EXERCISE 1: Office space with a cost of P100,000 and accumulated depreciation of P30,000 can

be sold for P150,000 less a 6% broker commission. Alternatively, the office space can be leased
for ten years for a total of P170,000 at the end of which there is no salvage value. In addition,
repair, insurance, and property tax on the rented office space would total P24,000 over the ten
years. Determine the differential income or loss from the lease alternative.
SOLUTION:
Differential revenue from alternatives:
Revenue from lease P170,000
Revenue from sale 150,000
Differential revenue from lease P20,000
Differential cost of alternatives:
Repairs, insurance, and property tax expense P 24,000
Commission expense 9,000
Differential cost of lease 15,000
Net differential income from lease alternative P 5,000

EXERCISE 2: Product A has revenue of P65,000, variable cost of goods sold of P50,000, variable
selling expenses of P12,000, and fixed costs of P25,000, creating a loss from operations of
P22,000.
a. Determine the differential income or loss from sales of Product A.
b. Should Product A be discontinued?
SOLUTION:
A. Differential revenue from sales of Product A:
Revenue from sales P65,000
Differential costs of Product A:
Variable cost of goods sold P50,000
Variable selling expenses 12,000 62,000
Annual differential income from Product A P 3,000

B. Product A should not be discontinued.

EXERCISE 3. A company manufactures a subcomponent of an assembly for P80 per unit,

including fixed costs of P25 per unit. A proposal is offered to purchase the subcomponent from
an outside source for P60 per unit, plus P5 per unit freight. Provide a differential analysis of the
outside purchase proposal.
SOLUTION:
Differential cost to purchase:
Purchase price of the subcomponent P60
Freight for subcomponent 5 P65
Differential cost to manufacture:
Variable manufacturing costs (P80 – P25 fixed cost) 55
Cost savings from manufacturing sub-component P10

EXERCISE 4. A machine with a book value of P32,000 has an estimated four-year life. A
proposal is offered to sell the old machine for P10,000 and replace it with a new machine at a
cost of P45,000. The new machine has a four-year life with no salvage value. The new machine
would reduce annual direct labor costs by P15,000. Provide a differential analysis on the
proposal to replace the machine.
SOLUTION:
Annual direct labor cost reduction P15,000
Number of years applicable x 4
Total differential decrease in cost P60,000
Proceeds from sale of old equipment (10,000) P50,000
Cost of new equipment (45,000)
Net differential decrease in cost from replacing equipment, 4-year total P 5,000
EXERCISE 5. Product T is produced for P2.50 per gallon, including P1.00 per gallon fixed cost. Product
T can be sold without additional processing for P3.50 per gallon, or processed further into Product V at
an additional cost of P1.60 per gallon, including P0.90 per gallon fixed cost. Product V can be sold for
P4.00 per gallon. Provide a differential analysis for further processing into Product V.
SOLUTION:
Differential revenue from further processing per gallon:
Revenue per gallon from sale of Product T P3.50
Revenue per gallon from sale of Product V 4.00
Differential revenue P0.50
Differential cost per gallon:
Additional cost for producing Product V
(P1.60 – P0.90) 0.70
Differential loss from further processing into Product V P0.20

EXERCISE 6. Product D is normally sold for P4.40 per unit. A special price of P3.60 is offered for the
export market. The variable production cost is P3.00 per unit. An additional export tariff of 10% of
revenue will be required to be paid for all export products. Determine the differential income or loss
per unit from selling Product D for export.
SOLUTION:
Differential revenue from export:
Revenue per unit from export sale P3.60
Differential cost from export:
Variable manufacturing costs P3.00
Export tariff (10% x P3.60) 0.36 3.36
Differential income from accepting export sale P0.24

EXERCISE 7. Apex Corporation produces and sells Product Z at a total cost of P30 per unit. Of this
amount, P10 per unit is selling and administrative costs. The total variable cost is P18 per unit. The
desired profit is P3 per unit. Determine the markup percentage on total cost.