Relevant Costing by a Bobadilla

Incremental Analysis

MODULE 6 INCREMENTAL ANALYSIS Basic concepts Steps in decision making process 5. 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 evaluating possible courses of action is to A. 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 revenues A. Will enable the decision maker to assess a decision‟s impact on profit B. Is useful in assessing a variety of alternative decisions C. Provides sufficient and complete evidence with which to make a decision D. Answers a. and b. are correct Pitfalls in decision making 1. 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. 1

Incremental Analysis

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-term goals, which can lead to neglect of: A. sales promotion C. quarterly net income results B. expense control D. long-term strategic goals Incremental analysis 25. Incremental analysis is the process of identifying the financial data that: A. do not change under alternative courses of action B. are mixed under alternative courses of action C. change under alternative courses of action D. no correct answer is given 48. Incremental analysis is most useful A. 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 information 2. Predicted future cost and revenue data that will differ among alternative courses of action are known as A. relevant information C. marginal costs B. direct information D. incremental costs

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Incremental Analysis

4. Which of the following is described as data that are pertinent to a decision? A. qualitative characteristics C. timely information B. 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 analysis 3. 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. D. analysis of manufacturing variances. Irrelevant costs Sunk costs 9. The kind of cost that can be ignored in a short-term decision making is a(an) A. differential cost C. sunk cost B. incremental cost D. joint cost 30. Sunk costs are A. Costs that increase due to a higher volume of activity or the performance of an additional activity B. 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 activity C. The profits that a company forgoes by following a particular course of action D. Costs that were incurred prior to making a decision 33. A sunk cost is: 3

Incremental Analysis

A. B. C. D.

a cost incurred in the past and not relevant to any future course of action. an opportunity cost. useful in analysis of alternative courses of action. relevant to current decision making.

13. Which of the following is least likely to be a relevant item in deciding whether to replace an old machine? A. acquisition cost of the old machine B. outlay to be made for the new machine C. annual savings to be enjoyed on the new machine D. life of the new machine Unit costs 22. 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 costs 16. Relevant costs are A. all fixed and variable costs B. all costs that would be incurred within the relevant range of production C. past costs that are expected to be different in the future D. anticipated future costs that will differ among various alternatives 14. The Health Care Division of Piedmont Insurance employs three claims processors capable of processing 5,000 claims each. The division currently processes 12,000 claims. The manager has recently been approached by two sister divisions. Auto Division would like the Health Care Division to process approximately 2,000 claims. Property Division would like the Health Care Division to process approximately 5,000 claims. The Health Care Division would be compensated by Auto Division or Property Division for processing these claims. Assume that these are mutually exclusive alternatives. Claims processor salary cost is relevant for 4

Incremental Analysis

A. B. C. D.

Auto Division alternative only Property Division alternative only both Auto Division and Property Division alternatives neither Auto Division nor Property Division alternatives

Differential costs 31. The difference in cost between or among various alternative courses of action appropriately describes a(an): A. differential cost C. constraint B. ad hoc discount D. scarce resource Opportunity cost 10. 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 called A. Marginal cost C. Incremental cost B. Cost outlay D. Opportunity cost 11. An “opportunity cost” is A. the difference in total costs that results from selecting one alternative instead of another B. the profit forgone by selecting one alternative instead of another C. a cost that may be saved by not adopting an alternative D. 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 B. not relevant to decision making and is not usually reflected in accounting records C. relevant to decision making and is usually reflected in accounting records D. 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 is called A. opportunity benefit C. relevant cost 5

Incremental Analysis

B. opportunity cost

D. sunk cost

26. Opportunity cost is the A. 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 are A. Costs that increase due to a higher volume of activity or the performance of an additional activity B. 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 activity C. The profits that a company forgoes by following a particular course of action D. Costs that were incurred prior to making a decision 27. Using opportunity cost to analyze the income effects of a given alternative is referred to as A. engineering analysis C. account analysis B. mixed-cost analysis D. differential analysis Avoidable 15. A fixed cost is relevant if it is A. future cost B. sunk

C. avoidable D. a product cost

17. Which of the following is (are) a true statement(s) about cost behaviors in incremental analysis? 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

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Incremental Analysis

29. Avoidable costs are A. Costs that increase due to a higher volume of activity or the performance of an additional activity B. 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 activity C. The profits that a company forgoes by following a particular course of action D. Costs that were incurred prior to making a decision Out-of-pocket costs 23. 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 cost B. Relevant benefits D. Incremental revenue Sensitivity analysis 20. 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 assumption proves to be wrong, managers will use: A. sensitivity analysis. C. incremental analysis. B. total analysis. D. regression analysis. Make-or-buy decision Qualitative Considerations 38. 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. Manufacturing B. Distribution D. all of these choices Make decision 34. Manufacturing parts internally by a company causes: 7

Incremental Analysis

A. B. C. D.

the company to be dependent upon suppliers for timely delivery of parts the quality of the parts to be under the control of the company lower parts costs to be assured 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, if A. The company‟s production facility is at full capacity B. The relevant cost per-unit of making the part exceeds the per-unit relevant costs of purchasing the part C. The supplier of the part can produce a higher-quality part D. The supplier of the part has questionable reliability Buy decision 35. 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 a part? A. maintaining a long-term relationship with suppliers B. quality control is critical C. utilization of idle capacity D. part is critical to product Relevant costs Fixed costs 36. 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 8

Incremental Analysis

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 costs 39. 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 which there is no alternative use is A. 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 than buying it from an outside supplier is considered a(an) A. sunk cost C. opportunity cost B. 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 item C. variable costs to produce the item D. fixed costs to produce the item 9

Incremental Analysis

Decision rule 42. 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‟s A. total costs B. variable production costs plus avoidable fixed production costs C. total manufacturing costs D. variable costs 84. A company owns equipment that is used to manufacture important parts for its production process. The company plans to sell the equipment for P10,000 and to select one of the following alternatives: (1) acquire new equipment for P80,000 (2) purchase the important parts from an outside company at P4 per part. The company should quantitatively analyze the alternatives by comparing the cost of manufacture the parts A. 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 decision Process 49. 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 special order? A. the sales price of the product or service B. the production capacity of the company C. the impact on regular customers 10

Incremental Analysis

D. all of these choices Irrelevant cost 83. 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 labor B. Depreciation D. Variable OH 54. Given the following list of costs, which one should be ignored in a decision to produce additional units of product for a factory that is operating at less than 100% capacity, and the additional business will not use up the remainder of the plant capacity? A. Direct material cost per unit C. Fixed selling expenses B. Direct labor cost per hour D. Variable selling expenses Relevant costs Long-run decision 58. 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 costss 50. An opportunity cost commonly associated with a special order is A. the contribution margin on lost sales B. the variable costs of the order C. additional fixed cost that is related to the increased output D. any of the above 53. Operating at or near full capacity will require a firm considering a special order to recognize the: A. opportunity cost arising from lost sales B. value of full employment C. time value of money D. need for good management 11

Incremental Analysis

Decision rule 82. Production of a special order will increase gross profit when the additional revenue from the special order is greater than A. 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 enough to 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 to produce its own boxes for frozen foods, or use to process another company‟s frozen foods. It will be more profitable for Green Giant to process the competitor‟s frozen foods as long as the net cost is A. 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 supplier. D. less than both the cost to leave the plant idle and the cost to make or buy the boxes. Minimum acceptable price With excess capacity 55. 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 capacity 12

Incremental Analysis

56. 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 cycle 45. A product life cycle includes the phases of A. research and development and design C. marketing and distribution B. purchasing and production D. all of the above Product pricing Variable cost approach 60. 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 approach 59. 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-plus approach 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, and manufacturing, as well as selling and administrative costs -- is called the percentage of 13

Incremental Analysis

A. full costs. B. variable manufacturing costs.

C. total variable costs. D. absorption costs.

Target pricing 43. 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 approach 61. 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 further Joint products 67. Two or more manufactured products that have significant sales values and are not uniquely identifiable as individual products until the split-off point are called A. common products. C. co-mingled products. B. joint products. D. cooperative products. Relevant costs Incremental revenue 32. 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. Cost to process further 14

Incremental Analysis

65. 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 rule 64. 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 should be sold „as is.” B. If the costs to process further exceed the costs of current production, the product should be processed further. C. If the increase in revenue from selling the product after further processing is greater than the additional costs incurred in further processing, the company should opt for further processing. D. If the revenues generated by processing the product further exceed the revenues from selling the product “as is,” the company should process further. Keep-or-drop decision Strategic considerations 66. The decision to keep or drop products or services involves strategic consideration of the: A. potential impact on remaining products or services B. impact on employee morale C. growth potential of the firm D. All of the above answers are correct Goal 78. The goal in deciding whether to add or drop products, services, or departments is to obtain the greatest A. reduction in total costs. B. contribution possible to cover unavoidable costs. 15

Incremental Analysis

C. increase in sales revenues. D. decrease in direct fixed costs. Irrelevant cost 80. Which of the following should not enter into decision of whether to drop product? A. Unavoidable costs B. Avoidable costs C. Revenue that would be lost D. Nonfinancial impacts of the decision Decision rule 79. 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 maximization Factors affecting sales mix 70. Which of the following is an important factor affecting the sales mix of any company? A. organizational advertising expenditures B. organizational sales force compensation plan C. product selling price D. All of the above To relax a constraint 73. Which of the following will relax a constraint? A. Outsourcing all or part of the bottleneck operation B. Working overtime at the bottleneck operation C. Retraining employees and shifting them from the bottleneck 16

Incremental Analysis

D. A and B, only Decision rule 76. 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. 71. A useful device for solving production problems involving multiple products and limited resources is: A. gross sales per unit of product C. net profit per unit of product B. 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 focus production and sales on the product with the highest: A. Contribution per unit of scarce resource C. Contribution margin in pesos B. Margin of Safety D. Operating Leverage 69. When there is one scarce resource, the product that should be produced first is the product with the highest A. 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 be subcontracted. Each product has sufficient orders to utilize the entire manufacturing capacity. For short-run profit maximization, Uranus should manufacture the product with the A. 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.

