RELEVANT COSTING

Flag Motors is trying to decide whether it should continue to produce an engine

component or buy it from Saraw Philippines for P 2,500 each. The demand for the
coming year is 20 units. The costs of producing a single unit of the engine component
are as follows:
DM P 1,200
DL P 800
Factory Overhead (60% fixed) P 1,000

If Flag buys the components, the facility now used to make the components can be
rented out to another firm for P 5,000.

Should Flag make or buy the component?

Captain Company produces a single product. The cost of producing and selling a
single unit of this product at the company’s normal activity level of P 50,000 units per
month is as follows:

Manufacturing costs:
DM P 32.80 per unit
DL P 7.20 per unit
Variable Manufacturing Overhead P 3.00 per unit
Fixed Manufacturing Overhead P 100,000 per month
Selling and administrative costs:
Variable P 2.50 per unit
Fixed P 36,000 per month

The regular selling price of the product is P 75.00 per unit.

An order has been received from a customer for 5,000 units at a special discounted
price of P 50.00 per unit. This order would have no effect on normal sales and would not
change the total fixed costs. The variable selling and administrative expense would be P
0.50 less per unit on this order than on normal sales.

Should Captain accept or reject the special order?

Colonel Company sells I-Phone 8 at a price of P 28,000 per unit. The costs per unit
are:

DM P 8,000
DL P 6,000
VO P 4,000
FO P 2,000

A special order for 1,000 units was received from Private, a well-known cell phone
dealer based in Cavite. Additional shipping costs for this sale are P 2,000 per unit.
What is the minimum selling price per unit for the special order if:
a. Colonel is operating at full capacity?
b. Colonel has excess capacity?

The most recent monthly income statement for Sergeant Stores is given below:

Korea Branch Japan Branch Total

Sales P 1,200,000 P 800,000 P 2,000,000
Less: Variable Expenses P (840,000) P (360,000) P (1,200,000)
Contribution Margin P 360,000 P 440,000 P 800,000
Less: Traceable Fixed Expenses P (210,000) P (180,000) P (390,000)
Segment Margin P 150,000 P 260,000 P 410,000
Less: Common Fixed Expenses P (180,000) P (120,000) P (300,000)
Profit (Loss) P 30,000 P 140,000 P 110,000

Sergeant Stores considers eliminating Korea Branch. If Korea Branch were eliminated,
then its traceable fixed expenses could be avoided. The total common fixed expenses
are merely allocated and would be unaffected.

What will be the profit (loss) if Korea Branch is eliminated?

a. P 260,000 c. P (40,000)
b. P 140,000 d. P (70,000)

Assume that if Korea Branch is closed, 20% of its traceable fixed expenses would
continue unchanged. Also, closing of Korea Branch would result in a 20% decrease in
sales of Japan Branch. What will be the overall decrease in profit?

a. P 352,000 c. P 136,000
b. P 280,000 d. no decrease

General Company 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 @ P 3) P 15,000

Less:
VC (5,000 @ P 2) P 10,000
FC P 5,000 P 15,000
Profit - Nil –

If plant operations are suspended, a shutdown cost of P 2,000 per month will remain as
incurred. Since there is no immediate possibility of profit under present condition, the
problem of the company is just how to minimize the loss.

Required:
 1. What is the shutdown point in units?
2. Should the Company continue or shut down operations if the company expects
demand to be:
a. 4,000 units?
b. 2,000 units?

Major Company produces four products for a joint cost of P 10,000 the firm could sell
the products at the split-off point for the following amounts:

M P 15,000
I P 10,000
L P 2,000
O P0

At present, the products are processed beyond the split-off point and they are sold as
follows:

Product Sales Additional Processing Cost

M 40,000 28,000
I 30,000 16,000
L 20,000 14,000
O 2,500 3,000

1. Which product(s) should the firm sell at split-off point?

2. If the company takes the most profitable action, then what will be its profit?

Private Company produces three products: A. B and C. 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 Contribution Margin Hours on Machine

A 100 units P 20 10 per unit
B 80 units P 18 5 per unit
C 150 units P 25 10 per unit

There are 2,400 hours available on the machine during the week. Total fixed cost is P
5,000.

1. What is the best product combination that maximizes the weekly contribution?
a. 100 units of A; 80 UNITS OF b; 150 units of C
b. 50 units of A; 80 units of B; 150 units of C
c. 90 units of A; 0 unit of B; 150 units of C
2. How much is the profit associated with the best product combination?