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Relevant Costing by A Bobadilla PDF
Relevant Costing by A Bobadilla PDF
MODULE 6
INCREMENTAL ANALYSIS
Basic concepts
Steps in decision making process
5. What is the first step in the decision making process?
A. Specify the criteria by which the decision is to be made.
B. Consider the strategic issues regarding the decision context.
C. Perform an analysis in which the relevant information is developed and analyzed.
D. Compare the alternatives.
7. A major accounting contribution to the managerial decision-making process in evaluating possible courses of action is to
A. assign responsibility for the decision.
B. provide relevant revenue and cost data about each course of action.
C. determine the amount of money that should be spent on a project.
D. decide which actions that the management should consider.
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Incremental Analysis
19. Which one of the following is not a common mistake in a decision-making process?
A. Considering sunk costs as relevant.
B. Considering opportunity cost, an imputed cost, being relevant.
C. Considering fixed costs as avoidable fixed costs.
D. Unitizing fixed costs.
24. One of the behavioral problems with relevant cost analysis is the overemphasis on short-term goals, which can lead to neglect
of:
A. sales promotion C. quarterly net income results
B. expense control D. long-term strategic goals
Incremental analysis
25. Incremental analysis is the process of identifying the financial data that:
A. do not change under alternative courses of action
B. are mixed under alternative courses of action
C. change under alternative courses of action
D. no correct answer is given
Relevant information
2. Predicted future cost and revenue data that will differ among alternative courses of action are known as
A. relevant information C. marginal costs
B. direct information D. incremental costs
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Incremental Analysis
Irrelevant costs
Sunk costs
9. The kind of cost that can be ignored in a short-term decision making is a(an)
A. differential cost C. sunk cost
B. incremental cost D. joint cost
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Incremental Analysis
A. a cost incurred in the past and not relevant to any future course of action.
B. an opportunity cost.
C. useful in analysis of alternative courses of action.
D. relevant to current decision making.
13. Which of the following is least likely to be a relevant item in deciding whether to replace an old machine?
A. acquisition cost of the old machine
B. outlay to be made for the new machine
C. annual savings to be enjoyed on the new machine
D. life of the new machine
Unit costs
22. Unit costs can mislead decision makers. Which of the following situations dealing with unit costs are not expected to result in a faulty analysis?
A. Unit costs used in make-or-buy decisions might include costs such as avoidable fixed costs.
B. Variable unit cost directly varies with the changes in production units.
C. Total fixed costs increase as more units are produced within the relevant range.
D. Contribution margin on products that can be manufactured in using the freed capacity is irrelevant in the decision.
Relevant costs
16. Relevant costs are
A. all fixed and variable costs
B. all costs that would be incurred within the relevant range of production
C. past costs that are expected to be different in the future
D. anticipated future costs that will differ among various alternatives
14. The Health Care Division of Piedmont Insurance employs three claims processors capable of processing 5,000 claims each. The division currently processes
12,000 claims. The manager has recently been approached by two sister divisions. Auto Division would like the Health Care Division to process approximately
2,000 claims. Property Division would like the Health Care Division to process approximately 5,000 claims. The Health Care Division would be compensated
by Auto Division or Property Division for processing these claims. Assume that these are mutually exclusive alternatives. Claims processor salary cost is
relevant for
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Incremental Analysis
Differential costs
31. The difference in cost between or among various alternative courses of action appropriately describes a(an):
A. differential cost C. constraint
B. ad hoc discount D. scarce resource
Opportunity cost
10. An important concept in decision making is described as “the contribution to income that is forgone by not using a limited resource in its best alternative use.”