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Incremental Analysis

75. Profit can be maximized by producing products with the highest A. selling price B. contribution margin C. contribution margin per unit of items that are best sellers D. contribution per unit of the constraining resource 77. A company should advertise those products that A. Require the lowest commitment of resources to produce B. Have the largest total contribution margin C. Can be outsourced D. Have the largest total contribution margin after deducting the cost of the ad campaign Pitfall 81. 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) cost i. 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 costs would have been P650,000. In addition, Salmo‟s fixed costs during the fiscal year were P110,000. The incremental (decremental) cost was: A. P 40,000 C. P 150,000 B. P( 40,000) D. P(150,000) Opportunity cost ii. 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 of P60 per component. Luzon prefers to purchase 5,000 units per month, but its supplier could not guarantee this delivery schedule. In 18

Incremental Analysis

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 the 60,000 units at the beginning of the year is A. P132,000 C. P144,000 B. P150,000 D. P264,000 Defective/obsolete inventory Incremental net income iii. 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 and sold at their full price of P12 each. If Sieney reworks the defective units, how much incremental net income will result? A. P144,000 C. P 72,000 B. P 96,000 D. P 48,000 Minimum price iv. Joji Company manufactures and sell FM radios. Information on last year‟s operations (sales and production of the 2006 model) follows: Selling price P300 Cost per unit: Direct materials 70 Direct labor 40 Overhead (50% variable) 60 Selling costs (40% variable) 100 Production in units 10,000 Sales in units 9,500 At this time (May 2007), the 2007 model is in production and it renders the 2006 model radio obsolete. A foreign firm is willing to purchase the obsolete products at a net price of P140 each. If the remaining 500 units of the 2006 model radios are to be sold through regular channels, what is the minimum price the company would accept for the radios? A. P300 C. P270 B. P180 D. P 40 Special order Unit relevant cost 19

Incremental Analysis

v. 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 fixed manufacturing costs at P 5 per unit. A special order offering to buy 40,000 lamps for P11.50 each was received by Venus in April. Venus has sufficient plant capacity to manufacture the additional quantity of lamps; however, the production would have to be done by the present work force on an overtime-basis at an estimated additional cost of P1.50 per lamp. Venus will not incur any selling expenses as a result of the special order. Venus Company would have a unit relevant cost of A. P 8.00 C. P 9.50 B. P13.00 D. P14.50 vi. Wawa Enterprises has the capacity to produce 10,000 bearings, but operates at 90% of capacity. Bearings normally sell for P60 each, and cost an average of P50 to make, including a share of the monthly fixed costs of P180,000. Ilog Corp has offered to buy 1,000 bearings at P40 each. What is the relevant cost per unit? A. P 20 C. P 40 B. P 30 D. P 50 Total relevant cost vii. 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 the order. In analyzing the decision, the assistant controller is compiling the relevant costs of producing the order. The special order requires 1,000 kilograms of powdered Nitrocide, a solid chemical regularly used in the company‟s products. The current stock of Nitrocide is 8,000 kilograms at a book value of P8.10 per kilogram. If the special order is accepted, the firm will be forced to restock powdered Nitrocide earlier than expected, at a predicted cost of P8.70 per kilogram. Without the special order, the purchasing manager predicts that the price will be P8.30, when normal restocking 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. P10,300 B. P 8,300 D. P43,500 Incremental cost viii. Balagtas & Company expects to incur the following costs at the planned production level of 10,000 units: Direct materials P100,000 Direct labor 120,000 Variable overhead 60,000 20

Incremental Analysis

Fixed overhead 30,000 The selling price is P50 per unit. The company currently operates at full capacity of 10,000 units. Capacity can be increased to 13,000 units by operating overtime. Variable costs increase by P14 per unit for overtime production. Fixed overhead costs remain unchanged when 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. P31,000 B. P84,000 D. P62,000 Minimum acceptable price ix. Brace Co. has considerable excess manufacturing capacity. A special job order‟s cost sheet includes the following applied manufacturing overhead costs: Variable costs P56,250 Fixed 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 designers costing P13,750. What is the minimum acceptable price for the job? A. P 63,050 C. P101,250 B. P 70,000 D. P108,200 x. The cost to produce 24,000 units at 70% capacity consists of: Direct materials P360,000 Direct labor 540,000 Factory overhead, all fixed 290,000 Selling expense (35% variable, 65% fixed) 240,000 What unit price would the company have to charge to make P22,500 on a sale of 1,500 additional units that would be shipped out of the normal market area? A. P 51 C. P 41 B. P 56 D. P 50 xi. Kaila Company‟s unit cost of manufacturing and selling a given item at an activity level of 10,000 units per month are: Manufacturing costs Direct materials P39 21

Incremental Analysis

Direct labor 6 Variable overhead 8 Fixed overhead 9 Selling expenses Variable 30 Fixed 11 The company desires to seek an order for 5,000 units from a foreign customer. The variable selling expenses will be reduced by 40%, but the fixed costs for obtaining the order will be P20,000. Domestic sales will not be affected by the order. The minimum break-even price per unit to be considered on this special sale is A. P 71 C. P 69 B. P 75 D. P 84 xii. Chrisy Company sells a product for P18 per unit and the standard cost card for the product shows the following costs: Direct materials P 1.00 Direct labor 2.00 Overhead (80% fixed) 7.00 Total P10.00 Chrisy received a special order for 1,000 units of the product. The only additional cost to Chrisy would be foreign import taxes of P1 per unit. If Chrisy is able to sell all of the current production domestically, what would be the minimum sales price that Chrisy would consider for this special order? A. P 18 C. P 17 B. P 19 D. P 11 xiii. De Silva Co. is a manufacturer of industrial components. One of their products that is used as a subcomponent in auto manufacturing is KB69. This product has the following financial structure per unit: Selling price P150 Direct materials P 20 Direct labor 15 Variable manufacturing overhead 12 Fixed manufacturing overhead 30 Variable shipping and handling 3 22

Incremental Analysis

Fixed 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 KB69 parts. The next best alternative use of the excess capacity is to produce LB46, resulting in a contribution margin of P10,000. The minimum price that is acceptable for this one-time special order is A. P 60 C. P 70 B. P 87 D. P100 xiv. Sylvania Company. is currently operating at a loss of P15,000. The sales manager has received a special order for 5,000 units of product, which normally sells for P35 per unit. Costs associated 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 allow the use of a slightly lower grade of direct material, thereby lowering the price per unit by P1.50 and selling expenses would be decreased by P1. If Sylvania wants this special order to increase the total net income for the firm to P25,000, what sales price must be quoted for each of the 5,000 units? A. P18.50 C. P29.00 B. P24.50 D. P26.50 Maximum lost regular sales xv. 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 lose at the regular price before the decision become unwise? A. 1,000 units C. 500 units B. 200 units D. 0 units xvi. Filamer Company currently sells 1,000 units of product M for P2 each. Variable costs are P1.50. A discount store has offered P1.70 per unit for 400 units of product M. The managers believe that if they accept the special order, they will lose some sales at the regular price. 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 order xvii. 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 has a cost of P29 a unit. Further analysis reveals that you will not be paying sales commission of P2.50 a unit on this sales and its 23

Incremental Analysis

packaging requirement will save you an additional P1.50 per unit. However, the additional graphics required on this job will cost you P30,000. Note also that fixed costs amounting to P400,000 for the production of 50,000 of such products by the firm will not change. You decide to accept this order, but another customer who buys an average of 2,000 units for the period wants to pay you P22.50 rather than the regular price of P39 a unit. Profit will A. increase profit by P19,500 C. increase profit by P52,500 B. increase profit by P16,500 D. decrease profit by P52,500 xviii. The Thermo Company has received a special order for 300 units of product X for P6 a unit. It usually sells for P9.50 a unit with a cost of P7.50 a unit inclusive of 75 cents a unit as sales commission that will not be paid on this order. The cost also includes P3 in manufacturing overhead, was two-third of which is for the fair share of depreciation, rent, utilities and supervisor'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 increase A. loss by P225 C. gain by P225 B. loss by P375 D. gain by P375 xix. Alejar Company manufactures a product with a unit variable cost of P50 and a unit sales price of 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 a foreign market. This special sale would not affect its present sales. If the company has sufficient capacity to produce the additional units, acceptance of the special order would affect net 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. xx. KC Industries manufactures a product with the following costs per unit at the expected production of 30,000 units. Direct materials P 4 Direct labor 12 Variable manufacturing overhead 6 Fixed manufacturing overhead 8 The company has the capacity to produce 40,000 units. The product regularly sells for P40. A wholesaler 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 a A. P20,000 increase C. P4,000 increase 24

Incremental Analysis

B. P16,000 decrease

D. P 0 effect

xxi. 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 conversion cost. This product is seasonal. After July, demand for this product drops to 6,000 ounces monthly. In November, Garrison Co. offers to buy 1,500 ounces for P60,000. If Louderhead accepts the order, it must design a special label for Garrison at a cost of P5,000. Each label will cost P2.50 to make and apply. Louderhead should: A. accept the order, at a gain of P6,250 B. reject the order, at a loss of P18,750 C. reject the order, at a loss of P23,750 D. 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. Unit production costs (based on capacity production of 100,000 units per year) follow: Direct materials P50 Direct labor 20 Overhead (20% variable) 10 Other information: Sales price 100 SG & A costs (40% variable) 15 The Disk Division is operating at a level of 70,000 chips per year. xxii. What is the minimum price that the division would consider on a “special order” of 1,000 disks to be distributed through normal channels? A. P 72 C. P 81 B. P 78 D. P 6 xxiii. Assuming that that the Disk Division is producing and selling at capacity. What is the minimum selling price that the division would consider on a “special order” of 1,000 chips on which no variable period costs would be incurred? A. P100 C. P 94 B. P 72 D. P 90 25

Incremental Analysis

Make-or-buy decision Relevant costs xxiv. 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, the controller of the JLO Company is reviewing the decision to continue to make the small motors and 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 5 B. 1, 3, and 4 D. 2, 3, and 4 Relevant cost to make xxv. ELM Electronics has the following standard costs and other data: Part Beta Part Zeta Direct materials P 4.00 P80.00 Direct labor 10.00 47.00 Factory overhead 40.00 20.00 Unit standard cost P54.00 P147.00 Units needed per 6,000 8,000 year Machine hours per 4 2 unit Unit cost if P50.00 P150.00 purchased In the past years, ELM has manufactured all of its required components; however, this year only 30,000 hours of otherwise idle machine time can be devoted to 26

Incremental Analysis

the production of components. 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. Fixed capacity costs that will not be affected by any make-or-buy decision represent 60% of the applied overhead. The available 30,000 machine hours are to be scheduled so that ELM realizes maximum potential cost savings. The relevant unit production costs that should be considered in the decision to schedule machine time are: A. P54.00 for Beta and P147.00 for Zeta C. P14.00 for Beta and P127.00 for Zeta B. P50.00 for Beta and P150.00 for Zeta D. P30.00 for Beta and P135.00 for Zeta Maximum buy price xxvi. 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 at 30% if the company were to accept the proposal. What is the maximum amount per unit that the company can pay the supplier without decreasing its operating income? A. P8.50 C. P7.75 B. P6.75 D. P5.25 xxvii. Sinta Company can make 1,000 units of a necessary component with the following costs: Direct Materials P64,000 Direct Labor 16,000 Variable Overhead 8,000 Fixed Overhead ? 27

Incremental Analysis

The company can purchase the 1,000 units externally for P104,000. An analysis shows that at this external price, the company is indifferent between making or buying the part. Sinta Company 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 components, what is the maximum external price that Sinta Company would accept to acquire the 1,000 units externally? A. P102,000. C. P 96,000. B. P 94,000. D. P 88,000. xxviii. Almeda's Shop can make 1,000 units of a necessary component with the following costs: Direct Materials P64,000 Direct Labor 16,000 Variable Overhead 8,000 Fixed Overhead ? The company can purchase the 1,000 units externally for P104,000. None of Almeda Company's fixed overhead costs can be reduced, but another product could be made that would increase profit contribution by P16,000 if the components were acquired externally. If cost minimization is the major consideration and the company would prefer to buy the components, what is the maximum external price that Almeda Company would be willing to accept to acquire the 1,000 units externally? A. P 86,000. C. P 96,000. B. P110,000. D. P104,000. Effect of make decision xxix. 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 make the part is P20, including fixed costs, and P12, not including fixed costs. If 30,000 units of the part 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 part rather than purchasing it? A. P150,000 cost increase C. P150,000 cost decrease B. P 90,000 cost decrease D. P 90,000 cost increase xxx.

