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Incremental Analysis Basic Concepts

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Incremental Analysis

MODULE 6 24. One of the behavioral problems with relevant cost analysis is the overemphasis on short-term
goals, which can lead to neglect of:
INCREMENTAL ANALYSIS A. sales promotion C. quarterly net income results
B. expense control D. long-term strategic goals
Basic concepts
Steps in decision making process Incremental analysis
5. What is the first step in the decision making process? 25. Incremental analysis is the process of identifying the financial data that:
A. Specify the criteria by which the decision is to be made. A. do not change under alternative courses of action
B. Consider the strategic issues regarding the decision context. B. are mixed under alternative courses of action
C. Perform an analysis in which the relevant information is developed and analyzed. C. change under alternative courses of action
D. Compare the alternatives. D. no correct answer is given

7. A major accounting contribution to the managerial decision-making process in evaluating possible courses of action 48. Incremental analysis is most useful
is to A. in evaluating the master budget.
A. assign responsibility for the decision. B. in choosing between the net present value method and the internal rate of return method.
B. provide relevant revenue and cost data about each course of action. C. in developing relevant information for management decisions.
C. determine the amount of money that should be spent on a project. D. as a replacement technique for variance analysis.
D. decide which actions that the management should consider.
Relevant information
8. An analysis of relevant costs and relevant revenues 2. Predicted future cost and revenue data that will differ among alternative courses of action are
A. Will enable the decision maker to assess a decision’s impact on profit known as
B. Is useful in assessing a variety of alternative decisions A. relevant information C. marginal costs
C. Provides sufficient and complete evidence with which to make a decision B. direct information D. incremental costs
D. Answers a. and b. are correct
4. Which of the following is described as data that are pertinent to a decision?
Pitfalls in decision making A. qualitative characteristics C. timely information
1. When discussing the pitfalls to be avoided in decision-making, four reminders usually emerge. Which is NOT one of B. accurate information D. relevant information
those reminders?
A. Ignore sunk costs. 6. Which of the following best describes relevant information?
B. Beware of allocated fixed costs; identify the avoidable costs. A. Focused on the past and differs between the alternatives under consideration.
C. Pay special attention to identifying and including opportunity costs. B. Focused on the past and not related to the decision under consideration.
D. Do not overlook the time value of money in short-run decisions. 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.
19. Which one of the following is not a common mistake in a decision-making process?
A. Considering sunk costs as relevant. Application of incremental analysis
B. Considering opportunity cost, an imputed cost, being relevant. 3. Incremental analysis would not be appropriate for
C. Considering fixed costs as avoidable fixed costs. A. a make or buy decision.
D. Unitizing fixed costs. B. an allocation of limited resource decision.
C. elimination of an unprofitable segment.
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Incremental Analysis

D. analysis of manufacturing variances. 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
Irrelevant costs D. anticipated future costs that will differ among various alternatives
Sunk costs
9. The kind of cost that can be ignored in a short-term decision making is a(an) 14. The Health Care Division of Piedmont Insurance employs three claims processors capable of
A. differential cost C. sunk cost processing 5,000 claims each. The division currently processes 12,000 claims. The manager has
B. incremental cost D. joint cost 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
30. Sunk costs are process approximately 5,000 claims. The Health Care Division would be compensated by Auto
A. Costs that increase due to a higher volume of activity or the performance of an additional activity Division or Property Division for processing these claims. Assume that these are mutually
B. Costs that a company must incur to perform an activity at a given level, but will not be incurred if a company exclusive alternatives. Claims processor salary cost is relevant for
reduces or discontinues the activity A. Auto Division alternative only
C. The profits that a company forgoes by following a particular course of action B. Property Division alternative only
D. Costs that were incurred prior to making a decision C. both Auto Division and Property Division alternatives
D. neither Auto Division nor Property Division alternatives
33. A sunk cost is:
A. a cost incurred in the past and not relevant to any future course of action. Differential costs
B. an opportunity cost. 31. The difference in cost between or among various alternative courses of action appropriately
C. useful in analysis of alternative courses of action. describes a(an):
D. relevant to current decision making. A. differential cost C. constraint
B. ad hoc discount D. scarce resource
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 Opportunity cost
B. outlay to be made for the new machine 10. An important concept in decision making is described as “the contribution to income that is forgone
C. annual savings to be enjoyed on the new machine by not using a limited resource in its best alternative use.” This concept is called
D. life of the new machine A. Marginal cost C. Incremental cost
B. Cost outlay D. Opportunity cost
Unit costs
22. Unit costs can mislead decision makers. Which of the following situations dealing with unit costs are not expected to 11. An “opportunity cost” is
result in a faulty analysis? A. the difference in total costs that results from selecting one alternative instead of another
A. Unit costs used in make-or-buy decisions might include costs such as avoidable fixed costs. B. the profit forgone by selecting one alternative instead of another
B. Variable unit cost directly varies with the changes in production units. C. a cost that may be saved by not adopting an alternative
C. Total fixed costs increase as more units are produced within the relevant range. D. a cost that may be shifted to the future with little or no effect on current operations
D. Contribution margin on products that can be manufactured in using the freed capacity is irrelevant in the
decision. 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
Relevant costs B. not relevant to decision making and is not usually reflected in accounting records
16. Relevant costs are C. relevant to decision making and is usually reflected in accounting records
A. all fixed and variable costs D. not relevant to decision making and is usually reflected in accounting records
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Incremental Analysis

D. Costs that were incurred prior to making a decision


18. The potential benefit that may be obtained from following an alternative course of action is called
A. opportunity benefit C. relevant cost Out-of-pocket costs
B. opportunity cost D. sunk cost 23. Which of the following is a cost that requires a future outlay of cash that is relevant for future
decision-making?
26. Opportunity cost is the A. Opportunity cost C. Out-of-pocket cost
A. cash outlay required to implement an alternative. B. Relevant benefits D. Incremental revenue
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. Sensitivity analysis
D. fixed cost avoided when a product, department, or business unit is abandoned. 20. Sensitivity analysis is useful in decision making when:
A. there is a degree of uncertainty about the relevant data.
28. Opportunity costs are B. there is an opportunity cost included in the analysis.
A. Costs that increase due to a higher volume of activity or the performance of an additional activity C. sunk cost is included in the analysis.
B. Costs that a company must incur to perform an activity at a given level, but will not be incurred if a company D. the analysis is subject to a review by the management.
reduces or discontinues the activity
C. The profits that a company forgoes by following a particular course of action 21. To determine the possible outcome in a decision analysis if a key prediction or assumption proves
D. Costs that were incurred prior to making a decision to be wrong, managers will use:
A. sensitivity analysis. C. incremental analysis.
27. Using opportunity cost to analyze the income effects of a given alternative is referred to as B. total analysis. D. regression analysis.
A. engineering analysis C. account analysis
B. mixed-cost analysis D. differential analysis Make-or-buy decision
Qualitative Considerations
Avoidable 38. Which of the following elements of the value chain should be considered when deciding whether to
15. A fixed cost is relevant if it is make or buy a component needed for production?
A. future cost C. avoidable A. Marketing C. Manufacturing
B. sunk D. a product cost B. Distribution D. all of these choices

17. Which of the following is (are) a true statement(s) about cost behaviors in incremental analysis? Make decision
I. Fixed costs will not change between alternatives. 34. Manufacturing parts internally by a company causes:
II. Fixed costs may change between alternatives. A. the company to be dependent upon suppliers for timely delivery of parts
III. Variable costs will always change between alternatives. B. the quality of the parts to be under the control of the company
A. I C. III C. lower parts costs to be assured
B. II D. II and III D. a company's operations to be more efficient than when the parts are purchased from suppliers

29. Avoidable costs are 44. A company should decide to make, rather than buy, a part required for their product, if
A. Costs that increase due to a higher volume of activity or the performance of an additional activity A. The company’s production facility is at full capacity
B. Costs that a company must incur to perform an activity at a given level, but will not be incurred if a company B. The relevant cost per-unit of making the part exceeds the per-unit relevant costs of purchasing
reduces or discontinues the activity the part
C. The profits that a company forgoes by following a particular course of action C. The supplier of the part can produce a higher-quality part
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Incremental Analysis

D. The supplier of the part has questionable reliability B. the total variable cost of the component.
C. the fixed manufacturing cost of the component.
Buy decision D. zero.
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? 46. The cost of not receiving rent from a space because you decide to make the part rather than
B. Do the supplier's items meet product and quality specifications? buying it from an outside supplier is considered a(an)
C. Is the supplier reliable? A. sunk cost C. opportunity cost
D. All of the above should be considered. B. future cost D. fixed cost

41. Which of the following qualitative factors favors the buy choice in a make or buy decision for a part? 47. In a make-or-buy decision, an opportunity cost that should be considered is the:
A. maintaining a long-term relationship with suppliers A. income that could be generated from idle production space.
B. quality control is critical B. total costs to produce the item
C. utilization of idle capacity C. variable costs to produce the item
D. part is critical to product D. fixed costs to produce the item

Relevant costs Decision rule


Fixed costs 42. Haribon Company is faced with a make-or-buy decision. Haribon should agree to buy the part from
36. Within the context of the make or buy decision, when are fixed costs relevant? a supplier provided the price is less than Haribon’s
A. Fixed costs are always relevant A. total costs
B. Fixed costs are never relevant B. variable production costs plus avoidable fixed production costs
C. Fixed costs are relevant when they differ among alternatives C. total manufacturing costs
D. It cannot be determined without closely examining each particular situation D. variable costs

37. In a make or buy decision: 84. A company owns equipment that is used to manufacture important parts for its production process.
A. Only variable costs are relevant. The company plans to sell the equipment for P10,000 and to select one of the following
B. Fixed costs that can be avoided in the future are relevant. alternatives:
C. Fixed costs that will continue regardless of the decision are relevant. (1) acquire new equipment for P80,000
D. Only conversion costs are relevant. (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
Opportunity costs the parts
39. In a make-or-buy decision, which of the following is true? A. Plus P80,000 to the cost of buying the parts less P10,000.
A. Variable costs are the only relevant costs. B. to the cost of buying the parts less P10,000.
B. Allocated fixed costs are relevant. C. Less P10,000 to the cost of buying the parts.
C. Alternative uses of space and machinery are relevant. D. To the cost of buying the parts.
D. Making the product is the correct decision when there is idle capacity.
Special order decision
40. The opportunity cost of making a component part in a factory with excess capacity for which there is no alternative Process
use is 49. In making a special order decision, management should:
A. the total manufacturing cost of the component. A. compute a reasonable sales price for items not normally produced.
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Incremental Analysis

B. consider additional overhead cost. D. need for good management


C. consider normal and relevant costs.
D. All of the above. Decision rule
82. Production of a special order will increase gross profit when the additional revenue from the special
52. Which of the following factors should be considered in deciding whether to accept a special order? order is greater than
A. the sales price of the product or service A. The nonvariable costs incurred in producing the order.
B. the production capacity of the company B. The direct material and labor costs in producing the order.
C. the impact on regular customers C. The fixed costs incurred in producing the order.
D. all of these choices D. The marginal cost of producing the order.

