ManAcc3: Relevant costing

1. Differential Analyses
Otso Deretso has single product called Weh. The company currently sells 8,000 units of Weh at P40.00 per unit
The company’s costs at this level of activity are given below:
Variable costs: Fixed costs:
Direct Materials P10.00 Fixed Overhead 50,000
Direct Labor P 8.00 Fixed selling expenses 30,000
Variable Overhead P 5.00
Variable Selling Expenses P2.00

Required:
a. What is the company’s profit if it sells, 8,000 units of Weh?
b. The company could increase its sales by 25% if it spends 20,000 for Weh’s advertisements.
Determine the effect on company profit using:
1. Total Analysis 2. Differential Analysis

2. Make or buy
Samira Gutoc Co. uses 20 units of part “Pak” per month in the production of its main product. The
manufacturing costs per unit of part “Pak” are as follows:
Materials P1,000
Handling cost** P100
Direct Labor P5,000
Factory Overhead (40% fixed) P10,000
TOTAL P16,100
**Handling cost is applied to 10% cost of direct materials and/or any purchased parts
Chel Diokno Co., a well-known product of “Pak”, has offered to supply the part for Samira Gutoc Co. at P12,000
per unit. If Samira accepts Chel’s offer, the resulting idle facility may be used to produce another product,
product “ganern”, which is expected to earn P40,000 per month.

Should Samira make part “Pak” or buy it from Chel Diokno Co.?

3. Accept or reject (special order decision)

Gary Alejano Co. produces single product. The cost of producing a selling a single unit of this product at the
company’s normal activity level of 50,000 units per month is as follows:
Manufacturing Costs:
Direct materials 32.50 per unit
Direct labor 7.20 per unit
Variable manufacturing overhead 1.30 per unit
Fixed manufacturing overhead P1,045,000 per month
Selling and administrative costs:
Variable 1.90 per unit
Fixed P365,000 per month
The normal selling price of the product is P75.00 per unit

An order has been received from a customer for 3,000 units at a special discounted price of P65.60 per unit. This
order would have no effect on normal sales and would not change the total fixed costs. The variable selling and
administrative would be P.30 less per unit on this order than on normal sales. Should Gary Alejano Co. accept or
reject the special order?
4. Special order pricing
Erin Tanada Co. sells Pagbabago perfume at a price of P28,000 per unit. The costs per unit are:
Direct Materials 8,000
Direct Labor 6,000
Variable Overhead 4,000
Fixed Overhead 2,000
TOTAL P20,000
A special order for 1,000 units was received from Mar Roxas, a well-known dealer in Angeles City. Additional
shipping costs for this sale is P2,000 per unit.

Required: What is the minimum selling price per unit for the special order if:
a. Erin Tanada Co. is operating at full capacity?
b. Erin Tanada has excess capacity?

5. Shutting down operations

The most recent monthly income statement for Abeka Stores is given below:
RIP CHOKOLEIT Total
Branch Branch
Sales 1,200,000 800,000 2,000,000
Variable Expenses (840,000) (360,000) (1,200,000)
Contribution margin 360,000 440,000 800,000
Traceable fixed expenses (210,000) (180,000) (390,000)
Segment margin 150,000 260,000 410,000
Common fixed expenses (180,000) (120,000) (300,000)
Profit(loss) (30,000) 140,000 110,000

Abeka Stores considers for elimination RIP Branch. If this branch is eliminated, then its traceable fixed expenses
could be avoided. The total common fixed expenses are merely allocated and would be unaffected.

a. The elimination of the RIP would result in an overall company profit (loss) of:
b. Assume that if RIP branch is closed, one-fifth of its traceable fixed expenses would continue unchanged. Also,
closing of this branch would result in a 20% decrease in sales of CHOKOLEIT Branch. What will be the overall
decrease in profit?

6. Product elimination(Shutdown point)

Vote Wisely Co. expects that sales will drop below the current level of 5,000 units per month. An income
statement prepared for the monthly sales of 5,000 units show the following:
Sales (5,000 @ 3.00) P15,000
Less: Variable costs (5,000 @P2.00) 10,000
Fixed costs 5,000 15,000
Profit NIL

If plant operations are suspended, a shutdown cost (e.g plant maintenance and taxes) of P 2,000 per month will
remain as incurred. Since there is no immediate possibility of profit under present conditions, the problem of
the company is just how to minimize the loss.
 Required:
a. Shutdown point in units and in pesos.
b. Should the company continue or shut down operations if the company expects demand to be: 4,000 units?
2,000 units?

7. Sell or process further

HNP Co. produces four products for a joint cost of P10,000. The products are currently processed beyond the
split-off point, and the final products are sold as follows:
Products Sales Additional Processing cost
Cashew nut 40,000 26,000
Walnut 30,000 14,000
Peanut 20,000 16,000
Almond 2,500 3,000

The firm could sell the products at the split-off point for the following amounts:
Cashew nut 15,000
Walnut 11,000
Peanut 2,000
Almond 0

Required:
a. Which product(s) should the firm sell at split-off point?
b. If the company takes the profitable action, then what will be its profit?

8. Best product combination

Francis Tolentino Co. produces three products: MM, DD and AA. One machine is used to produce the products.
The contribution margins, sales demands and time on the machine (in hours) are as follows:

Market Limit Unit CM Hours on Machine

MM 100 units P20 10 per unit
DD 80 units P18 5 per unit
AA 150 units P25 10 per unit
There are 2,400 hours available on the machine during the week. Total fixed cost is P5,000.

Required:

a. What is the best product combination that maximizes the weekly contribution?
b. How much is the profit associated with the best product combination?