Alfaro's Manufacturing Company can make 100 units of a necessary component part with the following costs: Direct Materials P80,000 Direct Labor 13,000 28

Incremental Analysis

Variable Overhead 40,000 Fixed Overhead 27,000 If Alfaro's Manufacturing Company can purchase the component externally for P145,000 and only 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 P20,000 B. Buy and save P8,000 D. Buy and save P20,000 Effect of buy decision On fixed overhead cost xxxi. Sisa's Shop can make 1,000 units of a necessary component with the following costs: Direct Materials P64,000 Direct Labor 16,000 Variable Overhead 8,000 Fixed Overhead ? The company can purchase the 1,000 units externally for P104,000. The unavoidable fixed costs are P5,000 if the units are purchased externally. An analysis shows that at this external price, the company is indifferent between making or buying the part. What are the fixed overhead costs of making the component? A. P21,000. C. P11,000. B. P16,000. D. Cannot be determined. On income xxxii. 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 if product Whirl is outsourced, fixed costs of P8,000 attributable to this product will be reduced by 25%. If the product is outsourced, Sylvan will A. Decrease profit by P2,000 C. Increase profit by P2,000 B. Decrease profit by P4,000 D. Increase profit by P4,000 xxxiii. 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 if product Whirl is outsourced, fixed costs of P8,000 attributable to this product will be reduced by 25%. If Sylvan Processing Company purchased the product Whirl, the space could be rented out for P6,000. If the product is outsourced, profit would A. decrease, P2,000 C. increase, P2,000 29

Incremental Analysis

B. decrease, P4,000

D. increase, P4,000

xxxiv. It costs P450,000 to make 15,000 units of a part in this plant. This cost includes material of P90,000, direct labor of P120,000, variable overhead of P15,000, and P225,000 in fixed overhead 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. If the part is purchased, the space released can be rented for P65,000. If the part is purchased, the company will A. lose P20,000 C. gain P20,000 B. lose P45,000 D. gain P45,000 xxxv. Lane Co. manufactures ballpoint pens. Another manufacturer has offered to supply Lane with the 5,000 ink cartridges that it needs annually. The cost to buy the cartridges would be P15 each. In producing its own cartridges, Lane has incurred P10 in fixed costs and P8 in variable costs. If Lane buys the cartridges, its net income will: A. not change C. increase by P35,000 B. decrease by P35,000 D. increase by P25,000 xxxvi. The Rainbow Company manufactures Part No. 498 for use in its production cycle. The cost per unit if 20,000 units of Part No. 498 are manufactured are as follows: Direct materials P6 Direct labor 30 Variable overhead 12 Fixed 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 per unit. Rainbow will make the decision to buy the part from Reeves if there is a savings of P25,000 for Rainbow. If Rainbow accepts Reeves‟s offer, P9 per unit of the fixed overhead applied would be totally eliminated. Furthermore, Rainbow has determined that the released facilities could be used to save relevant costs in the manufacture of part No. 575. In order to have a savings of P25,000, the amount of the relevant costs that would be saved by using the released facilities in the manufacture of Part No. 575 would have to be A. P 80,000 C. P125,000 B. P 85,000 D. P140,000 xxxvii. Leis Manufacturing Co. uses 10 units of Part Number WS73 each month in the production of computer printer. The unit cost to manufacture one unit of 30

Incremental Analysis

WS73 is presented below. Direct materials P 1,000 Materials handling (20% of direct material cost) 200 Direct labor 8,000 Manufacturing overhead (150% of direct labor) 12,000 Total manufacturing cost P21,200 Material handling represents the direct variable costs of the Receiving Department that are applied to direct materials and purchased components on the basis of their cost. This is a separate charge in addition to manufacturing overhead. Leis‟ annual manufacturing overhead budget is one-third variable and two-thirds fixed. Garland Company, one of Leis‟ reliable vendors, 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 from Garland, the unit cost of WS73 would A. Increase by P4,800 C. Decrease by P6,200 B. Decrease by P3,200 D. Increase by P1,800 xxxviii. The Rural Cooperative, Inc. produces 1,000 units of Part M per month. The total manufacturing costs of the part are as follows: Direct materials P10,000 Direct labor 5,000 Variable overhead 5,000 Fixed overhead 30,000 Total manufacturing cost P50,000 An outside supplier has offered to supply the part at P30 per unit. It is estimated that 20% of the fixed overhead being assigned to Part M will no longer be incurred if the company purchases the part from the outside supplier. If Rural Cooperative purchases 1,000 units of Part M from the outside supplier, its monthly operating income will A. decrease by P 4,000 C. increase by P 1,000 B. decrease by P20,000 D. increase by P20,000 xxxix. Migs Corporation currently manufactures all component parts used in the manufacture of various hand tools. A steel handle is used in three different tools. The budgeted costs per unit based on 20,000 units are: Direct material P6.00 Direct labor 4.00 31

Incremental Analysis

Variable overhead 1.00 Fixed 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 each delivered. 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. xl. The Minolta, Inc. produces 1,000 units of Part M per month. The total manufacturing costs of the part are as follows: Direct materials P10,000 Direct labor 5,000 Variable overhead 5,000 Fixed overhead 30,000 Total manufacturing cost P50,000 An outside supplier has offered to supply the part at P30 per unit. It is estimated that 20% of the fixed overhead assigned to Part M will no longer be incurred if the company purchases the part from the outside supplier. If Minolta purchases 1,000 units of Part M from the outside supplier per month, then its monthly operating income will A. decrease by P 4,000 C. increase by P 1,000 B. decrease by P20,000 D. increase by P20,000 xli. Bulacan Company manufactures part G for use in the production of its principal product. The costs per unit for 10,000 units of part G are as follows: Direct materials P 3 Direct labor 15 Variable overhead 6 Fixed overhead 8 Total P32 Pampanga Company has offered to sell Bulacan 10,000 units of part G for P30 per unit. If Bulacan accepts Pampanga‟s offer, the released facilities could be used to save P45,000 in relevant costs in the manufacture of part H. In addition, P5 per unit of the fixed overhead applied to part G would continue. 32

Incremental Analysis

What alternative is more desirable and by what amount? A. B. C. Alternative Manufacture Manufacture Buy Amount P10,000 P15,000 P15,000

D. Buy P10,000

xlii. Blade Division of Dana Company produces hardened steel blades. One-third of the Blades Division‟s output is sold to the Lawn Products Division of Dana; the remainder is sold to outside customers. The Blade Division‟s estimated sales and standard costs data for the fiscal year ending June 30 are as follows: Lawn Products Outsiders Sales P15,000 P40,000 Variable 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 the Blade Division cannot sell any additional products to outside customers. Should Dana allow its Lawn Products Division to purchase the blades from the outside supplier, 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 xliii.

The Connell Company uses 5,000 units of Part 501 each year. The cost of manufacturing one unit Part 501 at this volume is as follows: Direct materials P2.50 Direct labor 3.50 Variable overhead 1.50 Fixed overhead 1.00 Total P8.50 An outside supplier has offered to sell Connell unlimited quantities of Part 501 at a unit cost of P7.75. If Connell accepts this offer, it can eliminate 50 percent of the fixed costs assigned to part 501. Furthermore, the space devoted to the manufacture of Part 501 would be rented to another company for P6,000 per year. If Connell accepts the offer of the outside supplier, annual profits will 33

Incremental Analysis

A. Increase by P13,500 B. Increase by P11,000

C. Increase by P 7,250 D. Increase by P 1,250

Point of indifference - Units xliv. 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 used to produce Part QS42 have fixed monthly cost of P150,000 and a capacity to produce 84,000 units per month. If Mars were to buy Part QS42 from an outside supplier, the facilities would be idle, but 60 percent of its fixed costs would not continue. The variable production costs of Part QS42 are P11 per unit. If Mars Industries is able to obtain Part QS42 from an outside supplier at a unit purchase price of P12.875, the monthly usage at which it will be indifferent between purchasing and making Part QS42 is A. 30,000 units C. 80,000 units B. 32,000 units D. 48,000 units Point of indifference - price xlv. Calero Manufacturing Company can make 100 units of a necessary component part with the following costs: Direct Materials P80,000 Direct Labor 13,000 Variable Overhead 40,000 Fixed Overhead 27,000 If Calero Manufacturing Company purchases the component externally, P20,000 of the fixed costs can be avoided. At what external price for the 100 units is the company indifferent between making or buying? A. P160,000. C. P153,000. B. P113,000. D. P133,000. Profit maximization Point of indifference xlvi. 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 P5.00 Variable cost per unit 3.00 1.50 1.00 34

Incremental Analysis

Contribution margin per unit P6.00 P4.50 P4.00 Dipsum is experiencing a bottleneck in one of its processes that affects each product as follows: Iced Soda Lemonade Tea Bottleneck process hours 3 3 4 per unit 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 mix xlvii. 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 and both products require one machine hour to manufacturer. Which of the following will provide the best sales mix of Product A and Product B assuming the market limitation of Product A is 200,000 units and the market limitation of Product B is 250,000 units? A. 250,000 units of Product A, 100,000 units of Product B B. 50,000 units of Product A, 300,000 units of Product B C. 100,000 units of Product A, 250,000 units of Product B D. 150,000 units of Product A, 200,000 units of Product B xlviii. The Hingis Corporation manufactures two products: X and Y. Contribution margin per unit is determined as follows: Product X Product Y Revenue P130 P80 Variable costs 70 P38 Contribution P 60 P42 margin Total demand for X is 16,000 units and for Y is 8,000 units. Machine hour is a scarce resource. 42,000 machine hours are available during the year. Product X requires 6 machine hours 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 3,000 35

Incremental Analysis

Product Y

zero

4,000

zero

8,000

xlix.