Irrelevant cost 51. If the firm is operating under capacity, the minimum special order price should be high enough to
83. In considering a special order that will enable a company to make a use of presently idle capacity, which of the cover:
following costs would be irrelevant. A. all variable costs and incremental fixed costs associated with the special order minus foregone
A. Materials C. Direct labor contribution margin on regular units not produced.
B. Depreciation D. Variable OH B. variable and incremental fixed costs associated with the special order and a profit margin.
C. limited variable costs associated with the special order.
54. Given the following list of costs, which one should be ignored in a decision to produce additional units of product for a D. neither variable nor fixed costs associated with the special order.
factory that is operating at less than 100% capacity, and the additional business will not use up the remainder of the
plant capacity? 57. Green Giant Foods has some excess manufacturing capacity that it can leave idle, use to produce
A. Direct material cost per unit C. Fixed selling expenses its own boxes for frozen foods, or use to process another company’s frozen foods. It will be more
B. Direct labor cost per hour D. Variable selling expenses 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.
Relevant costs B. less than the cost to leave the plant idle and greater than the cost to buy the boxes.
Long-run decision C. greater than the cost to leave the plant idle and lower than the cost to buy boxes from a
58. The sales price of a product, in the long run, must be enough to cover what type of costs? supplier.
A. Designing costs C. Servicing costs D. less than both the cost to leave the plant idle and the cost to make or buy the boxes.
B. Marketing costs D. All of the above
Minimum acceptable price
Opportunity costss With excess capacity
50. An opportunity cost commonly associated with a special order is 55. If there is excess capacity, the minimum acceptable price for a special order must cover
A. the contribution margin on lost sales A. variable costs associated with the special order.
B. the variable costs of the order B. variable and fixed manufacturing costs associated with the special order.
C. additional fixed cost that is related to the increased output C. variable and incremental fixed costs associated with the special order.
D. any of the above D. variable costs and incremental fixed costs associated with the special order plus the
contribution margin usually earned on regular units.
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 At full capacity
B. value of full employment 56. If a firm is at full capacity, the minimum special order price must cover
C. time value of money A. variable costs associated with the special order.
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Incremental Analysis

B. variable and fixed manufacturing costs associated with the special order. D. All of the above.
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 Target cost approach
regular units not produced. 61. In contrast to the total product and variable cost concepts used in setting seller's prices, the target
cost approach assumes that:
Product life cycle A. a markup is added to total cost. C. a markup is added to variable cost.
45. A product life cycle includes the phases of B. selling price is set by the marketplace. D. a markup is added to product cost.
A. research and development and design C. marketing and distribution
B. purchasing and production D. all of the above Sell-as-is-or-process further
Joint products
Product pricing 67. Two or more manufactured products that have significant sales values and are not uniquely
Variable cost approach identifiable as individual products until the split-off point are called
60. Managers who often make special pricing decisions are more likely to use which of the following cost concepts in A. common products. C. co-mingled products.
their work? B. joint products. D. cooperative products.
A. Total cost. C. Variable cost.
B. Product cost. D. Fixed cost. Relevant costs
Incremental revenue
Cost-plus approach 32. Incremental revenue is:
59. In using the variable cost concept of applying the cost-plus approach to product pricing, what is included in the A. a difference in costs between two decisions.
markup? B. a concession based on competitive influences.
A. Total costs plus desired profit. C. additional revenue across decision choices from potential sales.
B. Desired profit. D. the difference between selling price and variable costs.
C. Total selling and administrative expenses plus desired profit.
D. Total fixed manufacturing costs, total fixed selling and administrative expenses, and desired profit. Cost to process further
65. Which of the following costs is relevant in deciding whether to sell joint products at split-off or
62. Which of the following is NOT a cost concept commonly used in applying the cost-plus approach to product pricing? process them further?
A. Total cost concept. C. Variable cost concept. A. The unavoidable costs of further processing.
B. Product cost concept. D. Fixed cost concept. B. The additional costs of further processing.
C. The variable costs of operating the joint process.
63. The cost-plus pricing formula that takes into consideration all costs -- fixed, variable, and manufacturing, as well as D. The cost of materials used to make the joint products.
selling and administrative costs -- is called the percentage of
A. full costs. C. total variable costs. 68. What are the manufacturing costs incurred beyond the split-off point called?
B. variable manufacturing costs. D. absorption costs. A. Separable costs. C. Severance costs.
B. Joint costs. D. Common costs.
Target pricing
43. The concept of target pricing is employed when: Decision rule
A. a company wishes to set price in order to capture a predetermined market share. 64. How does a company determine whether to sell a product “as is” or process it further?
B. a price is pre-set by market conditions. A. If the costs to process further exceed the costs of current production, the product should be
C. a company wishes to meet marketing goals. sold ‘as is.”
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Incremental Analysis

B. If the costs to process further exceed the costs of current production, the product should be processed further. B. organizational sales force compensation plan
C. If the increase in revenue from selling the product after further processing is greater than the additional costs C. product selling price
incurred in further processing, the company should opt for further processing. D. All of the above
D. If the revenues generated by processing the product further exceed the revenues from selling the product “as is,”
the company should process further. To relax a constraint
73. Which of the following will relax a constraint?
Keep-or-drop decision A. Outsourcing all or part of the bottleneck operation
Strategic considerations B. Working overtime at the bottleneck operation
66. The decision to keep or drop products or services involves strategic consideration of the: C. Retraining employees and shifting them from the bottleneck
A. potential impact on remaining products or services D. A and B, only
B. impact on employee morale
C. growth potential of the firm Decision rule
D. All of the above answers are correct 76. A product mix decision involves
A. Influencing the sales volume mix of the products to minimize cost.
Goal B. Influencing the sales volume mix of the products to maximize revenue.
78. The goal in deciding whether to add or drop products, services, or departments is to obtain the greatest C. Producing the maximum amount of items that provide the highest contribution margin.
A. reduction in total costs. D. Producing the maximum amount of items that carry the lowest per-unit cost.
B. contribution possible to cover unavoidable costs.
C. increase in sales revenues. 71. A useful device for solving production problems involving multiple products and limited resources
D. decrease in direct fixed costs. is:
A. gross sales per unit of product C. net profit per unit of product
Irrelevant cost B. contribution per unit of scarce resource D. total benefit
80. Which of the following should not enter into decision of whether to drop product?
A. Unavoidable costs 72. When there is only one production constraint and excess demand, it is generally best to focus
B. Avoidable costs production and sales on the product with the highest:
C. Revenue that would be lost A. Contribution per unit of scarce resource C. Contribution margin in pesos
D. Nonfinancial impacts of the decision B. Margin of Safety D. Operating Leverage

Decision rule 69. When there is one scarce resource, the product that should be produced first is the product with
79. As long as its marginal cost is lower than its marginal revenue, a company should the highest
A. suspend additional production and sales activities. A. contribution margin per unit of the scarce resource.
B. perform a cost-benefit balance analysis before producing and selling additional products. B. sales price per unit of scarce resource.
C. engage in additional production and sales activities. C. demand.
D. examine cost behaviors and develop a cost function to measure the cost of future production. D. contribution margin per unit.

Short-run profit maximization 74. Uranus Company has 2 products that use the same manufacturing facilities and cannot be
Factors affecting sales mix subcontracted. Each product has sufficient orders to utilize the entire manufacturing capacity. For
70. Which of the following is an important factor affecting the sales mix of any company? short-run profit maximization, Uranus should manufacture the product with the
A. organizational advertising expenditures A. Lower total manufacturing costs for the manufacturing capacity.
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Incremental Analysis

B. Lower total variable manufacturing costs for the manufacturing capacity. A. P132,000 C. P144,000
C. Greater gross profit per hour of manufacturing capacity. B. P150,000 D. P264,000
D. Greater contribution margin per hour of manufacturing capacity.
Defective/obsolete inventory
75. Profit can be maximized by producing products with the highest Incremental net income
iii
A. selling price . Sieney & Company has 24,000 defective units of a product that cost P8 per unit to manufacture,
B. contribution margin and can be sold for P4 per unit. These units can be reworked for P2 per unit and sold at their full
C. contribution margin per unit of items that are best sellers price of P12 each. If Sieney reworks the defective units, how much incremental net income will
D. contribution per unit of the constraining resource result?
A. P144,000 C. P 72,000
77. A company should advertise those products that B. P 96,000 D. P 48,000
A. Require the lowest commitment of resources to produce
B. Have the largest total contribution margin Minimum price
iv
C. Can be outsourced . Joji Company manufactures and sell FM radios. Information on last year’s operations (sales and
D. Have the largest total contribution margin after deducting the cost of the ad campaign production of the 2006 model) follows:
Selling price P300
Pitfall Cost per unit:
81. The major pitfall in the contribution margin approach to pricing is Direct materials 70
A. its failure to recognize fixed costs. Direct labor 40
B. its failure to recognize depreciation expense. Overhead (50% variable) 60
C. its inability to control waste. Selling costs (40% variable) 100
D. its inability to recognize financing costs of the production in question. Production in units 10,000
Sales in units 9,500
PROBLEMS: At this time (May 2007), the 2007 model is in production and it renders the 2006 model radio
Incremental (decremental) cost obsolete. A foreign firm is willing to purchase the obsolete products at a net price of P140 each. If
i
. For the year ended April 30, 2007, Salmo Company incurred direct costs of P800,000 based on a particular course of the remaining 500 units of the 2006 model radios are to be sold through regular channels, what is
action. Had a different course of action been taken, direct costs would have been P650,000. In addition, Salmo’s the minimum price the company would accept for the radios?
fixed costs during the fiscal year were P110,000. A. P300 C. P270
The incremental (decremental) cost was: B. P180 D. P 40
A. P 40,000 C. P 150,000
B. P( 40,000) D. P(150,000) Special order
Unit relevant cost
v
Opportunity cost . Venus Company, a manufacturer of lamps, budgeted sales of 400,000 lamps at P20 per unit for the
ii
. Luzon Fabricators, Inc. estimates that 60,000 special components will be used in the manufacture of a specialty steel year. Variable manufacturing costs were budgeted at P8 per unit, and fixed manufacturing costs at
window for the whole next year. Its supplier quoted a price of P60 per component. Luzon prefers to purchase 5,000 P 5 per unit. A special order offering to buy 40,000 lamps for P11.50 each was received by Venus
units per month, but its supplier could not guarantee this delivery schedule. In order to ensure availability of these in April. Venus has sufficient plant capacity to manufacture the additional quantity of lamps;
components, Luzon is considering the purchase of all the 60,000 units at the beginning of the year. Assuming Luzon however, the production would have to be done by the present work force on an overtime-basis at
can invest cash at 8%, the company’s opportunity cost of purchasing all the 60,000 units at the beginning of the year an estimated additional cost of P1.50 per lamp. Venus will not incur any selling expenses as a
is result of the special order. Venus Company would have a unit relevant cost of
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Incremental Analysis

A. P 8.00 C. P 9.50 Variable costs P56,250


B. P13.00 D. P14.50 Fixed costs 45,000
The fixed costs include a normal P6,800 allocation for in-house design costs, although no in-house
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. Wawa Enterprises has the capacity to produce 10,000 bearings, but operates at 90% of capacity. Bearings normally design will be done. Instead, the special job will require the use of external designers costing
sell for P60 each, and cost an average of P50 to make, including a share of the monthly fixed costs of P180,000. Ilog P13,750.
Corp has offered to buy 1,000 bearings at P40 each. What is the relevant cost per unit? What is the minimum acceptable price for the job?
A. P 20 C. P 40 A. P 63,050 C. P101,250
B. P 30 D. P 50 B. P 70,000 D. P108,200
x
Total relevant cost . The cost to produce 24,000 units at 70% capacity consists of:
vii
. Intellectual Co. recently received an order for a product that it does not normally produce. Since the company has Direct materials P360,000
excess production capacity, management is considering accepting the order. In analyzing the decision, the assistant Direct labor 540,000
controller is compiling the relevant costs of producing the order. Factory overhead, all fixed 290,000
The special order requires 1,000 kilograms of powdered Nitrocide, a solid chemical regularly used in the company’s Selling expense (35% variable, 65% fixed) 240,000
products. The current stock of Nitrocide is 8,000 kilograms at a book value of P8.10 per kilogram. If the special What unit price would the company have to charge to make P22,500 on a sale of 1,500 additional
order is accepted, the firm will be forced to restock powdered Nitrocide earlier than expected, at a predicted cost of units that would be shipped out of the normal market area?
P8.70 per kilogram. Without the special order, the purchasing manager predicts that the price will be P8.30, when A. P 51 C. P 41
normal restocking takes place. Any order of the Nitrocide must be in 5,000 kilograms. B. P 56 D. P 50
What is the relevant cost of powdered Nitrocide to be included in the special order?
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A. P 8,700 C. P10,300 . Kaila Company’s unit cost of manufacturing and selling a given item at an activity level of 10,000
B. P 8,300 D. P43,500 units per month are:
Manufacturing costs
Incremental cost Direct materials P39
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. Balagtas & Company expects to incur the following costs at the planned production level of 10,000 units: Direct labor 6
Direct materials P100,000 Variable overhead 8
Direct labor 120,000 Fixed overhead 9
Variable overhead 60,000 Selling expenses
Fixed overhead 30,000 Variable 30
The selling price is P50 per unit. The company currently operates at full capacity of 10,000 units. Capacity can be Fixed 11
increased to 13,000 units by operating overtime. Variable costs increase by P14 per unit for overtime production. The company desires to seek an order for 5,000 units from a foreign customer. The variable selling
Fixed overhead costs remain unchanged when overtime operations occur. Balagtas has received a special order expenses will be reduced by 40%, but the fixed costs for obtaining the order will be P20,000.
from Florante, Inc. who has offered to buy 2,000 units at P45 each. Domestic sales will not be affected by the order.
What is the incremental cost associated with this special order? The minimum break-even price per unit to be considered on this special sale is
A. P42,000 C. P31,000 A. P 71 C. P 69
B. P84,000 D. P62,000 B. P 75 D. P 84
xii
Minimum acceptable price . Chrisy Company sells a product for P18 per unit and the standard cost card for the product shows
ix
. Brace Co. has considerable excess manufacturing capacity. A special job order’s cost sheet includes the following the following costs:
applied manufacturing overhead costs: Direct materials P 1.00
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Incremental Analysis

