adrenal Company has sufficient capacity to produce 90,000 CADS eachyear. A customer in a foreign market wants to purchase 20,000 CADS. Import duties on theCADS would be P1.70 per unit, and costs for permits and licenses would be P9,000. The onlyselling costs that would be associated with the order would be P3.20 per unit shipping cost.What is the break-even price on this order?A. P23.35 C. P22.15B. P28.65 D. P21.70

72. The company has 1,000 CADS on hand that have some deformities and are thereforeconsidered to be “seconds.” Due to the deformities, it will be impossible to sell these units atthe normal price through regular distribution channels. What unit cost figure is relevant forsetting a minimum selling price?A. P16.80 C. P 4.70

B. P18.00 D. P 1.20

73. Due to a strike in its supplier’s plant, Adrenal Company is unable to purchase more material forthe production of CADS. The strike is expected to last for two months. Adrenal Company hasenough material on hand to continue to operate at 30% of normal levels for the two months. Ifthe plant were closed, fixed overhead costs would continue at 60% of their normal level duringthe two-month period; the fixed selling costs would be reduced by 20% while the plant wasclosed. How much is the advantage or disadvantage of closing the plant for the two-monthperiod?A. Disadvantage, P144,000 C. Disadvantage, P15,000B. Advantage, P144,000 D. Advantage, P15,000

74. An outside manufacturer has offered to produce CADS for Adrenal Company and to ship themdirectly to Adrenal’s customers. If Adrenal Company accepts this offer, the facilities that it usesto produce CADS would be idle; however, fixed overhead costs would be reduced by 75% oftheir present level. Since the outside manufacturer would pay for all the costs of shipping, thevariable selling costs would be only two-thirds of their present amount. What is the unit costfigure that is relevant for comparison to whatever quoted price is received from the outsidemanufacturer?A. P20.95 C. P20.55B. P21.35 D. P16.80

Question Numbers 75 though 77 are based on the following:Henderson Equipment Company has produced a pilot run of 50 units of a recently developedcylinder used in its finished products. The company expects to produce and sell 800 units. Thepilot run required 14.25 direct-labor hours for the 50 cylinders, averaging 0.285 direct-labor hoursper cylinder. Henderson has experienced a significant learning curve on the direct-labor hoursneeded to produce new cylinders. As cumulative output doubles, say from 25 to 50 units forexample, the average labor time per unit declines by 20 percent. Past experience indicates thatlearning tends to cease by the time 800 parts are produced. Henderson’s manufacturing costs forcylinders are as follows:

Direct labor P120.00 per hourVariable overhead 100.00 per direct labor hourFixed overhead 166.00 per direct labor hourDirect material 40.50 per unit

Henderson has received a quote of P75 per unit from the Leyte Machine Company for theadditional 750 cylinders needed. Henderson frequently subcontracts this type of work and has

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always been satisfied with the quality of the units produced by Leyte. Recently, HendersonEquipment Company has been operating at considerably less than full capacity.

75. How many direct-labor hours are expected to be used for the production of 800 cylinders(including the pilot run)?A. 93.4 hours C. 79.1 hoursB. 74.7 hours D. 67.6 hours

76. The production of 800 cylinders, including the pilot run, requires total incremental costs of:A. P48,834 C. P68,452B. P49,802 D. P52,948

77. The effect on profit of producing 750 units instead of buying them from Leyte MachineCompany a(an)?A. Increase of P 8,470. C. Increase of P12,676.B. Increase of P 7,052. D. Decrease of P22,560.

Questions 78 through 81 are based on the following:CLASP Industries received an order for a piece of special machinery from Tigok Company. Just asCLASP completed the machine, Tigok declared backruptcy, defaulted on the order, and forfeitedthe 10 percent deposit paid on the selling price of P72,500.

CLASP’s manufacturing manager identified the costs already incurred in the production of thespecial machinery for Tigok as follows:

Direct material P16,600Direct labor 21,400Manufacturing overhead: Variable P10,700 Fixed 5,350 16,050Fixed selling and administrative costs 5,405Total P59,455

Another company, Kay Corporation, will buy the special machinery if it is reworked to Kay’sspecifications. CLASP offered to sell the reworked machinery to Kay as a special order forP68,400. Kay agreed to pay the price when it takes delivery in two months. The additionalidentifiable costs to rework the machinery to Kay’s specifications are as follows:

Direct materials P 6,200

Direct labor 4,200Total P10,400

A second alternative available to CLASP is to convert the special machinery to the standard model,which sells for P62,500. The additional identifiable costs for this conversion are as follows:

Direct materials P2,850Direct labor 3,300Total P6,150

A third alternative for CLASP is to sell the machine as is for a price of P52,000. However, thepotential buyer of the unmodified machine does not want it for 60 days. This buyer has offered aP7,000 down payment, with the remainder due upon delivery.

The following additional information is available regarding CLASP’s operations:

1. The sales commission rate on sales of standard models is 2 percent, while the rate on specialorders is 3 percent.

2. Normal credit terms for sales of standard models are 2/10, net/30. This means that acustomer receives a 2 percent discount if payment is made within 10 days, and payment isdue no later than 30 days after billing. Most customers take the 2 percent discount. Creditterms for a special order are negotiated with the customer.

3. The allocation rates for manufacturing overhead and fixed selling and administrative costs areas follows:Manufacturing costs: Variable 50% of direct-labor costs Fixed 25% of direct-labor costsFixed selling and administrative costs 10% of the total manufacturing costs

4. Normal time required for rework is one month.

78. How much peso contribution would the sale to Kay Corporation add to CLASP’ before-taxprofit?A. P53,848 C. P55,900B. P55,948 D. P 9,300

79. How much peso contribution would the alternative of converting the special machinery to

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standard model add to CLASP’s before-tax profit?A. P52,200 C. P52,825B. P54,475 D. P 7,650

80. If Kay makes CLASP a counteroffer, what is the lowest price CLASP should accept for thereworked machinery from Kay?A. P10,400 C. P10,722B. P12,500 D. P12,887

81. How much would the alternative of selling unmodified machinery to the potential buyercontribute to CLASP’s before-tax profit?A. P50,440 C. P49,920B. P 1,740 D. P49,400

Question Nos. 82 and 85 are based on the following:Constraint Company manufactures and sells three products, which are manufactured in a factorywith four departments. Both labor and machine time are applied to the products as they passthrough each department. The machines and labor skills required in each department are sospecialized that neither machines nor labor can be switched from one department to another.