Mary Manufacturing has assembled the following data pertaining to two popular products. Blender Electric mixer Direct materials P 6 P11 Direct labor 4 9 Factory overhead @ P16 per hour 16 32 Cost if purchased from an outside 20 38 supplier Annual demand (units) 20,000 28,000 Past experience has shown that the fixed manufacturing overhead component included in the cost per machine hour averages P10. Mary has a policy of filling all sales orders, even if it means purchasing units from outside suppliers. If 50,000 machine hours are available, and Mary Manufacturing desires to follow an optimal strategy, it should A. produce 25,000 electric mixers, and purchase all other units as needed B. produce 20,000 blenders and 15,000 electric mixers, and purchase all other units as needed C. produce 20,000 blenders and purchase all other units as needed D. produce 28,000 electric mixers and purchase all other units as needed

Decision l. 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 and Product B has a unit contribution margin of P45 and takes three machine hours to make. If there are 1,000 machine hours available to manufacture a product, income will be A. P3,000 more if Product A is made. C. P3,000 less if Product A is made. B. P3,000 less if Product B is made. D. the same if either product is made. li. The Baco Company produces three products with the following costs and selling prices: A B C Selling price per unit P16 P21 P21 Variable cost per unit 7 11 13 36

Incremental Analysis

Contribution margin per unit P 9 P10 P 8 Direct labor hours per unit 1.0 1.5 2.0 Machine 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 the machine hours are the company‟s production constraint? A. B. C. D. Direct labor A, B, C B, C, A B, C, A A, B, C hours Machine hours B, C, A B. C. A A, C, B A, C, B lii. Scarce Company has been producing two types of bearings, Plastic and Metal, for its own use in the production of main products. The data regarding these two bearings follow: Plastic Metal Machine hours required per 3.0 4.5 unit Standard 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 of Metal. Recently, Scarce‟s management decided to devote additional machine hours to other product lines resulting to only 48,000 machine hours per year that can be dedicated to the production of the bearings. An outside company has offered to sell Scarce the annual supply of the bearings at prices of P15.50 for Plastic and P17.50 for Metal. Scarce wants to schedule the otherwise idle 48,000 machine hours to produce bearings so that the company can minimize its costs (maximize its net benefits). Scarce Company will maximize its net benefits by purchasisng A. 7,000 units of Plastic and manufacturing the remaining bearings. B. 11,000 units of Metal and manufacturing 7,000 units of Plastic. 37

Incremental Analysis

C. 6,000 units of Plastic and manufacturing the remaining bearings. D. 5,000 units of Metal and manufacturing the remaining bearings. liii. HILO Company manufactures electric carpentry tools. The production department had met all production requirements for the current month and has an opportunity to produce additional units of product with its excess capacity. Unit selling prices and unit costs for three different drill models are as follows: Home Deluxe Pro Model Model Model Selling price P58 P65 P80 Direct material 16 20 19 Direct labor (P10 per 10 15 20 hour) Variable overhead 8 12 16 Fixed overhead 16 5 15 Variable overhead is applied on the basis of direct-labor pesos, while fixed overhead is applied on the basis of machine hours. There is sufficient demand for the additional production of any model 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 model B. Pro Model D. Equally liv. 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 and Product A requires 48 minutes to complete while Product B requires 75 minutes. Which of the following will provide the best sales mix of Product A and Product B assuming the market limitation 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 B B. 200,000 units of Product A, 152,000 units of Product B C. 152,000 units of Product A, 200,000 units of Product B D. 100,000 units of Product A, 250,000 units of Product B lv. Dimasalang Company has only 25,000 hours of machine time each month to manufacture its two products. Product X has a contribution margin of P50 and Product Y has a contribution margin of P64. Product X requires 5 machine hours and Product Y, 8 hours. If Dimasalang wants to dedicate 80% of its machine time to the product that will provide the most income, it will have a total contribution margin of 38

Incremental Analysis

A. P250,000 B. P240,000

C. P210,000 D. P200,000

Sell-as-is-or-process-further Minimum sales lvi. 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 and sells for P20 a pound. A small portion of the annual production of this product is retained for further processing in the Mixing Department, where it is combined with several other ingredients to form a paste, which is marketed as a silver polish selling for P40 per jar. This further processing requires ¼ pound of Grit 337 per jar. Costs of other ingredients, labor, and variable overhead associated with this further processing amount to P25 per jar. Variable selling 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 limited production 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 further processing of Grit 337. A. 8,000 C. 7,000 B. 5,600 D. 4,667 Decision lvii. 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 sell it for P90. The cost to assemble the product is estimated at P18 per unit and Beal Company believes 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. lviii. Sales of 25,000 units at P7.20 per unit are made monthly. The unit cost is P5.90. Incremental costs of P1.35 per unit to further process the units will result in the 25,000 units being sold for P8.75 each. Which course of action should the company take? A. Commit its resources to a different product B. Sell the units at the current stage of completion 39

Incremental Analysis

C. Do further processing and sell the units at P8.75 D. Do further processing on only one-half of the units lix. 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 another P15,000 in labor and overhead costs. When finished, Aaron will be able to sell the product for P350,000. Which of the following answers is correct? A. Sell now B. Finish the product because profits will increase by P25,000 C. Finish the product because profits will increase by P12,500 D. Finish the product because profits will increase by P10,000 Effect of decision lx. 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 lbs Selling price per pound at split-off P30 P16 Additional processing costs/pound after P15 P30 split-off (all variable) Selling price/pound after further P40 P50 processing The joint cost is P85,000. Ottawa currently sells both products at the split-off point. If Ottawa makes decision which maximizes profit, its profit will increase by A. P16,000 C. P 4,000 B. P50,000 D. P10,000 lxi. The cost to manufacture an unfinished unit is P40 (P30 variable and P10 fixed). The selling price per unit is P50. The company has unused production capacity and has determined that units could be finished and sold for P65 with an increase in variable costs of 40%. What is the additional net income per unit to be gained by finishing the unit? A. P 3 C. P10 B. P15 D. P12 40

Incremental Analysis

Total processing cost lxii. 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 costs are incurred. These two products can be sold as is or processed further. Further processing of either product does not delay the production of subsequent batches of the joint products. Below are some of the information: M N Unit selling price without further processing P25 P19 Unit selling price with further processing P31 P23 Total separate weekly variable costs of further processing P100,000 P110,000 To maximize Matador‟s manufacturing contribution margin, the total separate variable costs of further processing that should be incurred each week are A. P105,000 C. P110,000 B. P100,000 D. P210,000 Keep-or-drop decision Analysis lxiii. 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 expenses are P26,000. Its cost of goods sold is P64,000. Six thousand pesos of the direct expenses and P8,000 of its indirect expenses are avoidable expenses. Which of the following is not true? 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 decision lxiv. 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. The effect of this discontinuance on Banahaw‟s overall net operating income would be a(an) A. decrease of P30,000 C. increase of P30,000 B. decrease of P10,000 D. increase of P10,000 lxv. Mina Co. mines three products. Gold Ore sells for P1,000,000 per ton, variable costs are P600,000 per ton, and fixed mining costs are P6,000,000. The segment margin for 2007 was P1,200,000. The management of Mina Co. was considering dropping the mining of Gold Ore. Only one-half of the fixed 41

Incremental Analysis

expenses are direct and would be eliminated if the segment was dropped. If Gold Ore were dropped, net income for Mina Co. would A. Increase by P2,000,000 C. Decrease by P2,000,000 B. Increase by P1,200,000 D. Decrease by P1,200,000 lxvi. Agimat Company plans to discontinue a segment with a P32,000 segment margin. Common expenses allocated to the segment amounted to P45,000, of which P20,000 cannot be eliminated if the segment were closed. The effect of closing down the segment on Agimat Company‟s before tax profit would be A. P12,000 decrease C. P12,000 increase B. P 7,000 decrease D. P 7,000 increase Shutdown point lxvii. 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 overhead costs 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 caused Bulusan Company‟s sales to temporarily drop to only 9,000 units per month. Bulusan Company estimates that the strikes will last for about two months, after which time sales of E14 should return to normal. Due to the current low level of sales, however, Bulusan Company is thinking about closing down its own plant during the two months that the strikes are on. If Bulusan Company does close down its plant, it is estimated that fixed manufacturing overhead costs can be reduced to P105,000 per month and that fixed selling costs can be reduced by 10%. Start-up costs at the end of the shutdown period would total P8,000. Since Bulusan 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 indifferent between temporarily closing the plant or keeping it open? A. 11,000 C. 10,000 B. 24,125 D. 8,000 Equipment replacement lxviii. 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 salvage value. Variable operating costs would be P100,000 per year. The present machine has a book value of P50,000 and a remaining life of 5 years. Its disposal value now is P5,000, but it would be zero after 5 years. Variable operating costs would be P125,000 per year. Ignore income taxes. Considering the 5 years in total, what would be the difference in profit before income taxes by acquiring the new machine as opposed to 42

Incremental Analysis

retaining the present one? A. P10,000 decrease B. P15,000 decrease

C. P35,000 increase D. P40,000 increase

Lease lxix. 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 for P25,000 less 5% commission. Alternatively, Minton Co. has offered to lease the equipment for five years for a total of P48,750. Darren will incur repair, insurance, and property tax expenses estimated at P10,000. At lease-end, the equipment is expected to have no residual value. The net differential income from the lease alternative is: A. P15,000. C. P25,000. B. P 5,000. D. P12,500. Comprehensive Questions 70 through 74 are based on the following information: Adrenal Company has a single product called a CAD. The company normally produces and sells 60,000 CADS each year at a selling price of P32 per unit. The company‟s unit costs at this level of activity are given below: Direct materials P10.00 Direct labor 4.50 Variable manufacturing overhead 2.30 Fixed manufacturing overhead 5.00 Variable selling expenses 1.20 Fixed selling expenses 3.50 Total cost per unit P26.50 lxx. Assume that Adrenal Company has sufficient capacity to produce 90,000 CADS each year without any increase in fixed manufacturing overhead costs. The company could increase its sales by 25% above the present 60,000 units each year if it were willing to increase the fixed selling expenses by P80,000. The increase in income if the production is increased by 25% is A. P130,000 C. P 25,000 B. P108,333 D. P 20,800