Direct labor 2.00 B. 200 units D. 0 units


Overhead (80% fixed) 7.00
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Total P10.00 . Filamer Company currently sells 1,000 units of product M for P2 each. Variable costs are P1.50. A
Chrisy received a special order for 1,000 units of the product. The only additional cost to Chrisy would be foreign discount store has offered P1.70 per unit for 400 units of product M. The managers believe that if
import taxes of P1 per unit. If Chrisy is able to sell all of the current production domestically, what would be the they accept the special order, they will lose some sales at the regular price. Determine the number
minimum sales price that Chrisy would consider for this special order? of units they could lose before the order become unprofitable.
A. P 18 C. P 17 A. 200 units. C. 400 units.
B. P 19 D. P 11 B. 160 units. D. 500 units
xiii
. De Silva Co. is a manufacturer of industrial components. One of their products that is used as a subcomponent in Effect on profit of accepting the order
xvii
auto manufacturing is KB69. This product has the following financial structure per unit: . You have been approached by a foreign customer who wants to place an order for 15,000 units of
Selling price P150 Product C at P22.50 a unit. You currently sell this item for P39 a unit, and the item has a cost of
Direct materials P 20 P29 a unit. Further analysis reveals that you will not be paying sales commission of P2.50 a unit on
Direct labor 15 this sales and its packaging requirement will save you an additional P1.50 per unit. However, the
Variable manufacturing overhead 12 additional graphics required on this job will cost you P30,000. Note also that fixed costs amounting
Fixed manufacturing overhead 30 to P400,000 for the production of 50,000 of such products by the firm will not change. You decide
Variable shipping and handling 3 to accept this order, but another customer who buys an average of 2,000 units for the period wants
Fixed selling and administrative 10 to pay you P22.50 rather than the regular price of P39 a unit. Profit will
Total P 90 A. increase profit by P19,500 C. increase profit by P52,500
De Silva is operating at full capacity. It has received a special, one-time, order for 1,000 KB69 parts. The next best B. increase profit by P16,500 D. decrease profit by P52,500
alternative use of the excess capacity is to produce LB46, resulting in a contribution margin of P10,000. The
xviii
minimum price that is acceptable for this one-time special order is . The Thermo Company has received a special order for 300 units of product X for P6 a unit. It
A. P 60 C. P 70 usually sells for P9.50 a unit with a cost of P7.50 a unit inclusive of 75 cents a unit as sales
B. P 87 D. P100 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
xiv
. Sylvania Company. is currently operating at a loss of P15,000. The sales manager has received a special order for salary. The latter’s (supervisor's salary) accounts for one-half of this amount. Assuming that excess
5,000 units of product, which normally sells for P35 per unit. Costs associated with the product are: direct material, capacity is available, and this order requires a mold that costs P150, accepting the order will
P6; direct labor, P10; variable overhead, P3; applied fixed overhead, P4; and variable selling expenses, P2. The increase
special order would allow the use of a slightly lower grade of direct material, thereby lowering the price per unit by A. loss by P225 C. gain by P225
P1.50 and selling expenses would be decreased by P1. If Sylvania wants this special order to increase the total net B. loss by P375 D. gain by P375
income for the firm to P25,000, what sales price must be quoted for each of the 5,000 units?
xix
A. P18.50 C. P29.00 . Alejar Company manufactures a product with a unit variable cost of P50 and a unit sales price of
B. P24.50 D. P26.50 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
Maximum lost regular sales market. This special sale would not affect its present sales. If the company has sufficient capacity
xv
. Chua Company sells a product for P20 with variable cost of P8 per unit. Chua could accept a special order for to produce the additional units, acceptance of the special order would affect net income as follows:
1,000 units at P14. If Chua accepted the order, how many units could it lose at the regular price before the decision A. Income would decrease by P 12,000.
become unwise? B. Income would increase by P 12,000.
A. 1,000 units C. 500 units C. Income would increase by P210,000.
20
Incremental Analysis

D. Income would increase by P 60,000.


xxiii
. Assuming that that the Disk Division is producing and selling at capacity. What is the minimum
xx
. KC Industries manufactures a product with the following costs per unit at the expected production of 30,000 units. selling price that the division would consider on a “special order” of 1,000 chips on which no
Direct materials P 4 variable period costs would be incurred?
Direct labor 12 A. P100 C. P 94
Variable manufacturing overhead 6 B. P 72 D. P 90
Fixed manufacturing overhead 8
The company has the capacity to produce 40,000 units. The product regularly sells for P40. A wholesaler has Make-or-buy decision
offered to pay P32 a unit for 2,000 units. Relevant costs
xxiv
If the firm accepts the special order the effect on its operating income would be a . For the past 12 years, the JLO Company has produced the small electric motors that fit into its
A. P20,000 increase C. P4,000 increase main product line of dental drilling equipment. As materials costs have steadily increased, the
B. P16,000 decrease D. P 0 effect controller of the JLO Company is reviewing the decision to continue to make the small motors and
has identified the following facts:
xxi
. Louderhead Company makes bull-repellent scent according to a traditional Western recipe, which normally sells at 1) The equipment which is used to manufacture the electric motors has a book value of
P90 per unit. Normal production volume is 10,000 ounces per month. Average cost is P50 per ounce, of which P20 is P1,500,000.
direct material and P10 is variable conversion cost. This product is seasonal. After July, demand for this product 2) The space being occupied now by the electric motor manufacturing department could
drops to 6,000 ounces monthly. In November, Garrison Co. offers to buy 1,500 ounces for P60,000. If Louderhead be used to eliminate the need for storage space which is presently being rented.
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 3) Comparable units can be purchased from an outside supplier for P597.50.
and apply. Louderhead should: 4) Four of the people who work in the electric motor manufacturing department would be
A. accept the order, at a gain of P6,250 terminated and given eight weeks of separation pay.
B. reject the order, at a loss of P18,750 5) A P750,000 unsecured note is still outstanding on the equipment that is being used in
C. reject the order, at a loss of P23,750 the manufacturing process.
D. accept the order, at a gain of P11,250 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
Question Nos. 68 and 69 are based on the following information: B. 1, 3, and 4 D. 2, 3, and 4
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: Relevant cost to make
xxv
Direct materials P50 . ELM Electronics has the following standard costs and other data:
Direct labor 20 Part Beta Part Zeta
Overhead (20% variable) 10 Direct materials P 4.00 P80.00
Other information: Direct labor 10.00 47.00
Sales price 100 Factory overhead 40.00 20.00
SG & A costs (40% variable) 15 Unit standard cost P54.00 P147.00
The Disk Division is operating at a level of 70,000 chips per year. Units needed per year 6,000 8,000
Machine hours per unit 4 2
xxii
. What is the minimum price that the division would consider on a “special order” of 1,000 disks to be distributed Unit cost if purchased P50.00 P150.00
through normal channels? In the past years, ELM has manufactured all of its required components; however, this year only
A. P 72 C. P 81 30,000 hours of otherwise idle machine time can be devoted to the production of components.
B. P 78 D. P 6 Accordingly, some of the parts must be purchased from outside suppliers. In producing the parts,
21
Incremental Analysis

xxviii
factory overhead is applied at P10 per standard machine hour. Fixed capacity costs that will not be affected by any . Almeda's Shop can make 1,000 units of a necessary component with the following costs:
make-or-buy decision represent 60% of the applied overhead. Direct Materials P64,000
The available 30,000 machine hours are to be scheduled so that ELM realizes maximum potential cost savings. The Direct Labor 16,000
relevant unit production costs that should be considered in the decision to schedule machine time are: Variable Overhead 8,000
A. P54.00 for Beta and P147.00 for Zeta C. P14.00 for Beta and P127.00 for Zeta Fixed Overhead ?
B. P50.00 for Beta and P150.00 for Zeta D. P30.00 for Beta and P135.00 for Zeta 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
Maximum buy price contribution by P16,000 if the components were acquired externally. If cost minimization is the
xxvi
. The following are a company’s monthly unit costs to manufacture and market a particular product. major consideration and the company would prefer to buy the components, what is the maximum
Manufacturing Costs: external price that Almeda Company would be willing to accept to acquire the 1,000 units
Direct materials P2.00 externally?
Direct labor 2.40 A. P 86,000. C. P 96,000.
Variable indirect 1.60 B. P110,000. D. P104,000.
Fixed indirect 1.00
Effect of make decision
xxix
Marketing Costs: . A business is operating at 90% of capacity and is currently purchasing a part which is being used in
Variable 2.50 its manufacturing operations for P15 per unit. The unit cost for the business to make the part is
Fixed 1.50 P20, including fixed costs, and P12, not including fixed costs. If 30,000 units of the part are
The company must decide to continue making the product or buy it from an outside supplier. The supplier has normally purchased during the year but could be manufactured using unused capacity, what would
offered to make the product at a level of quality that the company prescribes. Fixed marketing costs would be be the amount of differential cost, increase or decrease, from making the part rather than
unaffected, but variable marketing costs would continue at 30% if the company were to accept the proposal. purchasing it?
What is the maximum amount per unit that the company can pay the supplier without decreasing its operating A. P150,000 cost increase C. P150,000 cost decrease
income? B. P 90,000 cost decrease D. P 90,000 cost increase
A. P8.50 C. P7.75
xxx
B. P6.75 D. P5.25 . Alfaro's Manufacturing Company can make 100 units of a necessary component part with the
following costs:
xxvii
. Sinta Company can make 1,000 units of a necessary component with the following costs: Direct Materials P80,000
Direct Materials P64,000 Direct Labor 13,000
Direct Labor 16,000 Variable Overhead 40,000
Variable Overhead 8,000 Fixed Overhead 27,000
Fixed Overhead ? If Alfaro's Manufacturing Company can purchase the component externally for P145,000 and only
The company can purchase the 1,000 units externally for P104,000. An analysis shows that at this external price, the P4,000 of the fixed costs can be avoided, what is the correct “make or buy” decision?
company is indifferent between making or buying the part. Sinta Company could avoid P6,000 in fixed overhead A. Make and save P8,000 C. Make and save P20,000
costs if it acquires the components externally. If cost minimization is the major consideration and the company would B. Buy and save P8,000 D. Buy and save P20,000
prefer to buy the components, what is the maximum external price that Sinta Company would accept to acquire the
1,000 units externally? Effect of buy decision
A. P102,000. C. P 96,000. On fixed overhead cost
xxxi
B. P 94,000. D. P 88,000. . Sisa's Shop can make 1,000 units of a necessary component with the following costs:
Direct Materials P64,000
22
Incremental Analysis