Constraint Company’s management is planning its production schedule for the next few months.The planning is complicated, because there are labor shortages in the community and somemachines will be down several months for repairs.

Management has assembled the following information regarding available machine and labor timeby department and the machine hours and direct-labors required per unit of product. These datashould be valid for the next six months.

D E P A R T M E N TMonthly Capacity Available 1 2 3 4Norman machine capacity in MH 3,500 3,500 3,000 3,500Capacity of machines being repairedin machine hours ( 500) ( 400) ( 300) ( 200)Available machine capacity in MH 3,000 3,100 2,700 3,300Available direct labor hours (DLH) 3,700 4,500 2,750 2,600

Labor and Machine Specifications perUnit of Product

Product Labor and Machine Time 401 Direct labor hours 2 3 3 1 Machine hours 1 1 2 2 403 Direct labor hours 1 2 - 2 Machine hours 1 1 - 2 405 Direct labor hours 2 2 2 1 Machine hours 2 2 1 1

The sales department believes that the monthly demand for the next six months will be as follows:

Product Monthly Unit Sales401 500403 400405 1,000

Inventory levels are satisfactory and need not be increased or decreased during the next sixmonths. Unit price and cost data that will be valid for the next six months are as follows:

P R O D U C T S401 403 405

Unit costs: Direct material P 7 P 13 P 17 Direct laborDepartment 1 12 6 12Department 2 21 14 14Department 3 24 -- 16Department 4 9 18 9 Variable overhead 27 20 25 Fixed overhead 15 10 32 Variable selling expenses 3 2 4Unit selling price P196 P123 P167

82. Which department has capacity constraint in labor hours?A. Department 1 C. Department 3B. Department 2 D. Department 4

83. The total Machine Hours required by estimated monthly unit sales are:A. 10,600 C. 11,600

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B. 12,100 D. 13,500

84. The total number of labor hours as constraint for a month is:A. 50 C. 300B. 750 D. No constraint

85. In order to maximize its monthly profit, Constraint Company should produce:A. B. C. D.

401 250 250 500 500403 0 400 400 0405 1,000 1,000 625 625

Question Nos. 86 through 89 are based on the following;Arnold Syjuco operates a small machine shops. He manufactures one standard product availablefrom many other similar businesses and he also manufactures products to customer order. Hiaccountant prepared the annual income statement shown below:

Custom Sales Standard Sales TotalSales P1,000,000 P500,000 P1,500,000Material P 200,000 P160,000 P 360,000Labor 400,000 180,000 580,000Depreciation 126,000 72,000 198,000Power 14,000 8,000 22,000Rent 120,000 20,000 140,000Heat and light 12,000 2,000 14,000Other 8,000 18,000 26,000 Total P 880,000 P460,000 P1,340,000Income P 120,000 P 40,000 P 160,000

The depreciation charges are for machines used in the respective product lines. The power chargeis apportioned on the estimate of power consumed. The rent is for the building space which hasbeen leased for 10 years at P140,000 per year. The rent and heat and light are apportioned to theproduct lines based on amount of floor space occupied. All other costs are current expensesidentified with the product line incurring them.

A valued custom parts customer has asked Mr. Syjuco to manufacture 5,000 special units for him.Mr. Syjuco is working at capacity and would have to give up some other business to take this

business. He cannot renege on custom orders already agreed to but he could reduce the output ofhis standard product by about one-half for one year while producing the specially requestedcustom part. The customer is willing to pay P140 for each part. The material cost will be aboutP40 per unit and the labor will be P72 per unit. Mr. Syjuco will have to spend P40,000 for a specialdevice which will be discarded when the job is done.

86. What is the incremental cost of the special order of 5,000 units?A. P600,000 C. P779,000B. P421,000 D. P371,000

87. What is the full cost of the special order?A. P779,000 C. P421,000B. P492,400 D. P651,000

88. The amount of opportunity cost of taking the special order is:A. P183,000 C. P250,000B. P 71,000 D. P124,600

89. What is the effect on the overall profit if the special order is accepted?A. P450,000 C. P( 25,000)B. P( 85,000) D. P 29,000

Question Nos. 90 through 94 are based on the following:The Verbatim Corporation, which produces and sells to wholesalers a highly successful line ofsummer lotions and insect repellents, has decided to diversify in order to stabilize sales over theyear. A natural area for the company to consider is the production of special lotion and cream toprevent dry and chapped skin.

After considerable research, a special product line has been developed. However, because of theconservatism of the company management, Verbatim’s president has decided to introduce onlyone of the new products for this coming rainy season. If the product is a success, furtherexpansion will be initiated in future years.

The product selected (called Chaps) is a lip balm that will be sold in a lipstick-type tube. Theproduct will be sold to wholesalers in boxes of 24 tubes for P800 per box. Because of availablecapacity, no additional fixed charges will be incurred to produce the product. However, aP10,000,000 fixed charge will be absorbed by the new product to allocate a fair share of thecompany’s present fixed costs to it.

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Using the estimated sales and production of 100,000 boxes of Chaps as the standard volume, theaccounting department has developed the following costs:

Direct labor P200 per boxDirect materials 300 per boxTotal overhead 150 per boxTotal P650 per box

Verbatim has approached a cosmetics manufacturer to discuss the possibility of purchasing thetubes for Chaps. The purchase price of the empty tubes from the cosmetics manufacturer wouldbe P90 per 24 tubes. If the Verbatim Corporation accepts the purchase proposal, it is estimatedthat direct labor and variable overhead costs would be reduced by 10% and direct material costswould be reduced by 20%.