43

Incremental Analysis

lxxi. Assume again that Adrenal Company has sufficient capacity to produce 90,000 CADS each year. A customer in a foreign market wants to purchase 20,000 CADS. Import duties on the CADS would be P1.70 per unit, and costs for permits and licenses would be P9,000. The only selling 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. P22.15 B. P28.65 D. P21.70 lxxii. The company has 1,000 CADS on hand that have some deformities and are therefore considered to be “seconds.” Due to the deformities, it will be impossible to sell these units at the normal price through regular distribution channels. What unit cost figure is relevant for setting a minimum selling price? A. P16.80 C. P 4.70 B. P18.00 D. P 1.20 lxxiii. Due to a strike in its supplier‟s plant, Adrenal Company is unable to purchase more material for the production of CADS. The strike is expected to last for two months. Adrenal Company has enough material on hand to continue to operate at 30% of normal levels for the two months. If the plant were closed, fixed overhead costs would continue at 60% of their normal level during the two-month period; the fixed selling costs would be reduced by 20% while the plant was closed. How much is the advantage or disadvantage of closing the plant for the two-month period? A. Disadvantage, P144,000 C. Disadvantage, P15,000 B. Advantage, P144,000 D. Advantage, P15,000 lxxiv. An outside manufacturer has offered to produce CADS for Adrenal Company and to ship them directly to Adrenal‟s customers. If Adrenal Company accepts this offer, the facilities that it uses to produce CADS would be idle; however, fixed overhead costs would be reduced by 75% of their present level. Since the outside manufacturer would pay for all the costs of shipping, the variable selling costs would be only two-thirds of their present amount. What is the unit cost figure that is relevant for comparison to whatever quoted price is received from the outside manufacturer? A. P20.95 C. P20.55 B. 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 developed cylinder used in its finished products. The company expects to produce and sell 800 units. The pilot run required 14.25 direct-labor hours for the 50 cylinders, averaging 0.285 direct-labor hours per cylinder. Henderson has experienced a significant learning curve on the direct-labor hours needed to produce new cylinders. As cumulative output doubles, say from 25 to 50 units for 44

Incremental Analysis

example, the average labor time per unit declines by 20 percent. Past experience indicates that learning tends to cease by the time 800 parts are produced. Henderson‟s manufacturing costs for cylinders are as follows: Direct labor P120.00 per hour Variable overhead 100.00 per direct labor hour Fixed overhead 166.00 per direct labor hour Direct material 40.50 per unit Henderson has received a quote of P75 per unit from the Leyte Machine Company for the additional 750 cylinders needed. Henderson frequently subcontracts this type of work and has always been satisfied with the quality of the units produced by Leyte. Recently, Henderson Equipment Company has been operating at considerably less than full capacity. lxxv. 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 hours B. 74.7 hours D. 67.6 hours lxxvi. The production of 800 cylinders, including the pilot run, requires total incremental costs of: A. P48,834 C. P68,452 B. P49,802 D. P52,948 lxxvii. The effect on profit of producing 750 units instead of buying them from Leyte Machine Company 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 as CLASP completed the machine, Tigok declared backruptcy, defaulted on the order, and forfeited the 10 percent deposit paid on the selling price of P72,500. CLASP‟s manufacturing manager identified the costs already incurred in the production of the special machinery for Tigok as follows: Direct material

P16,600 45

Incremental Analysis

Direct labor Manufacturing overhead: Variable Fixed Fixed selling and administrative costs Total

21,400 P10,700 5,350

16,050 5,405 P59,455

Another company, Kay Corporation, will buy the special machinery if it is reworked to Kay‟s specifications. CLASP offered to sell the reworked machinery to Kay as a special order for P68,400. Kay agreed to pay the price when it takes delivery in two months. The additional identifiable costs to rework the machinery to Kay‟s specifications are as follows: Direct materials Direct labor Total

P 6,200 4,200 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 Direct labor Total

P2,850 3,300 P6,150

A third alternative for CLASP is to sell the machine as is for a price of P52,000. However, the potential buyer of the unmodified machine does not want it for 60 days. This buyer has offered a P7,000 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 special orders is 3 percent. 2. Normal credit terms for sales of standard models are 2/10, net/30. This means that a customer receives a 2 percent discount if payment is made within 10 46

Incremental Analysis

days, and payment is due no later than 30 days after billing. Most customers take the 2 percent discount. Credit terms for a special order are negotiated with the customer. 3. The allocation rates for manufacturing overhead and fixed selling and administrative costs are as follows: Manufacturing costs: Variable 50% of direct-labor costs Fixed 25% of direct-labor costs Fixed selling and administrative costs 10% of the total manufacturing costs 4. Normal time required for rework is one month. lxxviii. How much peso contribution would the sale to Kay Corporation add to CLASP‟ before-tax profit? A. P53,848 C. P55,900 B. P55,948 D. P 9,300 lxxix. How much peso contribution would the alternative of converting the special machinery to standard model add to CLASP‟s before-tax profit? A. P52,200 C. P52,825 B. P54,475 D. P 7,650 lxxx. If Kay makes CLASP a counteroffer, what is the lowest price CLASP should accept for the reworked machinery from Kay? A. P10,400 C. P10,722 B. P12,500 D. P12,887 lxxxi. How much would the alternative of selling unmodified machinery to the potential buyer contribute to CLASP‟s before-tax profit? A. P50,440 C. P49,920 B. 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 factory with four departments. Both labor and machine time are applied to the products as they pass through each department. The machines and labor skills required in each department are so specialized that neither machines nor 47

Incremental Analysis

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 some machines will be down several months for repairs. Management has assembled the following information regarding available machine and labor time by department and the machine hours and direct-labors required per unit of product. These data should be valid for the next six months. Monthly Capacity Available Norman machine capacity in MH Capacity of machines being repaired in machine hours Available machine capacity in MH Available direct labor hours (DLH) Labor and Machine Specifications per Unit of Product Product Labor and Machine Time 401 Direct labor hours Machine hours 403 Direct labor hours Machine hours

DEPARTMENT 1 2 3 3,500 3,500 3,000

4 3,500

( 500) 3,000

( 400) 3,100

( 300) 2,700

( 200) 3,300

3,700

4,500

2,750

2,600

2

3

3

1

1 1

1 2

2 -

2 2

1

1

-

2 48

Incremental Analysis

405 hours

Direct labor Machine hours

2

2

2

1

2

2

1

1

The sales department believes that the monthly demand for the next six months will be as follows: Product 401 403 405

Monthly Unit Sales 500 400 1,000

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

Unit costs: Direct material Direct labor Department 1 Department 2 Department 3 Department 4 Variable overhead Fixed overhead Variable selling expenses Unit selling price

P R O D U C T S 401 403

405

P 7

P 13

P 17

12 21 24 9 27 15 3 P196

6 14 -18 20 10 2 P123

12 14 16 9 25 32 4 P167

lxxxii. Which department has capacity constraint in labor hours? A. Department 1 C. Department 3 49

Incremental Analysis

B. Department 2

D. Department 4

lxxxiii. The total Machine Hours required by estimated monthly unit sales are: A. 10,600 C. 11,600 B. 12,100 D. 13,500 lxxxiv. The total number of labor hours as constraint for a month is: A. 50 C. 300 B. 750 D. No constraint lxxxv. In order to maximize its monthly profit, Constraint Company should produce: A. B. C. D. 401 250 250 500 500 403 0 400 400 0 405 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 available from many other similar businesses and he also manufactures products to customer order. Hi accountant prepared the annual income statement shown below: Sales Material Labor Depreciation Power Rent Heat and light Other

Custom Sales P1,000,000 P 200,000 400,000 126,000 14,000 120,000 12,000 8,000

Standard Sales P500,000 P160,000 180,000 72,000 8,000 20,000 2,000 18,000

Total P1,500,000 P 360,000 580,000 198,000 22,000 140,000 14,000 26,000 50

Incremental Analysis

Total Income

P 880,000 P 120,000

P460,000 P 40,000

P1,340,000 P 160,000

The depreciation charges are for machines used in the respective product lines. The power charge is apportioned on the estimate of power consumed. The rent is for the building space which has been leased for 10 years at P140,000 per year. The rent and heat and light are apportioned to the product lines based on amount of floor space occupied. All other costs are current expenses identified 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 of his standard product by about one-half for one year while producing the specially requested custom part. The customer is willing to pay P140 for each part. The material cost will be about P40 per unit and the labor will be P72 per unit. Mr. Syjuco will have to spend P40,000 for a special device which will be discarded when the job is done. lxxxvi. What is the incremental cost of the special order of 5,000 units? A. P600,000 C. P779,000 B. P421,000 D. P371,000 lxxxvii. What is the full cost of the special order? A. P779,000 C. P421,000 B. P492,400 D. P651,000 lxxxviii. The amount of opportunity cost of taking the special order is: A. P183,000 C. P250,000 B. P 71,000 D. P124,600 lxxxix. 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 of summer lotions and insect repellents, has decided to diversify in 51

Incremental Analysis

order to stabilize sales over the year. A natural area for the company to consider is the production of special lotion and cream to prevent dry and chapped skin. After considerable research, a special product line has been developed. However, because of the conservatism of the company management, Verbatim‟s president has decided to introduce only one of the new products for this coming rainy season. If the product is a success, further expansion will be initiated in future years. The product selected (called Chaps) is a lip balm that will be sold in a lipstick-type tube. The product will be sold to wholesalers in boxes of 24 tubes for P800 per box. Because of available capacity, no additional fixed charges will be incurred to produce the product. However, a P10,000,000 fixed charge will be absorbed by the new product to allocate a fair share of the company‟s present fixed costs to it. Using the estimated sales and production of 100,000 boxes of Chaps as the standard volume, the accounting department has developed the following costs: Direct labor Direct materials Total overhead Total

P200 per box 300 per box 150 per box P650 per box

Verbatim has approached a cosmetics manufacturer to discuss the possibility of purchasing the tubes for Chaps. The purchase price of the empty tubes from the cosmetics manufacturer would be P90 per 24 tubes. If the Verbatim Corporation accepts the purchase proposal, it is estimated that direct labor and variable overhead costs would be reduced by 10% and direct material costs would be reduced by 20%. xc. What is the variable overhead rate per box of Chaps? A. P100 C. P 50 B. P150 D. P200 xci. What is the material cost per box of Chaps saved by purchasing them? A. P300 C. P 60 B. P240 D. P 30 xcii.

How much would it cost Verbatim to produce the tubes per box? 52

Incremental Analysis

A. P 60 B. P 85

C. P 90 D. P120

xciii. How much would Verbatim incur by making 125,000 boxes, assuming that additional equipment, at an annual rental of P1,000,000, must be acquired to produce this volume? A. P10,625,000 C. P11,250,000 B. P11,625,000 D. P12,500,000 xciv. Referring to Question No. 93, what is the impact on its profit if Verbatim were to buy 125,000 boxes? 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‟s normal volume of 3,000 units per month are show below: Unit manufacturing costs: Direct materials Direct labor Variable overhead Fixed overhead Unit marketing costs: Variable Fixed Total unit costs

P1,000 1,500 500 1,200 500 1,400

P4,200 1,900 P6,100

Unless otherwise stated, assume there is no connection between the situations described in the questions; each is to be treated independently. Unless otherwise stated, a regular selling price of P7,400 per unit should be assumed. Ignore income taxes and other costs that are not mentioned in the cost schedule or in a question itself.