Direct Labor 16,000 Part No. 498 are manufactured are as follows:
Variable Overhead 8,000 Direct materials P6
Fixed Overhead ? Direct labor 30
The company can purchase the 1,000 units externally for P104,000. The unavoidable fixed costs are P5,000 if the Variable overhead 12
units are purchased externally. An analysis shows that at this external price, the company is indifferent between Fixed overhead applied 16
making or buying the part. What are the fixed overhead costs of making the component? Total unit cost P64
A. P21,000. C. P11,000. The Reeves Company has offered to sell 20,000 units of part No. 498 to Rainbow for P60 per unit.
B. P16,000. D. Cannot be determined. 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
On income totally eliminated. Furthermore, Rainbow has determined that the released facilities could be used
xxxii
. Sylvan Processing Company is considering whether to make 2,000 units of product Whirl which costs P16 a unit or to save relevant costs in the manufacture of part No. 575. In order to have a savings of P25,000,
buy it from outside for P15 a unit. A further analysis shows that if product Whirl is outsourced, fixed costs of P8,000 the amount of the relevant costs that would be saved by using the released facilities in the
attributable to this product will be reduced by 25%. manufacture of Part No. 575 would have to be
If the product is outsourced, Sylvan will A. P 80,000 C. P125,000
A. Decrease profit by P2,000 C. Increase profit by P2,000 B. P 85,000 D. P140,000
B. Decrease profit by P4,000 D. Increase profit by P4,000
xxxvii
. Leis Manufacturing Co. uses 10 units of Part Number WS73 each month in the production of
xxxiii
. Sylvan Processing Company is considering whether to make 2,000 units of product Whirl which costs P16 a unit or computer printer. The unit cost to manufacture one unit of WS73 is presented below.
buy it from outside for P15 a unit. A further analysis shows that if product Whirl is outsourced, fixed costs of P8,000 Direct materials P 1,000
attributable to this product will be reduced by 25%. If Sylvan Processing Company purchased the product Whirl, the Materials handling (20% of direct material cost) 200
space could be rented out for P6,000. If the product is outsourced, profit would Direct labor 8,000
A. decrease, P2,000 C. increase, P2,000 Manufacturing overhead (150% of direct labor) 12,000
B. decrease, P4,000 D. increase, P4,000 Total manufacturing cost P21,200
Material handling represents the direct variable costs of the Receiving Department that are applied
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 to direct materials and purchased components on the basis of their cost. This is a separate charge
P120,000, variable overhead of P15,000, and P225,000 in fixed overhead inclusive of P45,000 in depreciation and in addition to manufacturing overhead. Leis’ annual manufacturing overhead budget is one-third
common overhead allocation of P150,000. The balance is for the section supervisor's salary. The part can be variable and two-thirds fixed. Garland Company, one of Leis’ reliable vendors, has offered to
purchased for P20 a unit. If the part is purchased, the space released can be rented for P65,000. If the part is supply part WS73 at a unit price of P15,000.
purchased, the company will If Leis purchases the WS73 units from Garland, the capacity being used by Leis to manufacture
A. lose P20,000 C. gain P20,000 these parts would be idle. Should Leis decide to purchase the parts from Garland, the unit cost of
B. lose P45,000 D. gain P45,000 WS73 would
A. Increase by P4,800 C. Decrease by P6,200
xxxv
. Lane Co. manufactures ballpoint pens. Another manufacturer has offered to supply Lane with the 5,000 ink cartridges B. Decrease by P3,200 D. Increase by P1,800
that it needs annually. The cost to buy the cartridges would be P15 each. In producing its own cartridges, Lane has
xxxviii
incurred P10 in fixed costs and P8 in variable costs. If Lane buys the cartridges, its net income will: . The Rural Cooperative, Inc. produces 1,000 units of Part M per month. The total manufacturing
A. not change C. increase by P35,000 costs of the part are as follows:
B. decrease by P35,000 D. increase by P25,000 Direct materials P10,000
Direct labor 5,000
xxxvi
. The Rainbow Company manufactures Part No. 498 for use in its production cycle. The cost per unit if 20,000 units of Variable overhead 5,000
23
Incremental Analysis

Fixed overhead 30,000 Fixed overhead 8


Total manufacturing cost P50,000 Total P32
An outside supplier has offered to supply the part at P30 per unit. It is estimated that 20% of the fixed overhead Pampanga Company has offered to sell Bulacan 10,000 units of part G for P30 per unit. If Bulacan
being assigned to Part M will no longer be incurred if the company purchases the part from the outside supplier. accepts Pampanga’s offer, the released facilities could be used to save P45,000 in relevant costs
If Rural Cooperative purchases 1,000 units of Part M from the outside supplier, its monthly operating income will in the manufacture of part H. In addition, P5 per unit of the fixed overhead applied to part G would
A. decrease by P 4,000 C. increase by P 1,000 continue.
B. decrease by P20,000 D. increase by P20,000 What alternative is more desirable and by what amount?
A. B. C. D.
xxxix
. Migs Corporation currently manufactures all component parts used in the manufacture of various hand tools. A steel Alternative Manufacture Manufacture Buy Buy
handle is used in three different tools. The budgeted costs per unit based on 20,000 units are: Amount P10,000 P15,000 P15,000 P10,000
Direct material P6.00
Direct labor 4.00 xlii
. Blade Division of Dana Company produces hardened steel blades. One-third of the Blades
Variable overhead 1.00 Division’s output is sold to the Lawn Products Division of Dana; the remainder is sold to outside
Fixed overhead 2.00 customers. The Blade Division’s estimated sales and standard costs data for the fiscal year ending
Total unit cost P13.00 June 30 are as follows:
Sans Steel, Inc. has offered to supply 20,000 units of the handle to Migs for P12.50 each delivered. If Migs currently Lawn Products Outsiders
has idle capacity that cannot be used, accepting the offer will
Sales P15,000 P40,000
A. Decrease the handle unit cost by P0.50.
Variable costs (10,000) (20,000)
B. Increase the handle unit cost by P1.50.
Fixed costs (3,000) (6,000)
C. Decrease the handle unit cost by P1.50.
Gross margin P 2,000 14,000
D. Increase the handle unit cost by P0.50.
Unit sales 10,000 20,000
xl
. The Minolta, Inc. produces 1,000 units of Part M per month. The total manufacturing costs of the part are as follows: The Lawn Products Division has an opportunity to purchase 10,000 identical quality blades from an
Direct materials P10,000 outside supplier at a cost of P1.25 per unit on a continuing basis. Assume that the Blade Division
Direct labor 5,000 cannot sell any additional products to outside customers.
Variable overhead 5,000 Should Dana allow its Lawn Products Division to purchase the blades from the outside supplier,
Fixed overhead 30,000 and why?
Total manufacturing cost P50,000 A. Yes, because buying the blades would save Dana Company P500.
An outside supplier has offered to supply the part at P30 per unit. It is estimated that 20% of the fixed overhead B. No, because making the blades would save Dana Company P1,500.
assigned to Part M will no longer be incurred if the company purchases the part from the outside supplier. C. Yes, because buying the blades would save Dana Company P2,500.
If Minolta purchases 1,000 units of Part M from the outside supplier per month, then its monthly operating income will D. No, because making the blades would save Dana Company P2,500
A. decrease by P 4,000 C. increase by P 1,000 xliii
B. decrease by P20,000 D. increase by P20,000 . 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:
xli
. Bulacan Company manufactures part G for use in the production of its principal product. The costs per unit for Direct materials P2.50
10,000 units of part G are as follows: Direct labor 3.50
Direct materials P 3 Variable overhead 1.50
Direct labor 15 Fixed overhead 1.00
Variable overhead 6 Total P8.50

24
Incremental Analysis

An outside supplier has offered to sell Connell unlimited quantities of Part 501 at a unit cost of P7.75. If Connell Bottleneck process hours per unit 3 3 4
accepts this offer, it can eliminate 50 percent of the fixed costs assigned to part 501. Furthermore, the space What price for lemonade would equate its profitability to that of soda?
devoted to the manufacture of Part 501 would be rented to another company for P6,000 per year. If Connell accepts A. P8.00. C. P6.00.
the offer of the outside supplier, annual profits will B. P7.00. D. P5.50.
A. Increase by P13,500 C. Increase by P 7,250
B. Increase by P11,000 D. Increase by P 1,250 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
Point of indifference - Units and its variable cost per unit is P12. The plant capacity is 350,000 machine hours and both
xliv
. Mars Industries is a multi-product company that currently manufactures 30,000 units of Part QS42 each month for products require one machine hour to manufacturer. Which of the following will provide the best
use in the production of its main product. The facilities now being used to produce Part QS42 have fixed monthly sales mix of Product A and Product B assuming the market limitation of Product A is 200,000 units
cost of P150,000 and a capacity to produce 84,000 units per month. If Mars were to buy Part QS42 from an outside and the market limitation of Product B is 250,000 units?
supplier, the facilities would be idle, but 60 percent of its fixed costs would not continue. The variable production A. 250,000 units of Product A, 100,000 units of Product B
costs of Part QS42 are P11 per unit. B. 50,000 units of Product A, 300,000 units of Product B
If Mars Industries is able to obtain Part QS42 from an outside supplier at a unit purchase price of P12.875, the C. 100,000 units of Product A, 250,000 units of Product B
monthly usage at which it will be indifferent between purchasing and making Part QS42 is D. 150,000 units of Product A, 200,000 units of Product B
A. 30,000 units C. 80,000 units
B. 32,000 units D. 48,000 units xlviii
. The Hingis Corporation manufactures two products: X and Y. Contribution margin per unit is
determined as follows:
Point of indifference - price Product X Product Y
xlv
. Calero Manufacturing Company can make 100 units of a necessary component part with the following costs: Revenue P130 P80
Direct Materials P80,000 Variable costs 70 P38
Direct Labor 13,000 Contribution margin P 60 P42
Variable Overhead 40,000 Total demand for X is 16,000 units and for Y is 8,000 units. Machine hour is a scarce resource.
Fixed Overhead 27,000 42,000 machine hours are available during the year. Product X requires 6 machine hours per unit
If Calero Manufacturing Company purchases the component externally, P20,000 of the fixed costs can be avoided. At while product Y requires 3 machine hours per unit.
what external price for the 100 units is the company indifferent between making or buying? How many units of X and Y should Hingis Corporation produce?
A. P160,000. C. P153,000.
A. B. C. D.
B. P113,000. D. P133,000.
Product X 16,000 8,000 7,000 3,000
Product Y zero 4,000 zero 8,000
Profit maximization
Point of indifference xlix
xlvi
. Dipsum Soft Drinks makes three products: iced tea, soda, and lemonade. The following data are available: . Mary Manufacturing has assembled the following data pertaining to two popular products.
Iced Tea Soda Lemonade Blender Electric mixer
Sales price per unit Direct materials P 6 P11
P9.00 P6.00 P5.00
Direct labor 4 9
Variable cost per unit 3.00 1.50 1.00 Factory overhead @ P16 per hour 16 32
Contribution margin per unit P6.00 P4.50 P4.00 Cost if purchased from an outside supplier 20 38
Dipsum is experiencing a bottleneck in one of its processes that affects each product as follows: Annual demand (units) 20,000 28,000
Iced Tea Soda Lemonade Past experience has shown that the fixed manufacturing overhead component included in the cost
25
Incremental Analysis