90. What is the variable overhead rate per box of Chaps?A. P100 C. P 50B. P150 D. P200

91. What is the material cost per box of Chaps saved by purchasing them?A. P300 C. P 60B. P240 D. P 30

92. How much would it cost Verbatim to produce the tubes per box?A. P 60 C. P 90B. P 85 D. P120

93. How much would Verbatim incur by making 125,000 boxes, assuming that additionalequipment, at an annual rental of P1,000,000, must be acquired to produce this volume?A. P10,625,000 C. P11,250,000B. P11,625,000 D. P12,500,000

94. Referring to Question No. 93, what is the impact on its profit if Verbatim were to buy 125,000boxes?A. Additional profit of P1,000,000. C. Additional profit of P375,000.B. Additional profit of P1,250,000. D. Decrease in profit of P625,000.

Question Nos. 95 through 101 are based on the following:Medical Supply Company produced hydraulic hoists that were used by hospitals to move

bedridden patients. The costs of manufacturing and marketing hydraulic hoists at the company’snormal volume of 3,000 units per month are show below:

Unit manufacturing costs:Direct materials P1,000Direct labor 1,500Variable overhead 500Fixed overhead 1,200 P4,200Unit marketing costs:Variable 500Fixed 1,400 1,900Total unit costs P6,100

Unless otherwise stated, assume there is no connection between the situations described in thequestions; each is to be treated independently. Unless otherwise stated, a regular selling price ofP7,400 per unit should be assumed. Ignore income taxes and other costs that are not mentionedin the cost schedule or in a question itself.

95. What is the monthly breakeven units for Medical Supply Company?A. 2,000 C. 1,950B. 2,689 D. 2,614

96. Market research estimates that volume could be increased to 3,500 units, which is well withinhoist production capacity limitations, if the price were ct from P7,400 to P6,500 per unit.Assuming the cost behavior patterns implied by the data in the cost schedule is correct, wouldyou recommend this action be taken?A. Yes, because the profit will increase by P1,500,000.B. Yes, because the profit will increase by P 200,000.C. No, because the profit will decrease by P1,200,000.D. No, because the profit will decrease by P2,400,000.

97. On March 1, a contract offer is made to Medical Supply Company by the Veterans’ Hospital tosupply 500 units for delivery by March 31. Because of an unusually large number of rushorders form their regular customers. Medical Supply plans to produce 4,000 units duringMarch, which will use all available capacity. If the Veterans’ Hospital’s order is accepted, 500units normally sold to regular customers would be lost to a competitor. The contract given bythe hospital would reimburse the Veterans’ Hospital’s share of March manufacturing costs,plus pay a fixed fee (profit) of P500,000. (There would be no variable marketing costs incurredon the hospital’s unit.) What impact would accepting the Veterans’ Hospital contract have on

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March income?A. P 1,100,000 C. P(1,350,000)B. P( 850,000) D. P 500,000

98. Medical Supply Company has an opportunity to enter a foreign market in which pricecompetition is keen. An attraction of the foreign market is that demand there is greatest whendemand in the domestic market is quite low; thus idle production facilities could be usedwithout affecting domestic business.An order for 1,000 units is being sought at a below-normal price in order to enter this market.Shipping costs for this order will amount to P750 per unit, while total costs of obtaining thecontract (marketing costs) will be P40,000. No other variable marketing costs would berequired on this order. Domestic business would be unaffected by this order. What is theminimum unit price should Medical Supply Company consider for this order of 1,000 units?A. P3,750 C. P3,790B. P3,000 D. P4,290

99. An inventory of 230 units of an obsolete model of the hoist remains in the stockroom. Thesemust be sold through regular channels at reduced prices, or the inventory will soon bevalueless. What is the minimum price that would be acceptable in selling these units?A. P3,500 C. P3,000B. P4,200 D. P 500

100. A proposal is received from an outside contractor who will make and ship 1,000 hydraulic hoistunits per month directly to Medical Supply’s customers as orders are received from MedicalSupply’s sales staff. Medical Supply’s fixed marketing costs would be unaffected, but itsvariable marketing costs would be cut by 20 percent for these 1,000 units produced by thecontractor. Medical Supply’s plant would operate at two thirds of its normal level, and totalallocated fixed manufacturing costs for these 1,000 units would be cut by 30 percent. What in-house unit cost should be used to compare with the quotation received from the supplier?A. P 3,760 C. P 4,240B. P 3,000 D. P 3,460

101. Assume the same facts as in requirement No. 101 except that the idle facilities would be usedto produce 800 modified hydraulic hoists per month for us in hospital operating rooms. Thesemodified hoists could be sold for P9,000 each, while the costs of production would be P5,500per unit variable manufacturing expense. Variable marketing costs would be P1,000 per unit.Fixed marketing and manufacturing costs would be unchanged whether the original 3,000regular units hoists were manufactured or the mix of 2,000 regular hoists plus 800 modifiedhoists were produced. What is the maximum purchase price per unit that Medical Supply

should be willing to pay the outside contractor?A. P 5,100 C. P 5,500B. P 3,100 D. P 5,600

Question Nos. 102 and 103 are based on the following:Marcus Fibers, Inc., specializes in the manufacturing of synthetic fibers that the company uses inmany products such as blankets, coats, and uniforms for police and firefighters. Marcus has beenin business since 1975 and has been profitable every year since 1983. The company uses astandard cost system and applies overhead on the basis of direct labor hours.

Marcus has recently received a request to bid on the manufacture of 800,000 blankets scheduledfor delivery to several military bases. The bid must be started at full cost per unit plus a return onfull cost of no more than 9 percent after income taxes. Full cost has been defined as including allvariable costs of manufacturing the product, a reasonable amount of fixed overhead, andreasonable incremental administrative costs associated with the manufacture and sale of theproduct. The contractor has indicated that bids in excess of P25 per blankets are not likely to beconsidered.

In order to prepare the bid for the 800,000 blankets, Andrea Lighter, cost accountant, has gatheredthe following information about the cost associated with the production of the blankets.

