MAS II

Name:

MAKE OR BUY: Gold, Inc., makes many of the components of its main product in-house. Recently, ABC
Electronics offered to supply one component, K-8, at a price of P6.50 each. Gold uses 20,000 units of
component K-8 each year. The costs per unit of this component is as follows:

Direct Materials P2.95

Direct Labor 0.40
Variable overhead 1.80
Fixed overhead 4.00
P9.15
The fixed overhead is an allocated expense; none of it would be eliminated if production of component
K-8 stopped.

1. What are the alternatives facing Gold, Inc., with respect to production of component K-8?
2. List the relevant cost for each alternative. Suppose that Gold, Inc., purchases K-8 from ABC
Electronics, by how much will operating income increase or decrease?
3. Suppose that P1.85 of the fixed overhead for component K-8 stops, then the leased machinery
can be returned immediately at no further cost.
a. What are the relevant cost for each alternative?
b. If Gold, Inc., purchases K-8 from ABC Electronics, by how much will operating income
increase or decrease?

ACCEPT OR REJECT: Go Company has been approached by a new customer with an offer to purchase
34,000 units of Go’s product at a price of P24 each. The new customer is geographically separated from
Go’s other customers, and there would be no effect on existing sales. Go normally produces 400,000
units but plans to produce and sell only 360,000 in the coming year. The normal sales price is P30 per
unit. Unit cost information is as follows:

Direct Materials P8.00

Direct Labor 10.00
Variable overhead 4.00
Fixed overhead 3.40
P25.40
If Go accepts the order, no fixed manufacturing activities will be affected because there is sufficient
excess capacity.

1. Should Go accept the special order? By how much will profit increase/decrease if the order is
accepted?
2. Suppose that Go’s distribution center at the warehouse is operating at full capacity and would
need to add capacity costing P6,000 for every 5,000 units to be packed and shipped. Should GO
accept the special order? By how much will profit increase or decrease if the order is accepted?
 MAS II

CONTINUE OR DROP A PRODUCT/BUSINESS SEGMENT: Lee Company makes two products,, Mad and
Min. Information on costs associated with each product line is as follows:

MAD MIN
Sales P135,000 P15,000
Less: Variable Expenses 50,000 8,600
Contribution Margin 85,000 6,400
Less:
Direct fixed expenses 3,000 1,200
Common fixed expenses 54,000 6,000
Operating Income P28,000 P(800)

The direct fixed expenses are advertising and selling costs that are incurred by the particular product
line. The common fixed expenses are allocated to the two product lines on the basis of sales revenue.
Total common fixed expenses would not change if a product line were dropped.

1. Develop a segmented income statement per product and in total for Lee Company. Be sure to
show segmented margin for each product.
2. By how much would operating income increase or decrease if the product MIN were dropped?

SELL NOW OR PROCESS FURTHER: See Company produces four joint products at a joint cost of
P125,000. The company currently processes all products beyond the split-off point and the final
products are sold as follows:

Products Sales Further Processing Cost

A P450,000 P360,000
B 140,000 70,000
C 45,000 10,000
D 20,000 25,000

See could sell the products at split-off point for the following amounts: A P120,000, B P40,000, C
P35,000, D P0.00

1. Which product/s should See sell at the split-off point?

2. What would See’s profit be if it took most profitable action with respect to each of its products?