per machine hour averages P10. Mary has a policy of filling all sales orders, even if it means purchasing units from
outside suppliers. *Variable manufacturing overhead is applied on the basis of direct labor hours.
If 50,000 machine hours are available, and Mary Manufacturing desires to follow an optimal strategy, it should **Fixed manufacturing overhead is applied on the basis of machine hours.
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 Scarce’s annual requirements for these bearings is 7,000 units of Plastic and 11,000 units of Metal.
C. produce 20,000 blenders and purchase all other units as needed Recently, Scarce’s management decided to devote additional machine hours to other product lines
D. produce 28,000 electric mixers and purchase all other units as needed 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
Decision prices of P15.50 for Plastic and P17.50 for Metal. Scarce wants to schedule the otherwise idle
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 48,000 machine hours to produce bearings so that the company can minimize its costs (maximize
contribution margin of P36 and takes two machine hours to make and Product B has a unit contribution margin of its net benefits).
P45 and takes three machine hours to make. If there are 1,000 machine hours available to manufacture a product, Scarce Company will maximize its net benefits by purchasisng
income will be A. 7,000 units of Plastic and manufacturing the remaining bearings.
A. P3,000 more if Product A is made. C. P3,000 less if Product A is made. B. 11,000 units of Metal and manufacturing 7,000 units of Plastic.
B. P3,000 less if Product B is made. D. the same if either product is made. C. 6,000 units of Plastic and manufacturing the remaining bearings.
D. 5,000 units of Metal and manufacturing the remaining bearings.
.
li
The Baco Company produces three products with the following costs and selling prices:
liii
A B C . HILO Company manufactures electric carpentry tools. The production department had met all
Selling price per unit P16 P21 P21 production requirements for the current month and has an opportunity to produce additional units
Variable cost per unit 7 11 13 of product with its excess capacity. Unit selling prices and unit costs for three different drill models
Contribution margin per unit P 9 P10 P 8 are as follows:
Direct labor hours per unit 1.0 1.5 2.0 Home Model Deluxe Model Pro Model
Machine hours per unit 4.5 2.0 2.5 Selling price P58 P65 P80
In what order should the three products be produced if either the direct labor-hours or the machine hours are the Direct material 16 20 19
company’s production constraint? Direct labor (P10 per hour) 10 15 20
A. B. C. D. Variable overhead 8 12 16
Direct labor hours A, B, C B, C, A B, C, A A, B, C Fixed overhead 16 5 15
Machine hours B, C, A B. C. A A, C, B A, C, B 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
lii
. Scarce Company has been producing two types of bearings, Plastic and Metal, for its own use in the production of in the product line. If it has excess machine capacity but a limited amount of labor time, to which
main products. The data regarding these two bearings follow: product or products should HILO Company devote its excess production?
Plastic Metal A. Home model C. Deluxe model
Machine hours required per unit 3.0 4.5 B. Pro Model D. Equally
Standard cost per unit liv
Prime costs P 8.00 P 9.00 . Product A sells for P12 per unit and its variable cost per unit is P10. Product B sells for P15 per unit
Variable overhead* 3.00 4.00 and its variable cost per unit is P12. The plant capacity is 350,000 machine hours and Product A
Fixed overhead** 4.50 6.75 requires 48 minutes to complete while Product B requires 75 minutes. Which of the following will
Total P15.50 P19.75 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?
26
Incremental Analysis

lviii
A. 46,875 units of Product A, 250,000 units of Product B . Sales of 25,000 units at P7.20 per unit are made monthly. The unit cost is P5.90. Incremental costs
B. 200,000 units of Product A, 152,000 units of Product B of P1.35 per unit to further process the units will result in the 25,000 units being sold for P8.75
C. 152,000 units of Product A, 200,000 units of Product B each. Which course of action should the company take?
D. 100,000 units of Product A, 250,000 units of Product B A. Commit its resources to a different product
B. Sell the units at the current stage of completion
lv
. Dimasalang Company has only 25,000 hours of machine time each month to manufacture its two products. Product C. Do further processing and sell the units at P8.75
X has a contribution margin of P50 and Product Y has a contribution margin of P64. Product X requires 5 machine D. Do further processing on only one-half of the units
hours and Product Y, 8 hours. If Dimasalang wants to dedicate 80% of its machine time to the product that will
lix
provide the most income, it will have a total contribution margin of . Aaron Company produces a product that can be sold for P250,000 at an intermediate stage. If
A. P250,000 C. P210,000 Aaron finishes the product, they will incur P75,000 of additional material costs and another
B. P240,000 D. P200,000 P15,000 in labor and overhead costs. When finished, Aaron will be able to sell the product for
P350,000.
Sell-as-is-or-process-further Which of the following answers is correct?
Minimum sales A. Sell now
lvi
. Snow Clean Corporation produces cleaning compounds and solutions for industrial and household use. While most B. Finish the product because profits will increase by P25,000
of its products are processed independently, a few are related. Grit 337, a coarse cleaning powder with many C. Finish the product because profits will increase by P12,500
industrial uses, costs P16 a pound to make and sells for P20 a pound. A small portion of the annual production of D. Finish the product because profits will increase by P10,000
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 Effect of decision
lx
requires ¼ pound of Grit 337 per jar. Costs of other ingredients, labor, and variable overhead associated with this . Ottawa Corporation produces two products from a joint process. Information about the two joint
further processing amount to P25 per jar. Variable selling costs are P3 per jar. If the decision were made to cease products follows:
production of the silver polish, P56,000 of Mixing Department fixed costs could be avoided. Snow Clean has limited Product X Product Y
production capacity for Grit 337, but unlimited demand for the cleaning powder. Anticipated production 2,000 lbs 4,000 lbs
What is the minimum number of jars of silver polish that would have to be sold to justify further processing of Grit Selling price per pound at split-off P30 P16
337. Additional processing costs/pound after split-off P15 P30
A. 8,000 C. 7,000 (all variable)
B. 5,600 D. 4,667 Selling price/pound after further processing P40 P50
The joint cost is P85,000. Ottawa currently sells both products at the split-off point. If Ottawa
Decision makes decision which maximizes profit, its profit will increase by
lvii
. Beal Company is starting business and is unsure of whether to sell its product assembled or unassembled. The unit A. P16,000 C. P 4,000
cost of the unassembled product is P40 and Beal Company would sell it for P90. The cost to assemble the product is B. P50,000 D. P10,000
estimated at P18 per unit and Beal Company believes the market would support a price of P116 on the assembled
unit. lxi
. The cost to manufacture an unfinished unit is P40 (P30 variable and P10 fixed). The selling price
What is the correct decision using the sell or process further decision rule? per unit is P50. The company has unused production capacity and has determined that units could
A. Sell before assembly, the company will be better off by P18 per unit. be finished and sold for P65 with an increase in variable costs of 40%. What is the additional net
B. Sell before assembly, the company will be better off by P26 per unit. income per unit to be gained by finishing the unit?
C. Process further, the company will be better off by P26 per unit. A. P 3 C. P10
D. Process further, the company will be better off by P8 per unit. B. P15 D. P12

27
Incremental Analysis

lxvi
Total processing cost . Agimat Company plans to discontinue a segment with a P32,000 segment margin. Common
lxii
. Matador Manufacturing schedules a weekly production of 15,000 units of Product M and 30,000 expenses allocated to the segment amounted to P45,000, of which P20,000 cannot be eliminated if
units of N for which P800,000 common variable costs are incurred. These two products can be the segment were closed. The effect of closing down the segment on Agimat Company’s before
sold as is or processed further. Further processing of either product does not delay the tax profit would be
production of subsequent batches of the joint products. Below are some of the information: A. P12,000 decrease C. P12,000 increase
M N B. P 7,000 decrease D. P 7,000 increase
Unit selling price without further processing P25 P19
Shutdown point
Unit selling price with further processing P31 P23 lxvii
. Bulusan Company normally produces and sells 30,000 units of E14 each month. E14 is a small
Total separate weekly variable costs of further processing P100,000 P110,000
electrical relay used in the automotive industry as a component part in various products. The
To maximize Matador’s manufacturing contribution margin, the total separate variable costs of further processing that
selling price is P22 per unit, variable costs are P14 per unit, fixed manufacturing overhead costs
should be incurred each week are
total P150,000 per month, and fixed selling costs total P30,000 per month.
A. P105,000 C. P110,000
B. P100,000 D. P210,000
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
Keep-or-drop decision
estimates that the strikes will last for about two months, after which time sales of E14 should return
Analysis
lxiii to normal. Due to the current low level of sales, however, Bulusan Company is thinking about
. A company is deciding whether or not to eliminate a segment of its business. The segment generates total sales of
closing down its own plant during the two months that the strikes are on. If Bulusan Company
P104,000, its direct expenses are P22,000, and its indirect expenses are P26,000. Its cost of goods sold is P64,000.
does close down its plant, it is estimated that fixed manufacturing overhead costs can be reduced
Six thousand pesos of the direct expenses and P8,000 of its indirect expenses are avoidable expenses. Which of the
to P105,000 per month and that fixed selling costs can be reduced by 10%. Start-up costs at the
following is not true?
end of the shutdown period would total P8,000. Since Bulusan Company uses just-in-time
A. This segment has a net loss of P8,000.
production method, no inventories are on hand.
B. This segment's revenue is greater than its avoidable costs.
C. This segment is a good candidate for elimination.
At what level of unit sales for the two-month period should Bulusan Company be indifferent
D. This segment's avoidable costs are greater than unavoidable costs.
between temporarily closing the plant or keeping it open?
A. 11,000 C. 10,000
Effect of drop decision
lxiv B. 24,125 D. 8,000
. 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
Equipment replacement
operating income would be a(an) lxviii
. MNL Company has an opportunity to acquire a new machine to replace one of its present
A. decrease of P30,000 C. increase of P30,000
machines. The new machine would cost P90,000, have a 5-year life and no estimated salvage
B. decrease of P10,000 D. increase of P10,000
value. Variable operating costs would be P100,000 per year. The present machine has a book
lxv value of P50,000 and a remaining life of 5 years. Its disposal value now is P5,000, but it would be
. Mina Co. mines three products. Gold Ore sells for P1,000,000 per ton, variable costs are P600,000 per ton, and
zero after 5 years. Variable operating costs would be P125,000 per year. Ignore income taxes.
fixed mining costs are P6,000,000. The segment margin for 2007 was P1,200,000. The management of Mina Co.
Considering the 5 years in total, what would be the difference in profit before income taxes by
was considering dropping the mining of Gold Ore. Only one-half of the fixed expenses are direct and would be
acquiring the new machine as opposed to retaining the present one?
eliminated if the segment was dropped. If Gold Ore were dropped, net income for Mina Co. would
A. P10,000 decrease C. P35,000 increase
A. Increase by P2,000,000 C. Decrease by P2,000,000
B. P15,000 decrease D. P40,000 increase
B. Increase by P1,200,000 D. Decrease by P1,200,000