53

Incremental Analysis

xcv. What is the monthly breakeven units for Medical Supply Company? A. 2,000 C. 1,950 B. 2,689 D. 2,614 xcvi. Market research estimates that volume could be increased to 3,500 units, which is well within hoist 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, would you 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. xcvii. On March 1, a contract offer is made to Medical Supply Company by the Veterans‟ Hospital to supply 500 units for delivery by March 31. Because of an unusually large number of rush orders form their regular customers. Medical Supply plans to produce 4,000 units during March, which will use all available capacity. If the Veterans‟ Hospital‟s order is accepted, 500 units normally sold to regular customers would be lost to a competitor. The contract given by the 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 incurred on the hospital‟s unit.) What impact would accepting the Veterans‟ Hospital contract have on March income? A. P 1,100,000 C. P(1,350,000) B. P( 850,000) D. P 500,000 xcviii. Medical Supply Company has an opportunity to enter a foreign market in which price competition is keen. An attraction of the foreign market is that demand there is greatest when demand in the domestic market is quite low; thus idle production facilities could be used without 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 the contract (marketing costs) will be P40,000. No other variable marketing costs would be required on this order. Domestic business would be unaffected by this order. What is the minimum unit price should Medical Supply Company consider for this order of 1,000 units? A. P3,750 C. P3,790 B. P3,000 D. P4,290 xcix. An inventory of 230 units of an obsolete model of the hoist remains in the stockroom. These must be sold through regular channels at reduced prices, or the inventory will soon be valueless. What is the minimum price that would be acceptable in selling these units? 54

Incremental Analysis

A. P3,500 B. P4,200

C. P3,000 D. P 500

c. A proposal is received from an outside contractor who will make and ship 1,000 hydraulic hoist units per month directly to Medical Supply‟s customers as orders are received from Medical Supply‟s sales staff. Medical Supply‟s fixed marketing costs would be unaffected, but its variable marketing costs would be cut by 20 percent for these 1,000 units produced by the contractor. Medical Supply‟s plant would operate at two thirds of its normal level, and total allocated 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 4,240 B. P 3,000 D. P 3,460 ci. Assume the same facts as in requirement No. 101 except that the idle facilities would be used to produce 800 modified hydraulic hoists per month for us in hospital operating rooms. These modified hoists could be sold for P9,000 each, while the costs of production would be P5,500 per unit variable manufacturing expense. Variable marketing costs would be P1,000 per unit. Fixed marketing and manufacturing costs would be unchanged whether the original 3,000 regular units hoists were manufactured or the mix of 2,000 regular hoists plus 800 modified hoists 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 5,500 B. 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 in many products such as blankets, coats, and uniforms for police and firefighters. Marcus has been in business since 1975 and has been profitable every year since 1983. The company uses a standard 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 scheduled for delivery to several military bases. The bid must be started at full cost per unit plus a return on full cost of no more than 9 percent after income taxes. Full cost has been defined as including all variable costs of manufacturing the product, a reasonable amount of fixed overhead, and reasonable incremental administrative costs associated with the manufacture and sale of the product. The contractor has indicated that bids in excess of P25 per blankets are not likely to be considered. In order to prepare the bid for the 800,000 blankets, Andrea Lighter, cost accountant, has gathered the following information about the cost associated with the 55

Incremental Analysis

production of the blankets. Direct material Direct labor Direct machine costs* Variable overhead Fixed overhead Incremental administrative costs Special fee** Material usage Production rate Effective tax rate

P 1.50 per pound of fibers P 7.00 per hour P10,00 per blanket P 3.00 per direct labor hour P 8.00 per direct labor hour P2,500 per 1,000 blankets P 0.50 per blanket 6 pounds per blanket 4 blankets per DLH 40%

cii. The minimum price per blanket that Marcus Fibers, Inc., could bid without reducing the company‟s net income is A. P24.00 C. P50.25 B. P21.50 D. P40.25 ciii. Using the full-cost criteria and the maximum allowable return specified, Marcus Fibers‟ bid price per blanket would be: A. P24.00 C. P26.00 B. P29.90 D. P27.90 ANSWER EXPLANATIONS i.

ii.

Answer: C Cost of alternative selected Cost of alternative rejected Incremental cost

P800,000 650,000 P150,000

Answer: A The company needs to purchase 55,000 units earlier than their scheduled 5,000-unit monthly purchase. Hence, the average 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).

iii. Answer: A 56

Incremental Analysis

Additional revenue after rework (24,000(12 – 4) Less Additional cost (24,000 x 2) Additional profit

P192,000 48,000 P144,000

iv. Answer: B The only relevant out-of pocket cost is the variable selling expense which is P40. The sale thru the regular channels involves an opportunity cost of P140. Variable selling expense (40% x 100) 40 Opportunity cost 140 Total 180 v. Answer: C Regular variable cost Overtime premium Relevant cost per unit vi. Answer: B Full cost Fixed overhead Relevant unit cost

P8.00 1.50 P9.50

(180,000/9,000)

50.00 20.00 30.00

vii. Answer: C Cost of 1,000 kg at latest price (1,000 x 8.70) Add excess price include on the remaining 4,000 kg. 4,000 x (8.70 – 8.30) Relevant cost

8,700 1,600 10,300

viii. Answer: B Direct materials (2,000 @ 10) Direct labor (2,000 @ 12) Variable overhead (2,000 @ 6) Increase in variable cost due to overtime (2,000 @ 14) Incremental cost

20,000 24,000 12,000 28,000 84,000

ix. Answer: B Variable costs Additional fixed costs Minimum bid price x. Answer: B Direct material

P56,250 13,750 P70,000 (360,000 ÷ 24,000)

P15.00 57

Incremental Analysis

Direct labor Variable selling expenses Total Add Profit per unit Selling price

(540,000 ÷ 24,000) (84,000 ÷ 24,000) (22,500 ÷ 1,500)

xi. Answer: B Relevant cost to make and sell: Direct materials Direct labor Variable OH Reduced selling expenses (30 x 0.06) Add‟l fixed cost (20,000 † 5,000) Minimum selling price

22.50 3.50 P41.00 15.00 P56.00

39 6 8 18 4 75

xii. Answer: B The 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 P18 Additional expenses 1 Minimum selling price P19 xiii. Answer: A Direct materials 20.00 Direct labor 15.00 Variable overhead 12.00 Variable shipping and handling 3.00 Lost contribution margin – LB46 (10,000 ÷ 1,000) 10.00 Minimum price 60.00 The lost contribution margin on regular sale is relevant because the company is operating at capacity. In a special sale wherein the company has to give up some of its regular units, the relevant costs consist of incremental costs plus any opportunity costs. xiv. Answer: D Direct materials Direct labor Variable overhead Variable selling expense Additional profit (40,000/5,000) Required selling price

4.50 10.00 3.00 1.00 8.00 26.50 58

Incremental Analysis

xv. Answer: C The maximum number of units in regular sales that Benjing could afford to lose equals the quantity that provides regular contribution margin that matches the contribution margin provided by special sale. Contribution margin from special sale 1,000 (14 – 8) 6,000 Divided by regularCM (20 – 8) ÷ 12 Maximum Number of units 500 To illustrate the solution: Contribution margin from special sale Less Decrease in regular sales‟ contribution margin (500 x 12) Effect on profit

6,000 6,000 NIL

xvi. Answer: B The maximum decrease in regular sale = Contribution margin from special sale/Unit contribution margin on regular sale (400 x 0.20) ÷ (2.00 -1.50) = 160 Answer: A Total contribution margin from special sale(15,000 x P5.50) P82,500 Less Additional fixed costs 30,000 Profit from special sale P52,500 Less Decrease in contribution margin on regular Sale 2,000(P39 – P22.50) 33,000 Additional profit P19,500 Please refer to Solution for Number regarding details of contribution margin per unit.

xvii.

xviii.

Answer: C Selling price Relevant cost per unit: Regular cost per unit Less: Commission Fixed overhead (P3 x 2/3) Net amount Incremental fixed cost (P150 300) Advantage per unit, Buy Number of units Increase in profit

P6.00 P7.50 P0.75 2.00

(2.75) P4.75 0.50

5.25 P0.75 300 P 225

xix. Answer: D Additional profit: 3,000 x (70 – 50) = 60,000 59

Incremental Analysis

xx. Answer: A Special price Relevant cost: Direct materials Direct labor Variable overhead Unit contribution margin Units ordered Additional profit xxi. Answer: A Sales Less: Variable production cost Additional Fixed cost Labeling cost Profit

32 4 12 6

22 10 2,000 20,000 60,000

(1,500 x 30)

45,000 5,000 3,750

(1,500 x 2.50)

53,750 6.250

xxii. Answer: B The minimum selling price should equal the relevant cost to produce and sell a unit of product. Direct materials P50 Direct labor 20 Variable overhead (P10 x 0.2) 2 Selling expense (P15 x 0.4) 6 Minimum selling price P78 xxiii.Answer: C The company has no excess capacity to be devoted to the production of additional units for special sale. In a special sale decision where there is no excess capacity, the minimum selling price must be equal to the market price less any avoidable expenses. Selling price P100 Less Avoidable selling expense (P15 x 0.4) 6 Minimum selling price P 94 xxiv. Answer: D The book value of the old equipment is a sunk cost and therefore not a relevant one. Also, the related cost on outstanding note are irrelevant. They are not affected by a decision. xxv. Answer: D Relevant Costs Beta

Zeta 60

Incremental Analysis

Direct materials Direct labor Factory overhead 40% Relevant Unit cost

4.00 10.00 16.00 P30.00

80.00 47.00 8.00 135.00

Answer: C Direct material 2.00 Direct labor 2.40 Variable overhead 1.60 Avoidable marketing cost (0.7 x 2.50) 1.75 Relevant cost Make 7.75 The maximum purchase price, if ever the company has to decide buying the product, is P6.75. Any amount higher than P6.75 will necessarily increase the unit cost of the product.

xxvi.

xxvii.

Answer: B Direct materials Direct labor Variable overhead Avoidable fixed overhead Total relevant cost to make

64,000 16,000 8,000 6,000 94,000

xxviii.

Answer: D Direct materials Direct labor Variable overhead Additional contribution margin Total relevant cost to make

64,000 16,000 8,000 16,000 104,000

xxix.

Answer: B Variable cost to make parts Cost buy Cost savings – “Make” decision

xxx. Answer: A Direct materials Direct labor Variable overhead Avoidable fixed overhead Relevant cost – make Purchase price

(30,000 x 12) (30,000 x 15)

360,000 450,000 90,000 80,000 13,000 40,000 4,000 137,000 145,000 61

Incremental Analysis

Advantage – Make xxxi.