Direct material P 1.50 per pound of fibersDirect labor P 7.00 per hourDirect machine costs* P10,00 per blanketVariable overhead P 3.00 per direct labor hourFixed overhead P 8.00 per direct labor hourIncremental administrative costs P2,500 per 1,000 blanketsSpecial fee** P 0.50 per blanketMaterial usage 6 pounds per blanketProduction rate 4 blankets per DLHEffective tax rate 40%

102. The minimum price per blanket that Marcus Fibers, Inc., could bid without reducing thecompany’s net income isA. P24.00 C. P50.25B. P21.50 D. P40.25

103. Using the full-cost criteria and the maximum allowable return specified, Marcus Fibers’ bidprice per blanket would be:

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A. P24.00 C. P26.00B. P29.90 D. P27.90

ANSWER EXPLANATIONS

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1 . Answer: CCost of alternative selected P800,000Cost of alternative rejected 650,000Incremental cost P150,000

2 . Answer: AThe company needs to purchase 55,000 units earlier than their scheduled 5,000-unit monthly purchase. Hence, theaverage investment for the inventory is (55,000 x P60 ÷ 2) or P1,650,000. The opportunity cost is P132,000 or(P1,650,000 x 0.08).

3 . Answer: AAdditional revenue after rework (24,000(12 – 4) P192,000Less Additional cost (24,000 x 2) 48,000Additional profit P144,000

4 . Answer: BThe only relevant out-of pocket cost is the variable selling expense which is P40. The sale thru the regular channelsinvolves an opportunity cost of P140.

Variable selling expense (40% x 100) 40Opportunity cost 140Total 180

5 . Answer: CRegular variable cost P8.00Overtime premium 1.50Relevant cost per unit P9.50

6 . Answer: BFull cost 50.00Fixed overhead (180,000/9,000) 20.00Relevant unit cost 30.00

7 . Answer: CCost of 1,000 kg at latest price (1,000 x 8.70) 8,700Add excess price include on the remaining 4,000 kg. 4,000 x (8.70 – 8.30) 1,600Relevant cost 10,300

8 . Answer: BDirect materials (2,000 @ 10) 20,000Direct labor (2,000 @ 12) 24,000Variable overhead (2,000 @ 6) 12,000Increase in variable cost due to overtime (2,000 @ 14) 28,000 Incremental cost 84,000

9 . Answer: BVariable costs P56,250Additional fixed costs 13,750Minimum bid price P70,000

10 . Answer: BDirect material (360,000 ÷ 24,000) P15.00Direct labor (540,000 ÷ 24,000) 22.50

Variable selling expenses (84,000 ÷ 24,000) 3.50Total P41.00Add Profit per unit (22,500 ÷ 1,500) 15.00Selling price P56.00

11 . Answer: BRelevant cost to make and sell:Direct materials 39Direct labor 6Variable OH 8Reduced selling expenses (30 x 0.06) 18Add’l fixed cost (20,000 ÷ 5,000) 4 Minimum selling price 75

12 . Answer: BThe company has no existing capacity. The minimum selling price for this special sales should equal the regular selling price plus additional expenses.

Regular selling price P18Additional expenses 1Minimum selling price P19

13 . Answer: ADirect materials 20.00Direct labor 15.00Variable overhead 12.00Variable shipping and handling 3.00Lost contribution margin – LB46 (10,000 ÷ 1,000) 10.00Minimum price 60.00

The lost contribution margin on regular sale is relevant because the company is operating at capacity. In a special salewherein the company has to give up some of its regular units, the relevant costs consist of incremental costs plus anyopportunity costs.

14 . Answer: DDirect materials 4.50Direct labor 10.00Variable overhead 3.00Variable selling expense 1.00Additional profit (40,000/5,000) 8.00Required selling price 26.50

15 . Answer: CThe maximum number of units in regular sales that Benjing could afford to lose equals the quantity that provides regularcontribution margin that matches the contribution margin provided by special sale.

Contribution margin from special sale 1,000 (14 – 8) 6,000Divided by regularCM (20 – 8) ÷ 12Maximum Number of units 500

To illustrate the solution:Contribution margin from special sale 6,000Less Decrease in regular sales’ contribution margin (500 x 12) 6,000Effect on profit NIL

16 . Answer: B

The maximum decrease in regular sale = Contribution margin from special sale/Unit contribution margin on regularsale

(400 x 0.20) ÷ (2.00 -1.50) = 160

17 . Answer: ATotal contribution margin from special sale(15,000 x P5.50) P82,500Less Additional fixed costs 30,000Profit from special sale P52,500Less Decrease in contribution margin on regularSale 2,000(P39 – P22.50) 33,000Additional profit P19,500

Please refer to Solution for Number regarding details of contribution margin per unit.

18 . Answer: CSelling price P6.00Relevant cost per unit:Regular cost per unit P7.50Less: Commission P0.75 Fixed overhead (P3 x 2/3) 2.00 (2.75)Net amount P4.75Incremental fixed cost (P150 300) 0.50 5.25Advantage per unit, Buy P0.75Number of units 300Increase in profit P 225

19 . Answer: DAdditional profit: 3,000 x (70 – 50) = 60,000

20 . Answer: ASpecial price 32Relevant cost:Direct materials 4Direct labor 12Variable overhead 6 22Unit contribution margin 10Units ordered 2,000Additional profit 20,000

21 . Answer: ASales 60,000Less: Variable production cost (1,500 x 30) 45,000 Additional Fixed cost 5,000 Labeling cost (1,500 x 2.50) 3,750 53,750Profit 6.250

22 . Answer: BThe minimum selling price should equal the relevant cost to produce and sell a unit of product.

Direct materials P50Direct labor 20Variable overhead (P10 x 0.2) 2Selling expense (P15 x 0.4) 6 Minimum selling price P78

23 . Answer: CThe company has no excess capacity to be devoted to the production of additional units for special sale. In a specialsale decision where there is no excess capacity, the minimum selling price must be equal to the market price less anyavoidable expenses.

Selling price P100Less Avoidable selling expense (P15 x 0.4) 6Minimum selling price P 94

24 . Answer: DThe book value of the old equipment is a sunk cost and therefore not a relevant one. Also, the related cost onoutstanding note are irrelevant. They are not affected by a decision.

25 . Answer: DRelevant Costs

BetaZetaDirect materials 4.00 80.00Direct labor10.00 47.00Factory overhead 40% 16.00 8.00Relevant UnitcostP30.00135.00

26 . Answer: CDirect material 2.00Direct labor 2.40Variable overhead 1.60Avoidable marketing cost (0.7 x 2.50) 1.75Relevant cost Make 7.75

The maximum purchase price, if ever the company has to decide buying the product, is P6.75. Any amount higher thanP6.75 will necessarily increase the unit cost of the product.