28
Incremental Analysis

Lease A. P16.80 C. P 4.70


lxix
. Darren Co. is considering disposing an equipment that costs P50,000 and has P40,000 of accumulated depreciation B. P18.00 D. P 1.20
to date. Darren Co. can sell the equipment through a broker for P25,000 less 5% commission. Alternatively, Minton
lxxiii
Co. has offered to lease the equipment for five years for a total of P48,750. Darren will incur repair, insurance, and . Due to a strike in its supplier’s plant, Adrenal Company is unable to purchase more material for the
property tax expenses estimated at P10,000. At lease-end, the equipment is expected to have no residual value. The production of CADS. The strike is expected to last for two months. Adrenal Company has enough
net differential income from the lease alternative is: material on hand to continue to operate at 30% of normal levels for the two months. If the plant
A. P15,000. C. P25,000. were closed, fixed overhead costs would continue at 60% of their normal level during the two-
B. P 5,000. D. P12,500. 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?
Comprehensive A. Disadvantage, P144,000 C. Disadvantage, P15,000
Questions 70 through 74 are based on the following information: B. Advantage, P144,000 D. Advantage, P15,000
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:
lxxiv
Direct materials P10.00 . An outside manufacturer has offered to produce CADS for Adrenal Company and to ship them
Direct labor 4.50 directly to Adrenal’s customers. If Adrenal Company accepts this offer, the facilities that it uses to
Variable manufacturing overhead 2.30 produce CADS would be idle; however, fixed overhead costs would be reduced by 75% of their
Fixed manufacturing overhead 5.00 present level. Since the outside manufacturer would pay for all the costs of shipping, the variable
Variable selling expenses 1.20 selling costs would be only two-thirds of their present amount. What is the unit cost figure that is
Fixed selling expenses 3.50 relevant for comparison to whatever quoted price is received from the outside manufacturer?
Total cost per unit P26.50 A. P20.95 C. P20.55
B. P21.35 D. P16.80
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 Question Numbers 75 though 77 are based on the following:
each year if it were willing to increase the fixed selling expenses by P80,000. The increase in income if the Henderson Equipment Company has produced a pilot run of 50 units of a recently developed cylinder
production is increased by 25% is used in its finished products. The company expects to produce and sell 800 units. The pilot run
A. P130,000 C. P 25,000 required 14.25 direct-labor hours for the 50 cylinders, averaging 0.285 direct-labor hours per cylinder.
B. P108,333 D. P 20,800 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 example, the average labor
lxxi
. Assume again that Adrenal Company has sufficient capacity to produce 90,000 CADS each year. A customer in a time per unit declines by 20 percent. Past experience indicates that learning tends to cease by the time
foreign market wants to purchase 20,000 CADS. Import duties on the CADS would be P1.70 per unit, and costs for 800 parts are produced. Henderson’s manufacturing costs for cylinders are as follows:
permits and licenses would be P9,000. The only selling costs that would be associated with the order would be Direct labor P120.00 per hour
P3.20 per unit shipping cost. What is the break-even price on this order? Variable overhead 100.00 per direct labor hour
A. P23.35 C. P22.15 Fixed overhead 166.00 per direct labor hour
B. P28.65 D. P21.70 Direct material 40.50 per unit

Henderson has received a quote of P75 per unit from the Leyte Machine Company for the additional
lxxii
. The company has 1,000 CADS on hand that have some deformities and are therefore considered to be “seconds.” 750 cylinders needed. Henderson frequently subcontracts this type of work and has always been
Due to the deformities, it will be impossible to sell these units at the normal price through regular distribution satisfied with the quality of the units produced by Leyte. Recently, Henderson Equipment Company has
channels. What unit cost figure is relevant for setting a minimum selling price? been operating at considerably less than full capacity.
29
Incremental Analysis

lxxv
. How many direct-labor hours are expected to be used for the production of 800 cylinders (including the pilot run)? Direct materials P2,850
A. 93.4 hours C. 79.1 hours Direct labor 3,300
B. 74.7 hours D. 67.6 hours Total P6,150
lxxvi
. The production of 800 cylinders, including the pilot run, requires total incremental costs of: A third alternative for CLASP is to sell the machine as is for a price of P52,000. However, the potential
A. P48,834 C. P68,452 buyer of the unmodified machine does not want it for 60 days. This buyer has offered a P7,000 down
B. P49,802 D. P52,948 payment, with the remainder due upon delivery.
lxxvii
. The effect on profit of producing 750 units instead of buying them from Leyte Machine Company a(an)? The following additional information is available regarding CLASP’s operations:
A. Increase of P 8,470. C. Increase of P12,676.
B. Increase of P 7,052. D. Decrease of P22,560. 1. The sales commission rate on sales of standard models is 2 percent, while the rate on special
orders is 3 percent.
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 2. Normal credit terms for sales of standard models are 2/10, net/30. This means that a customer
machine, Tigok declared backruptcy, defaulted on the order, and forfeited the 10 percent deposit paid on the selling price receives a 2 percent discount if payment is made within 10 days, and payment is due no later than
of P72,500. 30 days after billing. Most customers take the 2 percent discount. Credit terms for a special order
are negotiated with the customer.
CLASP’s manufacturing manager identified the costs already incurred in the production of the special machinery for Tigok
as follows: 3. The allocation rates for manufacturing overhead and fixed selling and administrative costs are as
follows:
Direct material P16,600 Manufacturing costs:
Direct labor 21,400 Variable 50% of direct-labor costs
Manufacturing overhead: Fixed 25% of direct-labor costs
Variable P10,700 Fixed selling and administrative costs 10% of the total manufacturing costs
Fixed 5,350 16,050
Fixed selling and administrative costs 5,405 4. Normal time required for rework is one month.
Total P59,455
lxxviii
. How much peso contribution would the sale to Kay Corporation add to CLASP’ before-tax profit?
Another company, Kay Corporation, will buy the special machinery if it is reworked to Kay’s specifications. CLASP offered A. P53,848 C. P55,900
to sell the reworked machinery to Kay as a special order for P68,400. Kay agreed to pay the price when it takes delivery B. P55,948 D. P 9,300
in two months. The additional identifiable costs to rework the machinery to Kay’s specifications are as follows:
lxxix
. How much peso contribution would the alternative of converting the special machinery to standard
Direct materials P 6,200 model add to CLASP’s before-tax profit?
Direct labor 4,200 A. P52,200 C. P52,825
Total P10,400 B. P54,475 D. P 7,650
lxxx
A second alternative available to CLASP is to convert the special machinery to the standard model, which sells for . If Kay makes CLASP a counteroffer, what is the lowest price CLASP should accept for the
P62,500. The additional identifiable costs for this conversion are as follows: reworked machinery from Kay?
30
Incremental Analysis

A. P10,400 C. P10,722 The sales department believes that the monthly demand for the next six months will be as follows:
B. P12,500 D. P12,887
Product Monthly Unit Sales
lxxxi
. How much would the alternative of selling unmodified machinery to the potential buyer contribute to CLASP’s before- 401 500
tax profit? 403 400
A. P50,440 C. P49,920 405 1,000
B. P 1,740 D. P49,400
Inventory levels are satisfactory and need not be increased or decreased during the next six months.
Question Nos. 82 and 85 are based on the following: Unit price and cost data that will be valid for the next six months are as follows:
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 P R O D U C T S
skills required in each department are so specialized that neither machines nor labor can be switched from one
401 403 405
department to another.
Unit costs:
Direct material P 7 P 13 P 17
Constraint Company’s management is planning its production schedule for the next few months. The planning is
Direct labor
complicated, because there are labor shortages in the community and some machines will be down several months for
Department 1 12 6 12
repairs.
Department 2 21 14 14
Department 3 24 -- 16
Management has assembled the following information regarding available machine and labor time by department and the
Department 4 9 18 9
machine hours and direct-labors required per unit of product. These data should be valid for the next six months.
Variable overhead 27 20 25
Fixed overhead 15 10 32
D E PARTM E NT Variable selling expenses 3 2 4
Monthly Capacity Available 1 2 3 4 Unit selling price P196 P123 P167
Norman machine capacity in MH 3,500 3,500 3,000 3,500
Capacity of machines being repaired lxxxii
. Which department has capacity constraint in labor hours?
in machine hours ( 500) ( 400) ( 300) ( 200) A. Department 1 C. Department 3
Available machine capacity in MH 3,000 3,100 2,700 3,300 B. Department 2 D. Department 4
Available direct labor hours (DLH) 3,700 4,500 2,750 2,600
lxxxiii
. The total Machine Hours required by estimated monthly unit sales are:
Labor and Machine Specifications per A. 10,600 C. 11,600
Unit of Product B. 12,100 D. 13,500
Product Labor and Machine Time
401 Direct labor hours 2 3 3 1
Machine hours 1 1 2 2 lxxxiv
. The total number of labor hours as constraint for a month is:
403 Direct labor hours 1 2 - 2 A. 50 C. 300
Machine hours 1 1 - 2 B. 750 D. No constraint
405 Direct labor hours 2 2 2 1
Machine hours 2 2 1 1 lxxxv
. In order to maximize its monthly profit, Constraint Company should produce:

31
Incremental Analysis

lxxxvii
A. B. C. D. . What is the full cost of the special order?
401 250 250 500 500 A. P779,000 C. P421,000
403 0 400 400 0 B. P492,400 D. P651,000
405 1,000 1,000 625 625
lxxxviii
.The amount of opportunity cost of taking the special order is:
Question Nos. 86 through 89 are based on the following; A. P183,000 C. P250,000
Arnold Syjuco operates a small machine shops. He manufactures one standard product available from many other B. P 71,000 D. P124,600
similar businesses and he also manufactures products to customer order. Hi accountant prepared the annual income lxxxix
statement shown below: . What is the effect on the overall profit if the special order is accepted?
A. P450,000 C. P( 25,000)
Custom Sales Standard Sales Total B. P( 85,000) D. P 29,000
Sales P1,000,000 P500,000 P1,500,000
Question Nos. 90 through 94 are based on the following:
Material P 200,000 P160,000 P 360,000
The Verbatim Corporation, which produces and sells to wholesalers a highly successful line of summer
Labor 400,000 180,000 580,000
lotions and insect repellents, has decided to diversify in order to stabilize sales over the year. A natural
Depreciation 126,000 72,000 198,000
area for the company to consider is the production of special lotion and cream to prevent dry and
Power 14,000 8,000 22,000
chapped skin.
Rent 120,000 20,000 140,000
Heat and light 12,000 2,000 14,000
After considerable research, a special product line has been developed. However, because of the
Other 8,000 18,000 26,000
conservatism of the company management, Verbatim’s president has decided to introduce only one of
Total P 880,000 P460,000 P1,340,000
the new products for this coming rainy season. If the product is a success, further expansion will be
Income P 120,000 P 40,000 P 160,000
initiated in future years.
The depreciation charges are for machines used in the respective product lines. The power charge is apportioned on the The product selected (called Chaps) is a lip balm that will be sold in a lipstick-type tube. The product
estimate of power consumed. The rent is for the building space which has been leased for 10 years at P140,000 per will be sold to wholesalers in boxes of 24 tubes for P800 per box. Because of available capacity, no
year. The rent and heat and light are apportioned to the product lines based on amount of floor space occupied. All other additional fixed charges will be incurred to produce the product. However, a P10,000,000 fixed charge
costs are current expenses identified with the product line incurring them. will be absorbed by the new product to allocate a fair share of the company’s present fixed costs to it.
A valued custom parts customer has asked Mr. Syjuco to manufacture 5,000 special units for him. Mr. Syjuco is working Using the estimated sales and production of 100,000 boxes of Chaps as the standard volume, the
at capacity and would have to give up some other business to take this business. He cannot renege on custom orders accounting department has developed the following costs:
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 Direct labor P200 per box
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 Direct materials 300 per box
discarded when the job is done. Total overhead 150 per box
lxxxvi
Total P650 per box
. What is the incremental cost of the special order of 5,000 units?
A. P600,000 C. P779,000 Verbatim has approached a cosmetics manufacturer to discuss the possibility of purchasing the tubes
B. P421,000 D. P371,000 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
32
Incremental Analysis

and variable overhead costs would be reduced by 10% and direct material costs would be reduced by 20%. 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
xc
. What is the variable overhead rate per box of Chaps? P7,400 per unit should be assumed. Ignore income taxes and other costs that are not mentioned in the
A. P100 C. P 50 cost schedule or in a question itself.
B. P150 D. P200
xcv
. What is the monthly breakeven units for Medical Supply Company?
A. 2,000 C. 1,950
xci
. What is the material cost per box of Chaps saved by purchasing them? B. 2,689 D. 2,614
A. P300 C. P 60
B. P240 D. P 30 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
xcii
. How much would it cost Verbatim to produce the tubes per box? cost behavior patterns implied by the data in the cost schedule is correct, would you recommend
A. P 60 C. P 90 this action be taken?
B. P 85 D. P120 A. Yes, because the profit will increase by P1,500,000.
B. Yes, because the profit will increase by P 200,000.
xciii
. How much would Verbatim incur by making 125,000 boxes, assuming that additional equipment, at an annual rental C. No, because the profit will decrease by P1,200,000.
of P1,000,000, must be acquired to produce this volume? D. No, because the profit will decrease by P2,400,000.
A. P10,625,000 C. P11,250,000
B. P11,625,000 D. P12,500,000 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
xciv
. Referring to Question No. 93, what is the impact on its profit if Verbatim were to buy 125,000 boxes? form their regular customers. Medical Supply plans to produce 4,000 units during March, which will
A. Additional profit of P1,000,000. C. Additional profit of P375,000. use all available capacity. If the Veterans’ Hospital’s order is accepted, 500 units normally sold to
B. Additional profit of P1,250,000. D. Decrease in profit of P625,000. 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)
Question Nos. 95 through 101 are based on the following: of P500,000. (There would be no variable marketing costs incurred on the hospital’s unit.) What
Medical Supply Company produced hydraulic hoists that were used by hospitals to move bedridden patients. The costs impact would accepting the Veterans’ Hospital contract have on March income?
of manufacturing and marketing hydraulic hoists at the company’s normal volume of 3,000 units per month are show A. P 1,100,000 C. P(1,350,000)
below: B. P( 850,000) D. P 500,000

