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Chapter 19 - Answer
Chapter 19 - Answer
CHAPTER 19
I. Questions
1. Quantitative factors are those which may more easily be reduced in
terms of pesos such as projected costs of materials, labor and overhead.
Qualitative factors are those whose measurement in pesos is difficult and
imprecise; yet a qualitative factor may be easily given more weight than
the measurable cost savings. It can be seen that the accountants role in
making decisions deals with the quantitative factors.
2. Relevant costs are expected future costs that will differ between
alternatives. In view of the definition of relevant costs, historical costs
are always irrelevant because they are not future costs. They may be
helpful in predicting relevant costs but they are always irrelevant costs
per se.
3. The differential costs in any given situation is commonly defined as the
change in total cost under each alternative. It is not relevant cost, but it
is the algebraic difference between the relevant costs for the alternatives
under consideration.
4. Analysis:
The original cost of the old truck is irrelevant but its disposal value is
relevant. It is recommended that the truck should be rebuilt because it
will involve lesser cash outlay.
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Chapter 19 Relevant Costs for Decision Making
II. Exercises
Case 1 Case 2
Not Not
Item Relevant Relevant Relevant Relevant
a. Sales revenue ................................ X X
b. Direct materials............................... X X
c. Direct labor ................................ X X
d. Variable manufacturing
overhead.......................................... X X
e. Book value Model E7000
machine........................................... X X
f. Disposal value Model E7000
machine........................................... X X
g. Depreciation Model E7000
machine........................................... X X
h. Market value Model F5000
machine (cost)................................ X X
i. Fixed manufacturing
overhead.......................................... X X
j. Variable selling expense ................. X X
k. Fixed selling expense...................... X X
l. General administrative
overhead.......................................... X X
Requirement 1
* Depreciation ................................................................
P2,000
Insurance ................................................................ 960
Garage rent................................................................ 480
Automobile tax and license................................ 60
Total ................................................................ P3,500
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Requirement 2
Requirement 3
When figuring the incremental cost of the more expensive car, the relevant
costs would be the purchase price of the new car (net of the resale value of
the old car) and the increases in the fixed costs of insurance and automobile
tax and license. The original purchase price of the old car is a sunk cost and
is therefore irrelevant. The variable operating costs would be the same and
therefore are irrelevant. (Students are inclined to think that variable costs
are always relevant and fixed costs are always irrelevant in decisions. This
requirement helps to dispel that notion.)
Requirement 1
Per Unit
Differential
Costs 15,000 units
Make Buy Make Buy
Cost of purchasing ................................................................
P200 P3,000,000
Direct materials................................................................
P 60 P 900,000
Direct labor ................................................................
80 1,200,000
Variable manufacturing overhead ................................ 10 150,000
Fixed manufacturing overhead, traceable1 ................................ 20 300,000
Fixed manufacturing overhead, common................................ 0 0 0 0
Total costs ................................................................
P170 P200 P2,550,000 P3,000,000
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Chapter 19 Relevant Costs for Decision Making
Requirement 2
Make Buy
Cost of purchasing (part 1)................................................................ P3,000,000
Cost of making (part 1) ................................................................ P2,550,000
Opportunity costsegment margin forgone on a
potential new product line................................................................ 650,000
Total cost ................................................................................................
P3,200,000 P3,000,000
Thus, the company should accept the offer and purchase the parts from the outside
supplier.
Only the incremental costs and benefits are relevant. In particular, only the
variable manufacturing overhead and the cost of the special tool are relevant
overhead costs in this situation. The other manufacturing overhead costs are
fixed and are not affected by the decision.
Per Total
Unit 10 bracelets
Incremental revenue................................................................
P3,499.50 P34,995.00
Incremental costs:
Variable costs:
Direct materials................................................................
1,430.00 14,300.00
Direct labor ................................................................
860.00 8,600.00
Variable manufacturing overhead ................................ 70.00 700.00
Special filigree ................................................................
60.00 600.00
Total variable cost................................................................
P2,420.00 24,200.00
Fixed costs:
Purchase of special tool................................ 4,650.00
Total incremental cost................................................................ 28.850.00
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Requirement 1
X Y Z
(1) Contribution margin per unit................................................................
P18 P36 P20
(2) Direct labor cost per unit................................................................
P12 P32 P16
(3) Direct labor rate per hour ................................................................
8 8 8
(4) Direct labor-hours required per unit (2) (3) ................................1.5 4.0 2.0
Contribution margin per direct labor-hour (1) (4)................................
P12 P 9 P10
Requirement 2
X Y Z
Contribution margin per direct labor-hour ................................
P12 P9 P10
Direct labor-hours available ................................ 3,000 3,000 3,000
Total contribution margin ................................ P36,000 P27,000 P30,000
Although product X has the lowest contribution margin per unit and the
second lowest contribution margin ratio, it has the highest contribution
margin per direct labor-hour. Since labor time seems to be the companys
constraint, this measure should guide management in its production
decisions.
Requirement 3
The amount Jaycee Company should be willing to pay in overtime wages for
additional direct labor time depends on how the time would be used. If
there are unfilled orders for all of the products, Jaycee would presumably
use the additional time to make more of product X. Each hour of direct
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Chapter 19 Relevant Costs for Decision Making
labor time generates P12 of contribution margin over and above the usual
direct labor cost. Therefore, Jaycee should be willing to pay up to P20 per
hour (the P8 usual wage plus the contribution margin per hour of P12) for
additional labor time, but would of course prefer to pay far less. The upper
limit of P20 per direct labor hour signals to managers how valuable
additional labor hours are to the company.