27 . Answer: BDirect materials 64,000Direct labor 16,000Variable overhead 8,000Avoidable fixed overhead 6,000 Total relevant cost to make 94,000

28 . Answer: DDirect materials 64,000Direct labor 16,000Variable overhead 8,000Additional contribution margin 16,000Total relevant cost to make 104,000

29 . Answer: BVariable cost to make parts (30,000 x 12) 360,000Cost buy (30,000 x 15) 450,000Cost savings – “Make” decision 90,000

30 . Answer: ADirect materials 80,000Direct labor 13,000Variable overhead 40,000Avoidable fixed overhead 4,000Relevant cost – make 137,000Purchase price 145,000

Advantage – Make 8,000

31 . Answer: ADirect materials 64,000Direct labor 16,000Variable overhead 8,000Total variable cost 88,000Less Purchase cost 104,000Avoidable fixed cost 16,000Add unavoidable FC 5,000Total fixed overhead 21,000

32 . Answer: BPurchase cost (2,000 x P15) P30,000Relevant cost to make: Variable cost (2,000 x P16) – 8,000 P24,000 Avoidable fixed cost (8,000 x 0.25) 2,000 26,000Additional cost – Buy (Decrease in profit) P 4,000

Alternative computation for relevant cost to make:Total cost (2,000 x P16) P32,000Less unavoidable fixed cost (8,000 x 0.75) 6,000Relevant cost to make P26,000

33 . Answer: CCost of purchase (2,000 x P15) P30,000Relevant cost – make:Variable cost (2,000 x P16) – P8,000 P24,000Avoidable fixed cost (P8,000 x 0.25) 2,000Opportunity cost – rent 6,000 32,000

Cost savings – Buy (increase in profit) P( 2,000)

34 . Answer: CRelevant costs to make

Direct materials P 90,000Direct labor 120,000Variable overhead 15,000Supervisor’s salary 30,000Opportunity costs, rent 65,000 Total 320,000

Relevant cost to buy (15,000 x P20) 300.000Advantage - Buy P 20,000If the company would purchase the units, it would save P20,000.

35 . Answer: BCost of ink cartridges (5,000 x P15) P75,000Less: Relevant cost to produce (5,000 x P8) 40,000Additional cost if ink cartridges are purchased P35,000

36 . Answer: BDirect material (20,000 @ 6) 120,000Direct labor (20,000 @30) 600,000Variable overhead (20,000 @ 120 240,000

Avoidable fixed cost (20,000 @ 9) 180,000Total relevant costs - Make 1,140,000

Purchase cost (20,000 @ 60) 1,200,000Add net savings 25,000Total 1,225,000Less: Cost to make 1,140,000Opportunity cost 85,000

37 . Answer: APurchase price 15,000Handling cost (20% x P15,000) 3,000Total 18,000Cost to make (21,200 – 8,000)* 13,200Increase in unit cost if goods are purchased 4,800

*Fixed OH (12,000 x 2 ÷ 3) = 8,000

38 . Answer: ACost to make:Direct materials P10,000Direct labor 5,000Variable overhead 5,000Avoidable fixed OH (20% x 30,000) 6,000Relevant cost P26,000Purchase costs (1,000 @ 30) 30,000Decrease in profit in profit P 4,000

39 . Answer: BRelevant costs to make per unit:Direct materials 6.00Direct labor 4.00Variable overhead 1.00Relevant cost – “to make” 11.00Purchase price per unit 12.50Increase in per unit cost if purchased 1.50

40 . Answer: ADirect materials 10,000Direct labor 5,000Variable overhead 5,000Avoidable fixed overhead (30,000 x 0.2) 6,000Total relevant cost 26,000Purchase cost 30,000Additional cost if purchased 4,000

41 . Answer: CDirect materials 3.00Direct labor 15.00 Variable overhead 6.00 Avoidable fixed cost 3.00 Total per unit 27.00 Number of unit x10,000

Total 270,000 Add savings from the manufacture of other product 45,000 Total relevant cost – make 315,000 Total purchase cost (10,000 x 30) 300,000 Advantage “Buy” 15,000

42 . Answer: DThough the problem deals with transfer of goods from one division to another division, the solution focuses on make onbuy decision approach.

Purchase price, outside supplier 1.25Variable cost to make (10,000 ÷ 10,000) 1.00Additional unit cost to the company 0.25Units to be purchased 10,000Decrease in Dana’s profit if goods are purchased 2,500

43 . Answer: CTotal purchase cost (5,000 x 7.75) 38,750Less Relevant cost to make

Direct materials @ 2.5 12,500Direct labor @ 3.5 17,500Variable overhead @ 1.5 7,500Avoidable fixed cost @ 0.5 2,500Opportunity cost 6,000 46,000

Net saving – purchase (7,250)

44 . Answer: DThe solution is made in equation form, using y = a + bx for 2 alternatives:

Let x = indifference point in unitsMake: y = 150,000 + 11xBuy: y = 60,000 + 12.875x

150,000 + 11x = 60,000 + 12.875x1.875x = 60,000x = 48,000

45 . Answer: CDirect materials 80,000Direct labor 13,000Variable overhead 40,000Avoidable fixed overhead 20,000Total relevant cost 153,000

46 . Answer: BSodaLemomadeSelling price6.005.00Variable cost 1.501.00Contribution margin4.504.00Processinghours34CM/Hr1.501.00For the Lemonade to be as profitable as Soda, its contribution margin per hour should be P1.50.

Therefore the required selling price for Lemonade is P7, calculated as:Contribution margin per unit (4 hours x P1.50) P6.00Variable cost per unit 1.00Selling price P7.00

47 . Answer: CProduct B has a greater contribution margin per unit (P15 - P12 = P3) than Product A (P12 - P10 = P2). The company should produce the maximum units it can sell of Product B (250,000) and use the rest of the machine hour capacity to

produce 100,000 units of Product A.