Unit manufacturing costs: xcviii


. Medical Supply Company has an opportunity to enter a foreign market in which price competition is
Direct materials P1,000 keen. An attraction of the foreign market is that demand there is greatest when demand in the
Direct labor 1,500 domestic market is quite low; thus idle production facilities could be used without affecting domestic
Variable overhead 500 business.
Fixed overhead 1,200 P4,200 An order for 1,000 units is being sought at a below-normal price in order to enter this market.
Unit marketing costs: Shipping costs for this order will amount to P750 per unit, while total costs of obtaining the contract
Variable 500 (marketing costs) will be P40,000. No other variable marketing costs would be required on this
Fixed 1,400 1,900 order. Domestic business would be unaffected by this order. What is the minimum unit price
Total unit costs P6,100 should Medical Supply Company consider for this order of 1,000 units?
A. P3,750 C. P3,790
33
Incremental Analysis

B. P3,000 D. P4,290 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 production of the blankets.
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 Direct material P 1.50 per pound of fibers
acceptable in selling these units? Direct labor P 7.00 per hour
A. P3,500 C. P3,000 Direct machine costs* P10,00 per blanket
B. P4,200 D. P 500 Variable overhead P 3.00 per direct labor hour
Fixed overhead P 8.00 per direct labor hour
c
. A proposal is received from an outside contractor who will make and ship 1,000 hydraulic hoist units per month Incremental administrative costs P2,500 per 1,000 blankets
directly to Medical Supply’s customers as orders are received from Medical Supply’s sales staff. Medical Supply’s Special fee** P 0.50 per blanket
fixed marketing costs would be unaffected, but its variable marketing costs would be cut by 20 percent for these Material usage 6 pounds per blanket
1,000 units produced by the contractor. Medical Supply’s plant would operate at two thirds of its normal level, and Production rate 4 blankets per DLH
total allocated fixed manufacturing costs for these 1,000 units would be cut by 30 percent. What in-house unit cost Effective tax rate 40%
should be used to compare with the quotation received from the supplier?
cii
A. P 3,760 C. P 4,240 . The minimum price per blanket that Marcus Fibers, Inc., could bid without reducing the company’s
B. P 3,000 D. P 3,460 net income is
A. P24.00 C. P50.25
ci
. Assume the same facts as in requirement No. 101 except that the idle facilities would be used to produce 800 B. P21.50 D. P40.25
modified hydraulic hoists per month for us in hospital operating rooms. These modified hoists could be sold for
ciii
P9,000 each, while the costs of production would be P5,500 per unit variable manufacturing expense. Variable . Using the full-cost criteria and the maximum allowable return specified, Marcus Fibers’ bid price
marketing costs would be P1,000 per unit. Fixed marketing and manufacturing costs would be unchanged whether per blanket would be:
the original 3,000 regular units hoists were manufactured or the mix of 2,000 regular hoists plus 800 modified hoists A. P24.00 C. P26.00
were produced. What is the maximum purchase price per unit that Medical Supply should be willing to pay the B. P29.90 D. P27.90
outside contractor?
A. P 5,100 C. P 5,500 ANSWER EXPLANATIONS
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.

34
i
. Answer: C
Cost of alternative selected P800,000
Cost of alternative rejected 650,000
Incremental cost P150,000
ii
. 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
Additional revenue after rework (24,000(12 – 4) P192,000
Less Additional cost (24,000 x 2) 48,000
Additional profit 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 P8.00
Overtime premium 1.50
Relevant cost per unit P9.50
vi
. Answer: B
Full cost 50.00
Fixed overhead (180,000/9,000) 20.00
Relevant unit cost 30.00
vii
. Answer: C
Cost of 1,000 kg at latest price (1,000 x 8.70) 8,700
Add excess price include on the remaining 4,000 kg. 4,000 x (8.70 – 8.30) 1,600
Relevant cost 10,300
viii
. Answer: B
Direct materials (2,000 @ 10) 20,000
Direct labor (2,000 @ 12) 24,000
Variable overhead (2,000 @ 6) 12,000
Increase in variable cost due to overtime (2,000 @ 14) 28,000
Incremental cost 84,000
ix
. Answer: B
Variable costs P56,250
Additional fixed costs 13,750
Minimum bid price P70,000
x
. Answer: B
Direct material (360,000 ÷ 24,000) P15.00
Direct labor (540,000 ÷ 24,000) 22.50
Variable selling expenses (84,000 ÷ 24,000) 3.50
Total P41.00
Add Profit per unit (22,500 ÷ 1,500) 15.00
Selling price P56.00
xi
. Answer: B
Relevant cost to make and sell:
Direct materials 39
Direct labor 6
Variable OH 8
Reduced selling expenses (30 x 0.06) 18
Add’l fixed cost (20,000 ÷ 5,000) 4
Minimum selling price 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 4.50
Direct labor 10.00
Variable overhead 3.00
Variable selling expense 1.00
Additional profit (40,000/5,000) 8.00
Required selling price 26.50
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 6,000
Less Decrease in regular sales’ contribution margin (500 x 12) 6,000
Effect on profit 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
xvii
. 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.
xviii
. Answer: C
Selling price P6.00
Relevant cost per unit:
Regular cost per unit P7.50
Less: Commission P0.75
Fixed overhead (P3 x 2/3) 2.00 (2.75)
Net amount P4.75
Incremental fixed cost (P150 300) 0.50 5.25
Advantage per unit, Buy P0.75
Number of units 300
Increase in profit P 225
xix
. Answer: D
Additional profit: 3,000 x (70 – 50) = 60,000
xx
. Answer: A
Special price 32
Relevant cost:
Direct materials 4
Direct labor 12
Variable overhead 6 22
Unit contribution margin 10
Units ordered 2,000
Additional profit 20,000
xxi
. Answer: A
Sales 60,000
Less: Variable production cost (1,500 x 30) 45,000
Additional Fixed cost 5,000
Labeling cost (1,500 x 2.50) 3,750 53,750
Profit 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
BetaZetaDirect materials 4.00 80.00Direct labor10.00 47.00Factory overhead 40% 16.00 8.00Relevant Unit
costP30.00135.00
xxvi
. 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.
xxvii
. Answer: B
Direct materials 64,000
Direct labor 16,000
Variable overhead 8,000
Avoidable fixed overhead 6,000
Total relevant cost to make 94,000
xxviii
. Answer: D
Direct materials 64,000
Direct labor 16,000
Variable overhead 8,000
Additional contribution margin 16,000
Total relevant cost to make 104,000
xxix
. Answer: B
Variable cost to make parts (30,000 x 12) 360,000
Cost buy (30,000 x 15) 450,000
Cost savings – “Make” decision 90,000
xxx
. Answer: A
Direct materials 80,000
Direct labor 13,000
Variable overhead 40,000
Avoidable fixed overhead 4,000
Relevant cost – make 137,000
Purchase price 145,000
Advantage – Make 8,000
xxxi
. Answer: A
Direct materials 64,000
Direct labor 16,000
Variable overhead 8,000
Total variable cost 88,000
Less Purchase cost 104,000
Avoidable fixed cost 16,000
Add unavoidable FC 5,000
Total fixed overhead 21,000
xxxii
. Answer: B
Purchase cost (2,000 x P15) P30,000
Relevant cost to make:
Variable cost (2,000 x P16) – 8,000 P24,000
Avoidable fixed cost (8,000 x 0.25) 2,000 26,000
Additional cost – Buy (Decrease in profit) P 4,000

Alternative computation for relevant cost to make:


Total cost (2,000 x P16) P32,000
Less unavoidable fixed cost (8,000 x 0.75) 6,000
Relevant cost to make P26,000
xxxiii
. Answer: C
Cost of purchase (2,000 x P15) P30,000
Relevant cost – make:
Variable cost (2,000 x P16) – P8,000 P24,000
Avoidable fixed cost (P8,000 x 0.25) 2,000
Opportunity cost – rent 6,000 32,000
Cost savings – Buy (increase in profit) P( 2,000)
xxxiv
. Answer: C
Relevant costs to make
Direct materials P 90,000
Direct labor 120,000
Variable overhead 15,000
Supervisor’s salary 30,000
Opportunity costs, rent 65,000
Total 320,000
Relevant cost to buy (15,000 x P20) 300.000
Advantage - Buy P 20,000
If the company would purchase the units, it would save P20,000.
xxxv
. Answer: B
Cost of ink cartridges (5,000 x P15) P75,000
Less: Relevant cost to produce (5,000 x P8) 40,000
Additional cost if ink cartridges are purchased P35,000
xxxvi
. Answer: B
Direct material (20,000 @ 6) 120,000
Direct labor (20,000 @30) 600,000
Variable overhead (20,000 @ 120 240,000
Avoidable fixed cost (20,000 @ 9) 180,000
Total relevant costs - Make 1,140,000

Purchase cost (20,000 @ 60) 1,200,000


Add net savings 25,000
Total 1,225,000
Less: Cost to make 1,140,000
Opportunity cost 85,000
xxxvii
. Answer: A
Purchase price 15,000
Handling cost (20% x P15,000) 3,000
Total 18,000
Cost to make (21,200 – 8,000)* 13,200
Increase in unit cost if goods are purchased 4,800
*Fixed OH (12,000 x 2 ÷ 3) = 8,000
xxxviii
. Answer: A
Cost to make:
Direct materials P10,000
Direct labor 5,000
Variable overhead 5,000
Avoidable fixed OH (20% x 30,000) 6,000
Relevant cost P26,000
Purchase costs (1,000 @ 30) 30,000
Decrease in profit in profit P 4,000
xxxix
. Answer: B
Relevant costs to make per unit:
Direct materials 6.00
Direct labor 4.00
Variable overhead 1.00
Relevant cost – “to make” 11.00
Purchase price per unit 12.50
Increase in per unit cost if purchased 1.50
xl
. Answer: A
Direct materials 10,000
Direct labor 5,000
Variable overhead 5,000
Avoidable fixed overhead (30,000 x 0.2) 6,000
Total relevant cost 26,000
Purchase cost 30,000
Additional cost if purchased 4,000
xli
. Answer: C
Direct materials 3.00
Direct labor 15.00
Variable overhead 6.00
Avoidable fixed cost 3.00
Total per unit 27.00
Number of unit x10,000
Total 270,000
Add savings from the manufacture of other product 45,000
Total relevant cost – make 315,000
Total purchase cost (10,000 x 30) 300,000
Advantage “Buy” 15,000
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
Units to be purchased 10,000
Decrease in Dana’s profit if goods are purchased 2,500
xliii
. Answer: C
Total purchase cost (5,000 x 7.75) 38,750
Less Relevant cost to make
Direct materials @ 2.5 12,500
Direct labor @ 3.5 17,500
Variable overhead @ 1.5 7,500
Avoidable fixed cost @ 0.5 2,500
Opportunity cost 6,000 46,000
Net saving – purchase (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 80,000
Direct labor 13,000
Variable overhead 40,000
Avoidable fixed overhead 20,000
Total relevant cost 153,000
xlvi
. Answer: B
SodaLemomadeSelling price6.005.00Variable cost 1.501.00Contribution margin4.504.00Processing
hours34CM/Hr1.501.00For the Lemonade to be as profitable as Soda, its contribution margin per hour should be P1.50.