Answer: A Direct materials Direct labor Variable overhead Total variable cost Less Purchase cost Avoidable fixed cost Add unavoidable FC Total fixed overhead

8,000 64,000 16,000 8,000 88,000

104,000

xxxii. Answer: B Purchase cost (2,000 x P15) Relevant cost to make: Variable cost (2,000 x P16) – 8,000 Avoidable fixed cost (8,000 x 0.25) Additional cost – Buy (Decrease in profit)

16,000 5,000 21,000 P30,000 P24,000 2,000

Alternative computation for relevant cost to make: Total cost (2,000 x P16) Less unavoidable fixed cost (8,000 x 0.75) Relevant cost to make xxxiii. Answer: C Cost of purchase (2,000 x P15) Relevant cost – make: Variable cost (2,000 x P16) – P8,000 Avoidable fixed cost (P8,000 x 0.25) Opportunity cost – rent Cost savings – Buy (increase in profit) xxxiv. Answer: C Relevant costs to make Direct materials Direct labor Variable overhead Supervisor‟s salary Opportunity costs, rent

26,000 P 4,000 P32,000 6,000 P26,000 P30,000

P24,000 2,000 6,000

32,000 P( 2,000)

P 90,000 120,000 15,000 30,000 65,000 62

Incremental Analysis

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

Answer: B Cost of ink cartridges (5,000 x P15) Less: Relevant cost to produce (5,000 x P8) Additional cost if ink cartridges are purchased

xxxvi. Answer: B Direct material Direct labor Variable overhead Avoidable fixed cost Total relevant costs - Make Purchase cost Add net savings Total Less: Cost to make Opportunity cost

320,000 300.000 P 20,000

P75,000 40,000 P35,000

(20,000 @ 6) (20,000 @30) (20,000 @ 120 (20,000 @ 9)

120,000 600,000 240,000 180,000 1,140,000

(20,000 @ 60)

1,200,000 25,000 1,225,000 1,140,000 85,000

xxxvii. Answer: A Purchase price Handling cost (20% x P15,000) Total Cost to make (21,200 – 8,000)* Increase in unit cost if goods are purchased

15,000 3,000 18,000 13,200 4,800

*Fixed OH (12,000 x 2 ÷ 3) = 8,000 xxxviii. Answer: A Cost to make: Direct materials Direct labor Variable overhead Avoidable fixed OH Relevant cost

(20% x 30,000)

P10,000 5,000 5,000 6,000 P26,000 63

Incremental Analysis

Purchase costs Decrease in profit in profit

(1,000 @ 30)

xxxix. Answer: B Relevant costs to make per unit: Direct materials Direct labor Variable overhead Relevant cost – “to make” Purchase price per unit Increase in per unit cost if purchased xl. Answer: A Direct materials Direct labor Variable overhead Avoidable fixed overhead (30,000 x 0.2) Total relevant cost Purchase cost Additional cost if purchased xli. Answer: C Direct materials Direct labor Variable overhead Avoidable fixed cost Total per unit Number of unit Total Add savings from the manufacture of other product Total relevant cost – make Total purchase cost (10,000 x 30) Advantage “Buy”

30,000 P 4,000

6.00 4.00 1.00 11.00 12.50 1.50 10,000 5,000 5,000 6,000 26,000 30,000 4,000 3.00 15.00 6.00 3.00 27.00 x10,000 270,000 45,000 315,000 300,000 15,000

xlii. Answer: D Though the problem deals with transfer of goods from one division to another division, the solution focuses on make on buy decision approach. Purchase price, outside supplier 1.25 Variable cost to make (10,000 ÷ 10,000) 1.00 Additional unit cost to the company 0.25 64

Incremental Analysis

Units to be purchased Decrease in Dana‟s profit if goods are purchased xliii. Answer: C Total purchase cost (5,000 x 7.75) Less Relevant cost to make Direct materials @ 2.5 Direct labor @ 3.5 Variable overhead @ 1.5 Avoidable fixed cost @ 0.5 Opportunity cost Net saving – purchase

10,000 2,500 38,750 12,500 17,500 7,500 2,500 6,000

46,000 (7,250)

xliv. Answer: D The solution is made in equation form, using y = a + bx for 2 alternatives: Let x = indifference point in units Make: y = 150,000 + 11x Buy: y = 60,000 + 12.875x 150,000 + 11x = 60,000 + 12.875x 1.875x = 60,000 x = 48,000 xlv. Answer: C Direct materials Direct labor Variable overhead Avoidable fixed overhead Total relevant cost

80,000 13,000 40,000 20,000 153,000

xlvi. Answer: B Soda Lemomade Selling price 6.00 5.00 Variable cost 1.50 1.00 Contribution margin 4.50 4.00 Processing hours 3 4 CM/Hr 1.50 1.00 For the Lemonade to be as profitable as Soda, its contribution margin per hour should be P1.50.

65

Incremental Analysis

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

P6.00 1.00 P7.00

xlvii.Answer: C Product 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. xlviii.

Answer: D Production order: Y, X Product X: Product Y: Total capacity – MH Machine hours devoted to Product Y (8,000 x 3) Hours available to X Production of X: 18,000 ÷ 6 = 3,000

xlix. Answer: B Production order: Purchase price Variable cost to make: Direct materials Direct materials Overhead *(16 – 10) @ Total Additional cost if purchased Additional cost per hour (Blender, 1 hr; Mixer 2 hours)

60 ÷ 6 = 10 42 ÷ 3 = 14

42,000 24,000 18,000

Blender 20

Electric Mixer 38

6 4 6 ( 16) 4

11 9 12 (32) 6

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 of Blender‟s requirement and just purchase units of electric mixer that cannot be accommodated by the remaining capacity. Product: Blender Electric Mixer [50,000 – (20,000 @ 1)] ÷ 2 Purchase: Electric Mixer (28,000 – 15,000)

20,000 15,000 13,000 66

Incremental Analysis

l.

li.

Answer: A CM – Product A CM – Product B Difference in contribution margin

36/2 x 1,000 45/3 x 1,000

18,000 15,000 3,000

Answer: A Based on DLH Products A B C Based on MH Products A B C

UCM 9 10 8

DLH/unit 1.0 1.5 2.0

CM/DLH 9.0 6.67 4.00

Priority 1ST 2nd 3rd

UCM 9 10 8

MH/unit 4.5 2 2.5

CM/MH 2.0 5.0 3.2

Priority 3rd 1st 2nd

lii. Answer: D Plastic 11.00 15.50 4.50 ÷ 3 1.50 1st

RC – make RC – Buy Additional Cost-Buy Hours required/unit Additional cost /hr. Priority Capacity (machine hours) MH used - Plastic (7,000 x 3) Available MH to Metal MH used - Metal (6,000 x 4.50) Purchase of Metal (11,000 – 6,000)

Metal 13.00 17.50 4.50 ÷ 4.5 1.0 2nd 48,000 21,000 27,000 (27,000) 5,000

liii. Answer: A Selling price Direct materials

Home 58 (16)

Deluxe 65 (20)

Pro 80 (19) 67

Incremental Analysis

Direct labor Variable overhead CM/unit Processing hour(s) CM/DLH Profitability rank liv. Answer: B Unit contribution margin: Product A Product B

(10) ( 8) 24 ÷ 1 24 1st

(15) (12) 18 ÷ 1.5 12 3rd

(20) (16) 25 ÷2 12.50 2nd

P12 – P10 P15 – P12

P2 P3

P2 ÷ 0.8 P3 ÷ 1.25

P2.50 P2.40

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

350,000 (160,000) 190,000 (190.000)

Contribution margin per hour: Product A Product B

200,000 152,000

Product A has higher contribution margin per hour. The company should produce the maximum units it can sell of Product A and use the rest of the machine hour capacity to produce units of Product A in order to maximize its profit. lv. Answer: B CM per hour: Product X: 50/5 Product Y: 64/8 The 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) lvi. Answer: A Selling price per unit – silver polish Less variable costs: Grit 337 (P20 ÷ 4) Ingredients, direct labor and variable OH

10 8 240,000 P40

P 5 25 68

Incremental Analysis

Variable selling costs Contribution margin per unit

3

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

33 P 7 8,000

The solution used the selling price of P20 as cost of Grit337 because there was unlimited demand for the cleaning powder. If, however, the demand for the cleaning powder is limited, the recommended solution would use P16 as the cost of Grit 337. lvii. Answer: D Increase in selling price Additional processing cost Addition profit per unit

116 – 90

26 18 8

lviii. Answer: C Selling price after further processing P8.75 Selling price if not processed further 7.20 Additional sales per unit 1.55 Number of units 25,000 Additional total sales P38,750 Less additional processing costs 33,750 Increase in profit if the product is processed P 5,000 Because further processing will provide more profit per unit, the company should process further. lix. Answer: D Additional sales Additional costs Additional profit

(350,000 – 250,000) (75,000 + 15,000)

P100,000 90,000 P 10,000

lx. Answer: A X Additional sales value 10 Additional processing costs 15 Incremental (decremental) profit per unit (5) If Product Y is processed further, profit will increase by P16,000 (4,000 x 4). lxi. Answer: A Additional Sales Price

(65 – 50)

Y 34 30 4

15.00 69

Incremental Analysis

Additional Cost Additional profit

(30 x 40%)

lxii. Answer: C Product to be processed further: Final selling price Selling price at split-off point Increase in selling price Units Total increase in sales Additional processing costs Increase (decrease) in profit

12.00 3.00 Prod M 31 25 6 15,000 90,000 100,000 (10,000)

Prod N 23 19 4 30,000 120,000 110,000 10,000

lxiii. Answer: C Revenues P104,000 Avoidable costs: Cost of goods sold P 64,000 Avoidable expenses (P6,000 + P8,000) 14,000 78,000 Segment 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 for this segment. The company will lose P26,000 of income if this segment is eliminated. lxiv. Answer: A Avoidable fixed cost (benefit) Lost contribution margin Decrease in profit

210,000 240,000 30,000

lxv. Answer: D The question did not require any computation. If Mina Co. drops the Gold Ore, it will lose the segment margin of P1,200,000, a decrease in Mina Co.‟s income. The amount of direct fixed expenses that would be eliminated were previously deducted from contribution margin, and therefore, not considered in the determination of the effect on income. lxvi. Answer: B Avoidable common expenses (45,000 – 20,000) Segment margin lost Decrease in profit

P 25,000 32,000 P (7,000)

lxvii.Answer: A Avoidable fixed expenses: 70

Incremental Analysis

Manufacturing (150,000 – 105,000) 2 90,000 Selling (30,000 x 0.10 x 2) 6,000 Start up cost (additional fixed expense ( 8,000) Net avoidable costs 88,000 Indifference point 88,000 ÷ (22-14) 11,000 units At 11,000 unit level (2 months), the contribution margin equals the avoidable costs. lxviii.

Answer: D Total Savings 5 year (125,000 – 100,000 ) 5 Less: Additional depreciation (90,000 – 50,000) Loss on sale of old machine (5,000 – 50,000) Increase in profit

125,000 (40,000) (45,000) 40,000

lxix. Answer: A Lease arrangement: Rental income (5 years) Cost of repairs, insurance and property taxes Net income

48,000 10,000 38,750

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

23,750 15,000

lxx. Answer: A Additional contribution (60,000 x 0.25 x 14) Additional fixed selling costs Additional profit Selling price Variable expenses: Materials Direct labor Variable overhead Variable selling costs Unit contribution margin lxxi. Answer: C Direct materials

210,000 80,000 130,000 32.00 10.00 4.50 2.30 1.20

18.00 14.00 10.00 71

Incremental Analysis

Direct labor Variable OH Variable selling cost Import duties Permits and licenses (9,000 ÷ 20,000) Minimum selling price

4.50 2.30 3.20 1.70 0.45 22.15

Import duties are assumed to be paid by Adrenal Company because of the nature of the sale. lxxii.Answer: D The 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. lxxiii.

