MANAGEMENT ADVISORY SERVICES

QUESTIONS & ANSWERS

COMPILED BY: MA. CRISTINA P. OBESO, CPA

1. The following pertains to Sure Company:

Sales (50,000 units) P1,000,000
Direct Materials and Direct Labor 300,000
Factory Overhead
Variable 40,000
Fixed 70,000
Selling and General Expenses
Variable 10,000
Fixed 60,000

How much was Sure's break-even point in number of units?

a. 9,848 b. 10,000 c. 18,571 d. 15,700

2. Michael Company began its operations on Jan. 1,2008 and produces a single product that sells
for P10/unit. Michael uses the actual (historical) cost system. In 2008, 100,000 units
were produced and 80,000 units were sold. There was no work-in-process inventory at
Dec. 31, 2008.
Manufacturing costs and selling and administrative expenses for 2008 were as
follows: Fixed costs Variable costs
Raw materials 2.00/unit produced
Direct labor 1.25/unit produced
Factory overhead 120,000 0.75/unit produced
Selling and administrative 70,000 1.00/unit produced

What would be Michael's finished goods inventory at Dec. 31, 2008 under absorption
costing method?
a. 80,000 b. 104,000 c. 110,000 d. 210,000

3. Hope Company manufactures Part P for use in its production cycle. The cost per unit for
10,000 units of part P are as follows:
Direct materials 3
Direct labor 15
Variable overhead 6
Fixed overhead 8
32
Hope can buy 10,000 units of Part P at P30 per unit. If Hope buys Part P. the
released facilities could be used to save P45,000 in relevant costs in the manufacture of
Part T. In addition, P5/unit of the fixed overhead applied to Part P would be totally eliminated.
What alternative is more desirable and by what amount is it more desirable?

a. Manufacture P10,000
b. Manufacture P15,000
c. Buy P35,000
d. none of the choices

4. Bonifacio Company makes and sells a popular product and its average annual sales is 14,000
units at P65 each. Details of its costs are as follows:

Variable manufacturing costs per unit 37

Variable selling expenses per unit 8
Annual fixed manufacturing overhead 112,000
Annual fixed selling and administrative 65,000

Sales are expected to go down to 1,200 units during the next three months due to road
construction. Hence, management plans to close for three months and avoid 60% of all fixed
 costs. But additional shut down costs of P10,500 will be incurred.
The company should operate since its expected sales in 3 months exceed
a. 803 units b. 1,000 units c. 574 units d. 790 units

5. Right Corporation projects the following transactions for 2009, its first year of operations:
Proceeds from issuance of common stock 1,000,000
Sales on account 2,200,000
Collections of accounts receivable 1,800,000
Cost of goods sold 1,400,000
Disbursements for purchases of merchandise
and expenses 1,200,000
Disbursements for income tax 250,000
Disbursements for purchase of fixed assets 800,000
Depreciation on fixed assets 150,000
Proceeds from borrowings 700,000
Payments on borrowings 80,000

The projected cash balance at Dec. 31, 2009 is

a. 1,170,000 b. 1,220,000 c. 1,370,000 d. 1,500,000

6. KC Corporation is planning to invest P80,000 in a three-year project.KC's expected rate of

return is 10%. The present value of P1 is at 10% for one year is .909, for two years is .826, and
for three years is .751. The cash flow, net of income tax, will be P30,000, for the first year
(present value of P27, 270) and P36,000 for the second year (present value of of P29,736).
Assuming the rate of return is exactly 10%, what will be the cash flow, net of income tax, for
the third year?
a. P22,000 b. P22, 994 c. P30,618 d. 27,270

7. The Dec. 31, 2007 balance sheet of Cyber Inc is presented below. These are only acounts
in Cyber's balance sheet. Amounts indicated by a question mark (?) can be calculated from the
additional information given
Assets
Cash 25,000
Accounts receivable (net) ?
Inventory ?
Property, plant and equipment (net) 294,000
432,000