Therefore the required selling price for Lemonade is P7, calculated as:
Contribution margin per unit (4 hours x P1.50) P6.00
Variable cost per unit 1.00
Selling price 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: 60 ÷ 6 = 10
Product Y: 42 ÷ 3 = 14
Total capacity – MH 42,000
Machine hours devoted to Product Y (8,000 x 3) 24,000
Hours available to X 18,000
Production of X: 18,000 ÷ 6 = 3,000
xlix
.
Answer: B
Production order:
BlenderElectric MixerPurchase price 20 38Variable cost to make: Direct materials 6 11 Direct materials 4 9 Overhead
*(16 – 10) @ 6 12 Total( 16) (32)Additional cost if purchased 4 6Additional cost per hour (Blender, 1 hr; Mixer 2 hours)
4
3
Since it will cost Mary P4 per hour to buy Blender and only P3 if Electric Mixer is purchased, it will produce all of
Blender’s requirement and just purchase units of electric mixer that cannot be accommodated by the remaining capacity.

Product:
Blender 20,000
Electric Mixer [50,000 – (20,000 @ 1)] ÷ 2 15,000
Purchase:
Electric Mixer (28,000 – 15,000) 13,000
l
. Answer: A
CM – Product A 36/2 x 1,000 18,000
CM – Product B 45/3 x 1,000 15,000
Difference in contribution margin 3,000
li
. Answer: A

Based on DLH
ProductsUCMDLH/unitCM/DLHPriorityA91.09.01STB101.56.672ndC82.04.003rd
Based on MH
ProductsUCMMH/unitCM/MHPriorityA94.52.03rdB1025.01stC82.53.22nd
lii
. Answer: D
PlasticMetalRC – make 11.00 13.00RC – Buy 15.50 17.50Additional Cost-Buy 4.50 4.50Hours required/unit÷ 3
÷ 4.5Additional cost /hr. 1.50 1.0Priority 1st 2ndCapacity (machine hours) 48,000MH used - Plastic (7,000 x 3)
21,000Available MH to Metal27,000MH used - Metal (6,000 x 4.50) (27,000)Purchase of Metal (11,000 – 6,000) 5,000
liii
. Answer: A
HomeDeluxeProSelling price586580Direct materials(16)(20)(19)Direct labor(10)(15)(20)Variable overhead( 8)(12)
(16)CM/unit241825Processing hour(s) ÷ 1 ÷ 1.5 ÷ 2CM/DLH2412 12.50Profitability rank1st3rd2nd
liv
. Answer: B
Unit contribution margin:
Product A P12 – P10 P2
Product B P15 – P12 P3
Contribution margin per hour:
Product A P2 ÷ 0.8 P2.50
Product B P3 ÷ 1.25 P2.40

Total capacity in hours 350,000


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

Product A has higher contribution margin per hour. The company should produce the maximum units it can sell 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 10
Product Y: 64/8 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) 240,000
lvi
. Answer: A
Selling price per unit – silver polish P40
Less variable costs:
Grit 337 (P20 ÷ 4) P 5
Ingredients, direct labor and variable OH 25
Variable selling costs 3 33
Contribution margin per unit P 7

Minimum number of jars of silver polish to be produced:


Avoidable fixed costs ÷ Contribution margin per jar P56,000 ÷ P7 8,000

The solution used the selling price of P20 as cost of Grit337 because there was unlimited demand for the 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 116 – 90 26
Additional processing cost 18
Addition profit per unit 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 (350,000 – 250,000) P100,000
Additional costs (75,000 + 15,000) 90,000
Additional profit P 10,000
lx
. Answer: A
XYAdditional sales value1034Additional processing costs1530Incremental (decremental) profit per unit(5) 4If Product Y
is processed further, profit will increase by P16,000 (4,000 x 4).
lxi
. Answer: A
Additional Sales Price (65 – 50) 15.00
Additional Cost (30 x 40%) 12.00
Additional profit 3.00
lxii
. Answer: C
Product to be processed further:Prod MProd NFinal selling price3123Selling price at split-off point2519Increase in selling
price64Units15,00030,000Total increase in sales90,000120,000Additional processing costs100,000110,000Increase
(decrease) in profit(10,000)10,000
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) 210,000
Lost contribution margin 240,000
Decrease in profit 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) P 25,000
Segment margin lost 32,000
Decrease in profit P (7,000)
lxvii
. Answer: A
Avoidable fixed expenses:
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 ) 5 125,000
Less:
Additional depreciation (90,000 – 50,000) (40,000)
Loss on sale of old machine (5,000 – 50,000) (45,000)
Increase in profit 40,000
lxix
. Answer: A
Lease arrangement:
Rental income (5 years) 48,000
Cost of repairs, insurance and property taxes 10,000
Net income 38,750

Sale arrangement:
Net proceeds (25,000 x 0.95) 23,750
Differential income –lease 15,000
lxx
. Answer: A
Additional contribution (60,000 x 0.25 x 14) 210,000
Additional fixed selling costs 80,000
Additional profit 130,000

Selling price 32.00


Variable expenses:
Materials 10.00
Direct labor 4.50
Variable overhead 2.30
Variable selling costs 1.20 18.00
Unit contribution margin 14.00
lxxi
. Answer: C
Direct materials 10.00
Direct labor 4.50
Variable OH 2.30
Variable selling cost 3.20
Import duties 1.70
Permits and licenses (9,000 ÷ 20,000) 0.45
Minimum selling price 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) 20,000
Selling (35,000 x 0.20) 7,000
Total 27,000

Contribution margin if the company has to operate (60,000 ÷ 6 x 0.30 x 14) 42,000
Disadvantage, closing the plant (15,000)
lxxiv
. Answer: A
Direct materials 10.00
Direct labor 4.50
Variable overhead 2.30
Avoidable fixed overhead (0.75 x 5) 3.75
Avoidable variable expense (1.20 x 1 ÷ 3) 0.40
Relevant cost – Make 20.95
lxxv
. Answer: A
Batch (each 50 units)Cum Ave. Hrs114.25211.4049.1287.296165.8368
Total Hours required: 16 x 5.8368 = 93.4
lxxvi
. Answer: D
Materials (800 x 40.50) 32,400
Direct labor (93.40 x 120) 11,208
Variable OH (93.40 x 100) 9,340
Total 52,948
lxxvii
. Answer: A
Production cost – 750 units:
Materials (750 x 40.00) 30,375
Direct labor (93.40 – 14.25) 120 9,498
VOH (93.40 – 14.25) 100 7,915
Total 47,780
Purchase cost (750 x 75)
Advantage – make 56,250
8,470
lxxviii
. Answer: A
Sales price to Kay Corp. 68,400
Rework costs:
Direct materials 6,200
Direct labor 4,200
Variable OH (4200 x 50%) 2,100 (12,500)
Commission (68,400 x 0.03) ( 2,052)
Before – tax peso contribution 53.848
lxxix
. Answer: A
Regular price 62,500
Deduct:
2% commission (62,500 x 0.02) 1,250
Sales discount (62,500 x 0.02) 1,250 2,500
Net price 60,000
Less additional conversion costs:
Direct materials 2,850
Direct labor 3,300
Variable OH - 50% 1,650 7,800
Net before – tax contribution 52,200
lxxx
. Answer: D
Cost of rework 6,200
Direct labor 4,200
Variable OH (4,200 x 0.50) 2,100
Total 12,500
Commission [0.03 (12,500 0.97)] 387
Total 12,887
lxxxi
. Answer: A
Sales price 52,000
Less: Commission (52,200 x 0.03) 1,560
Net contribution 50,440
lxxxii
. Answer: C
Department 3 has constraint in labor hours of 750.
Dept. 1Dept. 2Dept. 3Dept. 4Available DLH3,7004,5002,7502,600DLH required4011,0001,5001,500 500402 400 800 --
8004032,0002,0002,0001,000 Total3,4004,3003,5002,300Excess (Constraint) 300 200( 750) 300
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. 1Dept. 2Dept. 3Dept. 4Available MH3,0003,1002,7003,300MH required401 500 5001,0001,000402 400 400 --
8004032,0002,000 1,0001,000 Total2,9002,9002,0002,800Excess (Constraint) 100 200 700 500
Total machine hours required by monthly unit sales: (2,900 + 2,900 + 2,000 + 2,800) 10,600
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 S401403405Selling price per unitP196P123P167Variable unit costsDirect material71317Direct
labor663851Variable overhead272025Selling expenses324 Total variable cost1037397Unit contribution marginP 93P
50P 70No. of DLH required – Dept 33-2Contribution margin per DLHP 31-P 35Based on the above schedule, 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 1,000 x 2 2,000


Available hours for Product 401 750

Production units – Product 401 250 x 3 750

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

Alternative Solution:

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

Total required units, Product 401 500


Equivalent units based on constraint 750 ÷ 3 250
Production of Product 401 250

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) P200,000
Labor (5,000 x 72) 360,000
Incremental fixed cost (special device) 40,000
Costs to be incurred P600,000

Decrease in costs for standard products:


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

The amounts for depreciation, rent, and heat and light are assumed to be not affected by the special order. There is 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
Decrease in sales of standard products0.50 x 500,000 P250,000
Less variable costs:
Material (160,000 x 0.5) P80,000
Labor (180,000 x 0.5) 90,000
Other (18,000 x 0.5) 9,000 179,000
Opportunity costs P 71,000
lxxxix
. Answer: D
Special sales (5,000 x 140) P700,000
Variable costs 600,000
Contribution margin from special sale 100,000
Less opportunity costs 71,000
Increase in profit P 29,000
xc
. Answer: C
Total overhead rate per box P150
Less fixed overhead allocated per boxP10,000,000 ÷ 100,000 boxes 100
Variable overhead rate per box 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 10,625,000
Additional fixed costs 1,000,000
Total 11,625,000
xciv
. Answer: C
Total purchase cost 125,000 x 900 11,250,000
Total cost to make 125,000 x 85 11,625,000
Savings if purchased 375,000
xcv
. Answer: A
Fixed costs:
Manufacturing 3,000 x 1,200 P3,600,000
Marketing 3,000 x 1,400 4,200,000
Total P7,800,000

Selling Price P 7,400


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

Breakeven units 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) 10,500,000


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

Alternative Solution:
Total contribution margin 3,000 x (7,400 – 3,500) 11,700,000
Less Fixed costs 7,800,000
Current profit 3,900,000

Total contribution margin at reduced price 3,500 x (6,500 – 3,500) 10,500,000


Less Fixed costs 7,800,000
Revised profit 2,700,000
Current profit 3,900,000
Decrease in profit ( 1,200,000)
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 1,000
Direct labor 1,500
Variable overhead 500
Shipping cost 750
Cost of obtaining the order 40,000 ÷ 1,000 40
Minimum selling price 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 1,000
Direct labor 1,500
Variable overhead 500
Avoidable marketing costs 100
Opportunity cost [800 x (9,000 – 5,500 – 1,000)] ÷ 1,000 2,000
Maximum purchase price 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:

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


(800 x 5,500)4,400,000 Contractor’s cost 1,000 x 5,100 5,100,000Variable marketing costs Regular (2,000 x 500) +
(1,000 x 400) 1,400,000 Modified (800 x 1,000) 800,000Fixed costs. . 7,800,000Profit2,000,0001,900,000
Total profit (2,000,000 + 1,900,000) 3,900,000
cii
. Answer: A
Direct material (6 lbs.  P1.50) P9.00
Direct labor (0.25 hr.  P7) 1.75
Direct machine cost (P10/blanket) 10.00
Variable overhead (0.25 hr.  P3) 0.75
Administrative costs (P2,500/1,000) 2.50
Minimum bid price 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

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