Answer: C Avoidable fixed costs: Manufacturing (0.40 x 50,000) Selling (35,000 x 0.20) Total

20,000 7,000 27,000

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

Answer: A Direct materials Direct labor Variable overhead Avoidable fixed overhead (0.75 x 5) Avoidable variable expense (1.20 x 1 ÷ 3) Relevant cost – Make

lxxv.

Answer: A Batch (each 50 units) 1 2 4 8 16

42,000

(15,000)

10.00 4.50 2.30 3.75 0.40 20.95 Cum Ave. Hrs 14.25 11.40 9.12 7.296 5.8368

Total Hours required: 16 x 5.8368 = 93.4 72

Incremental Analysis

lxxvi.

Answer: D Materials (800 x 40.50) Direct labor (93.40 x 120) Variable OH (93.40 x 100) Total

lxxvii.

Answer: A Production cost – 750 units: Materials (750 x 40.00) Direct labor (93.40 – 14.25) 120 VOH (93.40 – 14.25) 100 Total Purchase cost (750 x 75) Advantage – make

lxxviii.

lxxix.

lxxx.

Answer: A Sales price to Kay Corp. Rework costs: Direct materials Direct labor Variable OH (4200 x 50%) Commission (68,400 x 0.03) Before – tax peso contribution Answer: A Regular price Deduct: 2% commission (62,500 x 0.02) Sales discount (62,500 x 0.02) Net price Less additional conversion costs: Direct materials Direct labor Variable OH - 50% Net before – tax contribution

32,400 11,208 9,340 52,948

30,375 9,498 7,915 47,780 56,250 8,470 68,400 6,200 4,200 2,100

(12,500) ( 2,052) 53.848 62,500

1,250 1,250 2,850 3,300 1,650

2,500 60,000

7,800 52,200

Answer: D 73

Incremental Analysis

lxxxi.

Cost of rework Direct labor Variable OH (4,200 x 0.50) Total Commission [0.03 (12,500 0.97)] Total

6,200 4,200 2,100 12,500 387 12,887

Answer: A Sales price Less: Commission (52,200 x 0.03) Net contribution

52,000 1,560 50,440

lxxxii. Answer: C Department 3 has constraint in labor hours of 750. Dept. 1 Dept. 2 Available DLH 3,700 4,500 DLH required 401 1,000 1,500 402 400 800 403 2,000 2,000 Total 3,400 4,300 Excess 300 200 (Constraint)

Dept. 3 2,750

Dept. 4 2,600

1,500 -2,000 3,500 ( 750)

500 800 1,000 2,300 300

lxxxiii. Answer: A The available machine hours are sufficient to produce the estimated monthly sales. The schedule for monthly production should consider maximizing the use of available direct labor hours in Department 3 because it is the only one with constraint. Dept. 1 Dept. 2 Dept. 3 Dept. 4 Available MH 3,000 3,100 2,700 3,300 MH required 401 500 500 1,000 1,000 402 400 400 -800 403 2,000 2,000 1,000 1,000 Total 2,900 2,900 2,000 2,800 Excess 100 200 700 500 (Constraint) Total machine hours required by monthly unit sales: (2,900 + 2,900 + 2,000 + 2,800) 10,600 74

Incremental Analysis

lxxxiv. Answer: B The table showing the comparison of available hours and required hours to produce all the required units in number 82 indicated that Department 3 is short by 750 hours. Any excess direct labor hours in the other departments cannot be switched to Department 3. lxxxv. Answer: B The production plan that will maximize monthly profit should be based on the profitability of the three products in terms of the use of direct labor hours in Department 3. P R O D U C T S 401 403 405 Selling price per unit P196 P123 P167 Variable unit costs Direct material 7 13 17 Direct labor 66 38 51 Variable overhead 27 20 25 Selling expenses 3 2 4 Total variable cost 103 73 97 Unit contribution margin P 93 P 50 P 70 No. of DLH required – Dept 3 2 3 Contribution margin per P 31 P 35 DLH Based on the above schedule, Product 405 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 Product 403 can be produced. Available direct labor hours – Department 3

2,750

Hours used by Product 405 Available hours for Product 401

1,000 x 2

2,000 750

Production units – Product 401

250 x 3

750

Production: Product 401 Product 403 Product 405

250 400 1,000

Alternative Solution:

75

Incremental Analysis

Since Product 401 is the less profitable per DLH, Product 403 and 405 will be produced in full and Product 401 will be partially produced. Total required units, Product 401 Equivalent units based on constraint 750 ÷ 3 Production of Product 401

500 250 250

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

Answer: B Costs incurred to make the order: Material (5,000 x 40) Labor (5,000 x 72) Incremental fixed cost (special device) Costs to be incurred

P200,000 360,000 40,000 P600,000

Decrease in costs for standard products: Material (0.5 x 160,000) Labor (0.5 x P180,000) Other (0.5 x P18,000 Decrease in costs Net incremental costs

P 80,000 90,000 9,000 P179,000 P421,000

The amounts for depreciation, rent, and heat and light are assumed to be not affected by the special order. There is no information provided as to how power cost was exactly incurred. lxxxvii. Answer: D Costs to be incurred for special order P600,000 Fixed costs: Depreciation (0.5 x 72,000) P36,000 Power (0.5 x 8,000) 4,000 Rent (0.5 x 20,000) 10,000 Heat and Light (0.5 x 2,000) 1,000 51,000 Total cost P651,000 The amount of fixed costs allocated to special order would be the costs that should have been assigned to the standard sales that would be cancelled. lxxxviii. Answer: B 76

Incremental Analysis

Decrease in sales of standard products0.50 x 500,000 Less variable costs: Material (160,000 x 0.5) Labor (180,000 x 0.5) Other (18,000 x 0.5) Opportunity costs lxxxix.

P250,000 P80,000 90,000 9,000

Answer: D Special sales (5,000 x 140) Variable costs Contribution margin from special sale Less opportunity costs Increase in profit

xc. Answer: C Total overhead rate per box Less fixed overhead allocated per boxP10,000,000 ÷ 100,000 boxes Variable overhead rate per box

179,000 P 71,000 P700,000 600,000 100,000 71,000 P 29,000 P150 100 P 50

xci. Answer: C The cost of materials saved by a decision of purchasing the tubes: is P300 x 0.20 = P 60 xcii. Answer: B The 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 60 Labor 0.1 x P200 20 Overhead 0.1 x P 50 5 Total savings (relevant cost) P 85 The maximum amount that Verbatim is willing to pay per box of 24 tubes must be P85. xciii.Answer: B Cost of making 125,000 boxes: Variable costs 125,000 x 85 Additional fixed costs Total xciv.

Answer: C Total purchase cost 125,000 x 900 Total cost to make 125,000 x 85

10,625,000 1,000,000 11,625,000 11,250,000 11,625,000 77

Incremental Analysis

Savings if purchased xcv. Answer: A Fixed costs: Manufacturing Marketing Total

375,000

3,000 x 1,200 3,000 x 1,400

Selling Price Less Variable costs: Direct materials Direct labor Variable overhead Marketing costs Total Unit contribution margin Breakeven units

P3,600,000 4,200,000 P7,800,000 P 7,400 P1,000 1,500 500 500 3,500 P 3,900

7,800,000 ÷ 3,900

2,000 units

xcvi. Answer: C In as much that there would be no change in the amount of fixed costs, the recommended solution was made by just comparing 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) Contribution margin based on current estimates Decrease 3,000 x (7,400 – 3,500) Decrease in profit Alternative Solution: Total contribution margin 3,000 x (7,400 – 3,500) Less Fixed costs Current profit Total contribution margin at reduced price 3,500 x (6,500 – 3,500) Less Fixed costs Revised profit Current profit Decrease in profit

10,500,000 11,700,000 ( 1,200,000) 11,700,000 7,800,000 3,900,000 10,500,000 7,800,000 2,700,000 3,900,000 ( 1,200,000) 78

Incremental Analysis

xcvii.

Answer: B Fixed fee P 500,000 Fixed overhead reimbursement 500 x 1,200 600,000 Total 1,100,000 Less lost contribution margin on regular customers (500 x 3,900) 1.950,000 Decrease in profit P( 850,000) The reimbursement for fixed overhead is an income for Medical Hospital Company because the special order does not entail additional fixed overhead.

xcviii. Answer: C Direct materials Direct labor Variable overhead Shipping cost Cost of obtaining the order 40,000 ÷ 1,000 Minimum selling price

1,000 1,500 500 750 40 3,790

xcix. Answer: D All the production costs, both variable and fixed, are no longer relevant because they are sunk costs. To be relevant to a decision, 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. c. Answer: D The maximum price at which the price charged by the contractor would indifferent to the cost to make the hoist is the total differential cost or avoidable cost. Direct materials 1,000 Direct labor 1,500 Variable overhead 500 Avoidable fixed overhead 1,200 x 0.30 360 Avoidable variable marketing cost 500 x 0.2 100 Maximum purchase price 3,460 ci. Answer: A Direct materials Direct labor Variable overhead Avoidable marketing costs Opportunity cost [800 x (9,000 – 5,500 – 1,000)] ÷ 1,000 Maximum purchase price

1,000 1,500 500 100 2,000 5,100

A better understanding of the solution can be made by drawing a schedule to compute income for this alternative and compare it with the income shown in solution for Question No. 97 as follows: 79

Incremental Analysis

Sales Variable production costs: In house production (2,000 x 3,000) (800 x 5,500) Contractor‟s cost 1,000 x 5,100 Variable marketing costs Regular (2,000 x 500) + (1,000 x 400) Modified (800 x 1,000) Fixed costs Profit Total profit

(2,000,000 + 1,900,000)

cii. Answer: A Direct material (6 lbs.  P1.50) Direct labor (0.25 hr.  P7) Direct machine cost (P10/blanket) Variable overhead (0.25 hr.  P3) Administrative costs (P2,500/1,000) Minimum bid price

Modified 7,200,000

4,400,000

Regular 22,200,000 6,000,000 5,100,000

800,000 . . 2,000,000

1,400,000 7,800,000 1,900,000

3,900,000 P9.00 1.75 10.00 0.75 2.50 P24.00

ciii. Answer: B Using the full-cost criteria and the maximum allowable return specified, Marcus Fibers‟ bid price per blanket would be: Relevant costs (from Requirement 1) P24.00 Fixed overhead (0.25 hr.  P8) 2.00 Subtotal P26.00 Allowable return (0.15*  P26) 3.90 Bid price P29.90 *0.09/(1 – 0.40) = 0.15

80