Liabilities & Stockholders' Equity

Current ratio (at year end) 1.5 to 1
Total liabilities divided by total stockholders'
equity 0.8
Inventory turnover (based on ending inventory) 10.5 times
Cost of sales for 2007 735,000

What was Cybers' Dec. 31, 2007 inventory?

a. 21,000 b. 30,000 c. 70,000 d. 88,000

8. The Heaven Co. makes and sells a single product called Zoom. Overhead costs are applied
to products on a basis of direct labor hours. The following data applies to the company's
activities for the month of November:
Actual fixed overhead cost incurred 161,450
Budgeted direct labor hours (denominator activity) 40,000
Number of zoom completed 21,000
Fixed overhead budget variance - favorable 11,450
Standard direct labor hours allowed per Zoom 2
Standard overhead rate 5

The volume variance for November is:

 a. 6,800 unfavorable b. 6,800 favorable
c. 7,500 favorable d. cannot be determined

9. The following information pertains to material R which is used by Barney Co.

Annual usage in units 20,000
Working days per year 250
Safety stock in units 800
Normal lead time in working days 30

Units of material R will be required evenly throughout the year. The order point is
a. 1,600 b. 2,400 c. 3,200 d. 3,600
ANSWERS

1. B Total fixed costs (expenses) P130,000

Div. by Contribution margin per unit
Selling price (P1,000,000/50,000) 20
Variable cost (350,000/50,000) 7 13
Break-even point in units 10,000

2. B Total manufacturing costs per unit: P4.00 + P1.20 = P5.20

Finished goods inventory: (20,000 x P5.20) = P104,000

3. C If part P is purchased:
Decrease in costs (savings):
Variable manufacturing (P10,000 x P24) 240,000
Fixed manufacturing eliminated (10,000 x P5) 50,000
Relevant costs savings 45,000
Total decrease in costs 335,000
Increase in cost (purchase price):
(10,000 x P30) 300,000
Net cost savings if part P is bought 35,000

4. A Shut down costs:

Fixed costs in 3 months (P177,000 x 1/4) 44,250
Less: Avoidable cost (loss) 28,200
16,050
div. by Contribution margin per unit 20
Shutdown point 802.5

5. A Cash receipts:
Issuance of common stock 1,000,000
Collection of accounts receivable 1,800,000
Proceeds from borrowings 700,000 3,500,000
Cash disbursements
Disbursements for purchases of
merchandise and expenses 1,200,000
Disbursements for income tax 250,000
Purchase of fixed assets 800,000
Payments on borrowings 80,000 2,330,000

6. C Present value of cash flow:

Cash flow PV Factor
Year 1 30,000 x 0.909 27,270.00
 Year 2 36,000 x 0.826 29,736.00
Year 3 ? x 0.75 ?
Present value of cash flow: ?
Investment outlay 80,000
Net present value using 10% rate of return 0

Total present value for the three years 80,000

Less: Present value for 2 years( P27,270+29736) 57,006
Present value of cash flow for the third year 22,994
Divide by PV factor for the third year 0.751
Cash flow for the third year 30,618

7. C Inventory turnover = Cost of sales = 10.5

Inventory, end

10.5 = 735,000
?
Inventory, Dec. 31 = P735,000/10.5 = 70,000

8C Budget based on standard hours:

Budgeted fixed overhead (P161,450-11,450) 150,000
(Fixed overhead rate: 150,000/40,000= 3.75)
Variable overhead 42,000 hrs x (P5.00-3.75) 52,500
202,500
Standard overhead cost:
42,000 hours x P5.00 = 210,000
Volume variance-favorable 7,500

9C The order point (reorder point) = lead time usage + safety stock
Lead time usage:
Daily usage (20,000 units / 250 days) 80 units
Normal lead time x 30
Lead time usage 2,400 units
Add: Safety stock 800
Order point 3,200 units
1,170,000