48 . Answer: DProduction order: Y, XProduct X: 60 ÷ 6 = 10Product Y: 42 ÷ 3 = 14Total capacity – MH 42,000Machine hours devoted to Product Y (8,000 x 3) 24,000Hours available to X 18,000

Production of X: 18,000 ÷ 6 = 3,000

49 . Answer: BProduction order:

BlenderElectric MixerPurchase price 20 38Variable cost to make: Direct materials 6 11 Direct materials 4 9 Overhead*(16 – 10) @ 6 12 Total( 16) (32)Additional cost if purchased 4 6Additional cost per hour (Blender, 1 hr; Mixer 2 hours)

4 3

Since it will cost Mary P4 per hour to buy Blender and only P3 if Electric Mixer is purchased, it will produce all ofBlender’s requirement and just purchase units of electric mixer that cannot be accommodated by the remaining capacity.

Product:Blender 20,000Electric Mixer [50,000 – (20,000 @ 1)] ÷ 2 15,000Purchase:Electric Mixer (28,000 – 15,000) 13,000

50 . Answer: ACM – Product A 36/2 x 1,000 18,000CM – Product B 45/3 x 1,000 15,000Difference in contribution margin 3,000

51 . Answer: A

Based on DLHProductsUCMDLH/unitCM/DLHPriorityA91.09.01STB101.56.672ndC82.04.003rd

Based on MHProductsUCMMH/unitCM/MHPriorityA94.52.03rdB1025.01stC82.53.22nd

52 . Answer: DPlasticMetalRC – make 11.00 13.00RC – Buy 15.50 17.50Additional Cost-Buy 4.50 4.50Hours required/unit÷ 3

÷ 4.5Additional cost /hr. 1.50 1.0Priority 1st 2ndCapacity (machine hours) 48,000MH used - Plastic (7,000 x 3)21,000Available MH to Metal27,000MH used - Metal (6,000 x 4.50) (27,000)Purchase of Metal (11,000 – 6,000) 5,000

53 . Answer: AHomeDeluxeProSelling price586580Direct materials(16)(20)(19)Direct labor(10)(15)(20)Variable overhead( 8)(12)

(16)CM/unit241825Processing hour(s) ÷ 1 ÷ 1.5 ÷ 2CM/DLH2412 12.50Profitability rank1st3rd2nd54 . Answer: B

Unit contribution margin: Product A P12 – P10 P2 Product B P15 – P12 P3

Contribution margin per hour: Product A P2 ÷ 0.8 P2.50 Product B P3 ÷ 1.25 P2.40

Total capacity in hours 350,000Less hours used by Product A 200,000 x 0.8 (160,000)Available hours for production of Product B 190,000Less hours by Product B 152,000 x 1.25 (190.000)Number of units to be produced: Product A 200,000 Product B 152,000

Product A has higher contribution margin per hour. The company should produce the maximum units it can sell ofProduct A and use the rest of the machine hour capacity to produce units of Product A in order to maximize its profit.

55 . Answer: BCM per hour: Product X: 50/5 10Product Y: 64/8 8The 20,000 hours (0.8 x 25,000) will be devoted to the production of X.Total contribution margin: (20,000 x 10) + (5,000 x 8) 240,000

56 . Answer: ASelling price per unit – silver polish P40Less variable costs:Grit 337 (P20 ÷ 4) P 5Ingredients, direct labor and variable OH 25Variable selling costs 3 33 Contribution margin per unit P 7

Minimum number of jars of silver polish to be produced:Avoidable fixed costs ÷ Contribution margin per jar P56,000 ÷ P7 8,000

The solution used the selling price of P20 as cost of Grit337 because there was unlimited demand for the cleaningpowder. If, however, the demand for the cleaning powder is limited, the recommended solution would use P16 as thecost of Grit 337.

57 . Answer: DIncrease in selling price 116 – 90 26Additional processing cost 18Addition profit per unit 8

58 . Answer: CSelling price after further processing P8.75Selling price if not processed further 7.20Additional sales per unit 1.55Number of units 25,000Additional total sales P38,750Less additional processing costs 33,750Increase in profit if the product is processed P 5,000

Because further processing will provide more profit per unit, the company should process further.

59 . Answer: DAdditional sales (350,000 – 250,000) P100,000Additional costs (75,000 + 15,000) 90,000Additional profit P 10,000

60 . Answer: AXYAdditional sales value1034Additional processing costs1530Incremental (decremental) profit per unit(5) 4If Product Y

is processed further, profit will increase by P16,000 (4,000 x 4).

61 . Answer: AAdditional Sales Price (65 – 50) 15.00Additional Cost (30 x 40%) 12.00 Additional profit 3.00

62 . Answer: CProduct to be processed further:Prod MProd NFinal selling price3123Selling price at split-off point2519Increase in selling

price64Units15,00030,000Total increase in sales90,000120,000Additional processing costs100,000110,000Increase(decrease) in profit(10,000)10,000

63 . Answer: CRevenues P104,000Avoidable costs:Cost of goods sold P 64,000Avoidable expenses (P6,000 + P8,000) 14,000 78,000Segment margin P 26,000

A segment is a potential candidate for elimination if its revenues are less than its avoidable costs. This is not the case forthis segment. The company will lose P26,000 of income if this segment is eliminated.

64 . Answer: AAvoidable fixed cost (benefit) 210,000Lost contribution margin 240,000Decrease in profit 30,000

65 . Answer: DThe question did not require any computation. If Mina Co. drops the Gold Ore, it will lose the segment margin ofP1,200,000, a decrease in Mina Co.’s income. The amount of direct fixed expenses that would be eliminated werepreviously deducted from contribution margin, and therefore, not considered in the determination of the effect onincome.

66 . Answer: BAvoidable common expenses (45,000 – 20,000) P 25,000Segment margin lost 32,000Decrease in profit P (7,000)

67 . Answer: AAvoidable fixed expenses:Manufacturing (150,000 – 105,000) 2 90,000Selling (30,000 x 0.10 x 2) 6,000Start up cost (additional fixed expense ( 8,000)Net avoidable costs 88,000Indifference point 88,000 ÷ (22-14) 11,000 units

At 11,000 unit level (2 months), the contribution margin equals the avoidable costs.

