Ciara Jane P.

Bautista Strategic Cost Management

BSA601-A 12 Task Performance 1

Case 1
1. Determine the relevant/differential costs.
Cost to make Cost to buy Difference
Direct materials P6.00
Direct labor 4.00
Variable manufacturing overhead 4.00
Avoidable fixed overhead 1.00
Cost to buy P20.00
Relevant cost per unit P15.00 P20.00 P5.00
Multiply by: units 2,000 2,000 2,000
Total P30,000 P40,000 P10,000

2. Should the company make or buy meals?

The airline company is better off making the meals because it will save P10,000 if
the company will make the meals rather than buying them.

Case 2
3. Determine the relevant/differential costs.
Variable cost P120,000
Less: Avoidable cost (10,000)
Relevant cost P110,000

4. Should the offer be accepted?

Price offered per round-trip flight P180,000
Less: Relevant cost (110,000)
Incremental income P70,000

Decision: The airline should accept the offer of the Hong Kong tourist agency because
the company will have an increase of P70,000 in their profit. The relevant cost is only
P110,000, but the price offered by the tourist agency is only P180,000.

Case 3
5. Determine the direct contribution margin.
Sales P400,000
Variable cost
Direct materials P140,000
Direct labor 80,000
Manufacturing overhead 50,000 (270,000)
Ciara Jane P. Bautista Strategic Cost Management
BSA601-A 12 Task Performance 1
Contribution margin P130,000
Less: Avoidable fixed overhead:
Supervisor’s salaries P40,000
Airport fees 10,000
Depreciation on equipment 20,000 (70,000)
Direct contribution margin P60,000

Alternative Solution
Net income P20,000
Add: Unavoidable fixed overhead:
Insurance P20,000
General overhead allocated 20,000 40,000
Direct contribution margin P60,000

6. Should the club be continued or eliminated?

Decision: The airline should continue because the direct contribution margin has a
positive value of P60,000.

Case 4
7. Shutdown costs
Unavoidable fixed cost during the shutdown period
[(P150,000 – 70,000) x 4 months] P320,000
Additional cost incurred 25,000
Restarting cost 50,000
Total shutdown costs P395,000

8. Shutdown savings
Total normal fixed cost if to operate
(P150,000 x 4 months) P600,000
Less: Total shutdown costs 395,000
Shutdown savings P205,000

9. Shutdown point
Shutdown savings P205,000
Divided by: Contribution margin per units
[(P400 – 12.50%) – P270] 80
Shutdown point 2,563
Ciara Jane P. Bautista Strategic Cost Management
BSA601-A 12 Task Performance 1
10. Net advantage of continue/shutdown operations
Result of continued operations
Sales (4,000 x (P400 – 12.50%)] P1,400,000
Cost of goods sold (4,000 x P270) (1,080,000)
Contribution margin P320,000
Fixed cost (P150,000 x 4 months) (600,000)
Net loss from continued operations (280,000)
Total shutdown cost 395,000
Advantage of continued operations P115,000

11. Should the club operations shut down or continue?

The club should continue operations because they will incur an additional loss of
P115,000 if the operations are shut down. Since the demand is 4,000, which is greater
than the shutdown point, it is more practical for the company to continue the
operations even if it will still incur a loss.

Case 5
12. Determine the relevant/differential cost.
Cost of new machine P30,000
Add: Operating cost (P160,000 – 90,000 x 4) 280,000
Less: Disposal value of old machine (10,000)
Total relevant cost to replace P300,000
Total relevant cost to retain (P160,000 x 4) (640,000)
Differential cost (P340,000)

13. Should the old loader be retained or replaced?

The airline should decide to replace the old loader since the total relevant cost to
replace is lower than the total relevant costs if the old loader is retained.