If all the demand for product X has been satisfied, Jaycee Company would
then use any additional direct labor-hours to manufacture product Z. In that
case, the company should be willing to pay up to P18 per hour (the P8 usual
wage plus the P10 contribution margin per hour for product Z) to
manufacture more product Z.
Likewise, if all the demand for both products X and Z has been satisfied,
additional labor hours would be used to make product Y. In that case, the
company should be willing to pay up to P17 per hour to manufacture more
product Y.
III. Problems
Product A Product B
Selling price per unit P1.20 P1.40
Less Variable costs/unit:
Materials 0.50 0.70
Labor 0.20 0.24
Factory overhead (25%) 0.10 0.14
0.80 1.08
Contribution margin/unit P0.40 P0.32
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Requirement 1
Requirement 2
Trampoline
Total Round Rectangular Octagonal
Sales ..................................... P1,000,000 P140,000 P500,000 P360,000
Less variable expenses ......... 410,000 60,000 200,000 150,000
Contribution margin............. 590,000 80,000 300,000 210,000
Less fixed expenses:
Advertising traceable..... 216,000 41,000 110,000 65,000
Depreciation of special
equipment ..................... 95,000 20,000 40,000 35,000
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Chapter 19 Relevant Costs for Decision Making
Line supervisors
salaries .......................... 19,000 6,000 7,000 6,000
Total traceable fixed
expenses ........................... 330,000 67,000 157,000 106,000
Product-line segment
margin............................... 260,000 P 13,000 P143,000 P104,000
Less common fixed
expenses ........................... 200,000
Net operating income
(loss)................................ P 60,000
Requirement 1
Product Line
A B C D
Selling price per unit P30 P25 P10 P8
Variable cost per unit 25 10 5 4
Contribution margin / unit P5 P15 P 5 P4
Divided by no. of hours required
for each unit 5 hrs. 10 hrs. 4 hrs. 1 hr.
Contribution per hour P1 P1.5 P1.25 P4
Product ranking:
1. D 2. B 3. C 4. A
Based on the above analysis, first priority should be given to Product D. The
company should use 4,000 out of the available 96,000 hrs. to produce 4,000
units of product D. The remaining 92,000 hrs. should be used to produce
9,200 units of Product B. Hence, the best product combination is 4,000 units
of Product D and 9,200 units of Product B.
Requirement 2
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Relevant Costs for Decision Making Chapter 19
Requirement 1
The company should accept the special order of 4,000 @ P10 each because
this selling price is still higher than the additional variable cost to be
incurred. Whether or not variable marketing expenses will be incurred, the
decision is still to accept the order.
Supporting computations:
(a) Assume no additional variable marketing cost will be incurred.
Selling price per unit P10.00
Less variable manufacturing costs:
Direct materials P5.00
Direct labor 3.00
Variable overhead 0.75 8.75
Contribution margin/unit P 1.25
Multiplied by number of units of order 4,000 units
Total increase in profit P5,000
(b) Assume additional variable marketing cost will be incurred.
Selling price per unit P10.00
Less variable costs (P8.75 + P0.25) 9.00
Contribution margin / unit P 1.00
Multiplied by number of units of order 4,000 units
Total increase in contribution margin P4,000
Requirement 2
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Chapter 19 Relevant Costs for Decision Making
Requirement 3
Requirement 4
Requirement (a)
Requirement (b)
Production
4,000 units 5,000 units 6,000 units
Sales (4,000 x P40) P160,000 P160,000 P160,000
Less variable costs
Production cost @ P25 100,000 125,000 150,000
Purchase cost @ P45 - - -
Total P100,000 P125,000 P150,000
Contribution margin P 60,000 P 35,000 P 10,000
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Requirement (c)
Problem 6 (Pricing)
Requirement A:
Operating
Result at Full
2005 2006 Capacity
Sales P 100,000 P 400,000 P 480,000
Less Variable cost 130,000 520,000 624,000
Contribution margin (P 30,000) (P120,000) (P144,000)
Less Fixed cost 40,000 40,000 40,000
Net income (loss) (P 70,000) (P160,000) (P184,000)
The company had been operating at a loss because the product had been
selling with a negative contribution margin. Hence, the more units are sold,
the higher the loss will be.
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Chapter 19 Relevant Costs for Decision Making
Requirement B: P60.14
Requirement C: P74.29
Requirement D: P56.58
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20. R S T
Sales (10,000 x P20) P200,000 P200,000 P200,000
Less: Variable costs
R (P12 x 10,000) 120,000
S (P 8 x 10,000) 80,000
T (P 4 x 10,000) 40,000
Contribution margin P 80,000 P120,000 P160,000
21. R S T
Sales (P16 x 15,000) P240,000 P240,000 P240,000
Less: Variable costs
R (P12 x 15,000) 180,000
S (P 8 x 15,000) 120,000
T (P 4 x 15,000) 60,000
Contribution margin P 60,000 P120,000 P180,000
Less: Fixed costs 40,000 80,000 120,000
Operating income P 20,000 P 40,000 P 60,000
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