68 . Answer: DTotal Savings 5 year (125,000 – 100,000 ) 5 125,000Less:Additional depreciation (90,000 – 50,000) (40,000)Loss on sale of old machine (5,000 – 50,000) (45,000)

Increase in profit 40,000

69 . Answer: A Lease arrangement:Rental income (5 years) 48,000Cost of repairs, insurance and property taxes 10,000Net income 38,750

Sale arrangement:Net proceeds (25,000 x 0.95) 23,750 Differential income –lease 15,000

70 . Answer: AAdditional contribution (60,000 x 0.25 x 14) 210,000Additional fixed selling costs 80,000Additional profit 130,000

Selling price 32.00Variable expenses:Materials 10.00Direct labor 4.50Variable overhead 2.30Variable selling costs 1.20 18.00Unit contribution margin 14.00

71 . Answer: CDirect materials 10.00Direct labor 4.50Variable OH 2.30Variable selling cost 3.20Import duties 1.70Permits and licenses (9,000 ÷ 20,000) 0.45Minimum selling price 22.15

Import duties are assumed to be paid by Adrenal Company because of the nature of the sale.

72 . Answer: DThe relevant cost in selling the units on hand (inferior quality) is P1.20, the variable selling costs the production costs, though variable, are considered irrelevant because they are historical (sunk) costs.

73 . Answer: CAvoidable fixed costs:Manufacturing (0.40 x 50,000) 20,000Selling (35,000 x 0.20) 7,000Total 27,000

Contribution margin if the company has to operate (60,000 ÷ 6 x 0.30 x 14) 42,000Disadvantage, closing the plant (15,000)

74 . Answer: ADirect materials 10.00Direct labor 4.50Variable overhead 2.30

Avoidable fixed overhead (0.75 x 5) 3.75Avoidable variable expense (1.20 x 1 ÷ 3) 0.40Relevant cost – Make 20.95

75 . Answer: ABatch (each 50 units)Cum Ave. Hrs114.25211.4049.1287.296165.8368

Total Hours required: 16 x 5.8368 = 93.4

76 . Answer: DMaterials (800 x 40.50) 32,400Direct labor (93.40 x 120) 11,208Variable OH (93.40 x 100) 9,340Total 52,948

77 . Answer: AProduction cost – 750 units: Materials (750 x 40.00) 30,375Direct labor (93.40 – 14.25) 120 9,498VOH (93.40 – 14.25) 100 7,915Total 47,780Purchase cost (750 x 75)Advantage – make 56,250 8,470

78 . Answer: ASales price to Kay Corp. 68,400Rework costs: Direct materials 6,200 Direct labor 4,200 Variable OH (4200 x 50%) 2,100 (12,500)Commission (68,400 x 0.03) ( 2,052)Before – tax peso contribution 53.848

79 . Answer: ARegular price 62,500Deduct: 2% commission (62,500 x 0.02) 1,250 Sales discount (62,500 x 0.02) 1,250 2,500 Net price 60,000Less additional conversion costs: Direct materials 2,850 Direct labor 3,300 Variable OH - 50% 1,650 7,800Net before – tax contribution 52,200

80 . Answer: DCost of rework 6,200Direct labor 4,200Variable OH (4,200 x 0.50) 2,100Total 12,500Commission [0.03 (12,500 0.97)] 387Total 12,887

81 . Answer: ASales price 52,000Less: Commission (52,200 x 0.03) 1,560Net contribution 50,440

82 . Answer: CDepartment 3 has constraint in labor hours of 750.

Dept. 1Dept. 2Dept. 3Dept. 4Available DLH3,7004,5002,7502,600DLH required4011,0001,5001,500 500402 400 800 --8004032,0002,0002,0001,000 Total3,4004,3003,5002,300Excess (Constraint) 300 200( 750) 300

83 . Answer: A The available machine hours are sufficient to produce the estimated monthly sales. The schedule for monthlyproduction should consider maximizing the use of available direct labor hours in Department 3 because it is the only onewith constraint.

Dept. 1Dept. 2Dept. 3Dept. 4Available MH3,0003,1002,7003,300MH required401 500 5001,0001,000402 400 400 --8004032,0002,000 1,0001,000 Total2,9002,9002,0002,800Excess (Constraint) 100 200 700 500

Total machine hours required by monthly unit sales: (2,900 + 2,900 + 2,000 + 2,800) 10,600

84 . Answer: BThe table showing the comparison of available hours and required hours to produce all the required units in number 82indicated that Department 3 is short by 750 hours. Any excess direct labor hours in the other departments cannot beswitched to Department 3.

85 . Answer: BThe production plan that will maximize monthly profit should be based on the profitability of the three products in termsof the use of direct labor hours in Department 3.

P R O D U C T S401403405Selling price per unitP196P123P167Variable unit costsDirect material71317Directlabor663851Variable overhead272025Selling expenses324 Total variable cost1037397Unit contribution marginP 93P

50P 70No. of DLH required – Dept 33-2Contribution margin per DLHP 31-P 35Based on the above schedule, Product405 is more profitable per hour than Product 401’s and, therefore, all of the units required for Product 405 should be

produced. Product 403 would not use any direct labor hours in Department 3 and so all of the required units for Product403 can be produced.

Available direct labor hours – Department 3 2,750

Hours used by Product 405 1,000 x 2 2,000Available hours for Product 401 750

Production units – Product 401 250 x 3 750

Production:Product 401 250Product 403 400Product 405 1,000

Alternative Solution:

Since Product 401 is the less profitable per DLH, Product 403 and 405 will be produced in full and Product 401 will bepartially produced.

Total required units, Product 401 500Equivalent units based on constraint 750 ÷ 3 250Production of Product 401 250

Alternative question: What is the maximum monthly contribution margin that Constraint Company can earn?Product 401 250 @ P93 P 23,250Product 403 400 @ P50 20,000Product 405 1,000 @ P70 70,000 Total contribution margin P113,250

86 . Answer: BCosts incurred to make the order:Material (5,000 x 40) P200,000Labor (5,000 x 72) 360,000Incremental fixed cost (special device) 40,000Costs to be incurred P600,000

Decrease in costs for standard products:Material (0.5 x 160,000) P 80,000Labor (0.5 x P180,000) 90,000Other (0.5 x P18,000 9,000Decrease in costs P179,000Net incremental costs P421,000

The amounts for depreciation, rent, and heat and light are assumed to be not affected by the special order. There is noinformation provided as to how power cost was exactly incurred.

87 . Answer: DCosts to be incurred for special order P600,000Fixed costs:Depreciation (0.5 x 72,000) P36,000Power (0.5 x 8,000) 4,000Rent (0.5 x 20,000) 10,000Heat and Light (0.5 x 2,000) 1,000 51,000Total cost P651,000

The amount of fixed costs allocated to special order would be the costs that should have been assigned to thestandard sales that would be cancelled.

88 . Answer: BDecrease in sales of standard products0.50 x 500,000 P250,000Less variable costs: Material (160,000 x 0.5) P80,000 Labor (180,000 x 0.5) 90,000 Other (18,000 x 0.5) 9,000 179,000Opportunity costs P 71,000

89 . Answer: DSpecial sales (5,000 x 140) P700,000Variable costs 600,000Contribution margin from special sale 100,000Less opportunity costs 71,000Increase in profit P 29,000

90 . Answer: CTotal overhead rate per box P150Less fixed overhead allocated per boxP10,000,000 ÷ 100,000 boxes 100

Variable overhead rate per box P 50

91 . Answer: CThe cost of materials saved by a decision of purchasing the tubes: is P300 x 0.20 = P 60

92 . Answer: BThe relevant cost to make the tubes by Verbatim should equal the amount of cost savings as follows:

Savings on materials 0.2 x P300 P 60Labor 0.1 x P200 20Overhead 0.1 x P 50 5Total savings (relevant cost) P 85

The maximum amount that Verbatim is willing to pay per box of 24 tubes must be P85.

93 . Answer: BCost of making 125,000 boxes:Variable costs 125,000 x 85 10,625,000Additional fixed costs 1,000,000Total 11,625,000

94 . Answer: CTotal purchase cost 125,000 x 900 11,250,000Total cost to make 125,000 x 85 11,625,000Savings if purchased 375,000

95 . Answer: AFixed costs:Manufacturing 3,000 x 1,200 P3,600,000Marketing 3,000 x 1,400 4,200,000 Total P7,800,000

Selling Price P 7,400Less Variable costs:Direct materials P1,000Direct labor 1,500Variable overhead 500Marketing costs 500 Total 3,500Unit contribution margin P 3,900

Breakeven units 7,800,000 ÷ 3,900 2,000 units

96 . Answer: CIn as much that there would be no change in the amount of fixed costs, the recommended solution was made by justcomparing the amounts of contribution margin based on the revised data and the original information:

Contribution margin based on new estimates 3,500 x (6,500 – 3,500) 10,500,000Contribution margin based on current estimates Decrease 3,000 x (7,400 – 3,500) 11,700,000Decrease in profit ( 1,200,000)

Alternative Solution:Total contribution margin 3,000 x (7,400 – 3,500) 11,700,000Less Fixed costs 7,800,000

Current profit 3,900,000

Total contribution margin at reduced price 3,500 x (6,500 – 3,500) 10,500,000Less Fixed costs 7,800,000Revised profit 2,700,000Current profit 3,900,000Decrease in profit ( 1,200,000)

97 . Answer: BFixed fee P 500,000Fixed overhead reimbursement 500 x 1,200 600,000Total 1,100,000Less lost contribution margin on regular customers (500 x 3,900) 1.950,000Decrease in profit P( 850,000)

The reimbursement for fixed overhead is an income for Medical Hospital Company because the special order does notentail additional fixed overhead.

98 . Answer: CDirect materials 1,000Direct labor 1,500Variable overhead 500Shipping cost 750Cost of obtaining the order 40,000 ÷ 1,000 40Minimum selling price 3,790

99 . Answer: DAll the production costs, both variable and fixed, are no longer relevant because they are sunk costs. To be relevant to adecision, the cost must be both valid and relevant. Therefore, the only relevant cost is the variable marketing cost,because if the units will be sold through regular channel, P500 will be incurred.

100 . Answer: DThe maximum price at which the price charged by the contractor would indifferent to the cost to make the hoist is thetotal differential cost or avoidable cost.

Direct materials 1,000Direct labor 1,500Variable overhead 500Avoidable fixed overhead 1,200 x 0.30 360Avoidable variable marketing cost 500 x 0.2 100Maximum purchase price 3,460

101 . Answer: ADirect materials 1,000Direct labor 1,500Variable overhead 500Avoidable marketing costs 100Opportunity cost [800 x (9,000 – 5,500 – 1,000)] ÷ 1,000 2,000Maximum purchase price 5,100

A better understanding of the solution can be made by drawing a schedule to compute income for this alternative andcompare it with the income shown in solution for Question No. 97 as follows:

ModifiedRegularSales7,200,00022,200,000Variable production costs: In house production (2,000 x 3,000) 6,000,000

(800 x 5,500)4,400,000 Contractor’s cost 1,000 x 5,100 5,100,000Variable marketing costs Regular (2,000 x 500) +(1,000 x 400) 1,400,000 Modified (800 x 1,000) 800,000Fixed costs. . 7,800,000Profit2,000,0001,900,000Total profit (2,000,000 + 1,900,000) 3,900,000

102 . Answer: ADirect material (6 lbs. P1.50) P9.00Direct labor (0.25 hr. P7) 1.75Direct machine cost (P10/blanket) 10.00Variable overhead (0.25 hr. P3) 0.75Administrative costs (P2,500/1,000) 2.50Minimum bid price P24.00

103 . Answer: BUsing the full-cost criteria and the maximum allowable return specified, Marcus Fibers’ bid price per blanket would be:

Relevant costs (from Requirement 1) P24.00Fixed overhead (0.25 hr. P8) 2.00Subtotal P26.00Allowable return (0.15* P26) 3.90Bid price P29.90

*0.09/(1 – 0.40) = 0.15

module 6 incremental analysis basic concepts

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