This concept is called
A. Marginal cost C. Incremental cost
B. Cost outlay D. Opportunity cost
18. The potential benefit that may be obtained from following an alternative course of action is called
A. opportunity benefit C. relevant cost
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Incremental Analysis
27. Using opportunity cost to analyze the income effects of a given alternative is referred to as
A. engineering analysis C. account analysis
B. mixed-cost analysis D. differential analysis
Avoidable
15. A fixed cost is relevant if it is
A. future cost C. avoidable
B. sunk D. a product cost
17. Which of the following is (are) a true statement(s) about cost behaviors in incremental analysis?
I. Fixed costs will not change between alternatives.
II. Fixed costs may change between alternatives.
III. Variable costs will always change between alternatives.
A. I C. III
B. II D. II and III
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Incremental Analysis
Out-of-pocket costs
23. Which of the following is a cost that requires a future outlay of cash that is relevant for future decision-making?
A. Opportunity cost C. Out-of-pocket cost
B. Relevant benefits D. Incremental revenue
Sensitivity analysis
20. Sensitivity analysis is useful in decision making when:
A. there is a degree of uncertainty about the relevant data.
B. there is an opportunity cost included in the analysis.
C. sunk cost is included in the analysis.
D. the analysis is subject to a review by the management.
21. To determine the possible outcome in a decision analysis if a key prediction or assumption proves to be wrong, managers will use:
A. sensitivity analysis. C. incremental analysis.
B. total analysis. D. regression analysis.
Make-or-buy decision
Qualitative Considerations
38. Which of the following elements of the value chain should be considered when deciding whether to make or buy a component needed for production?
A. Marketing C. Manufacturing
B. Distribution D. all of these choices
Make decision
34. Manufacturing parts internally by a company causes:
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Incremental Analysis
44. A company should decide to make, rather than buy, a part required for their product, if
A. The company‟s production facility is at full capacity
B. The relevant cost per-unit of making the part exceeds the per-unit relevant costs of purchasing the part
C. The supplier of the part can produce a higher-quality part
D. The supplier of the part has questionable reliability
Buy decision
35. In any make or buy decision confronting a company, which of the following factors should be considered?
A. Can the supplier provide a sufficient quantity to meet the company's current and future needs?
B. Do the supplier's items meet product and quality specifications?
C. Is the supplier reliable?
D. All of the above should be considered.
41. Which of the following qualitative factors favors the buy choice in a make or buy decision for a part?
A. maintaining a long-term relationship with suppliers
B. quality control is critical
C. utilization of idle capacity
D. part is critical to product
Relevant costs
Fixed costs
36. Within the context of the make or buy decision, when are fixed costs relevant?
A. Fixed costs are always relevant
B. Fixed costs are never relevant
C. Fixed costs are relevant when they differ among alternatives
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Incremental Analysis
Opportunity costs
39. In a make-or-buy decision, which of the following is true?
A. Variable costs are the only relevant costs.
B. Allocated fixed costs are relevant.
C. Alternative uses of space and machinery are relevant.
D. Making the product is the correct decision when there is idle capacity.
40. The opportunity cost of making a component part in a factory with excess capacity for which there is no alternative use is
A. the total manufacturing cost of the component.
B. the total variable cost of the component.
C. the fixed manufacturing cost of the component.
D. zero.
46. The cost of not receiving rent from a space because you decide to make the part rather than buying it from an outside supplier is considered a(an)
A. sunk cost C. opportunity cost
B. future cost D. fixed cost
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Incremental Analysis
Decision rule
42. Haribon Company is faced with a make-or-buy decision. Haribon should agree to buy the part from a supplier provided the price is less than Haribon‟s
A. total costs
B. variable production costs plus avoidable fixed production costs
C. total manufacturing costs
D. variable costs
84. A company owns equipment that is used to manufacture important parts for its production process. The company plans to sell the equipment for P10,000 and
to select one of the following alternatives:
(1) acquire new equipment for P80,000
(2) purchase the important parts from an outside company at P4 per part.
The company should quantitatively analyze the alternatives by comparing the cost of manufacture the parts
A. Plus P80,000 to the cost of buying the parts less P10,000.
B. to the cost of buying the parts less P10,000.
C. Less P10,000 to the cost of buying the parts.
D. To the cost of buying the parts.
52. Which of the following factors should be considered in deciding whether to accept a special order?
A. the sales price of the product or service
B. the production capacity of the company
C. the impact on regular customers
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Incremental Analysis
Irrelevant cost
83. In considering a special order that will enable a company to make a use of presently idle capacity, which of the following costs would be irrelevant.
A. Materials C. Direct labor
B. Depreciation D. Variable OH
54. Given the following list of costs, which one should be ignored in a decision to produce additional units of product for a factory that is operating at less than
100% capacity, and the additional business will not use up the remainder of the plant capacity?
A. Direct material cost per unit C. Fixed selling expenses
B. Direct labor cost per hour D. Variable selling expenses
Relevant costs
Long-run decision
58. The sales price of a product, in the long run, must be enough to cover what type of costs?
A. Designing costs C. Servicing costs
B. Marketing costs D. All of the above
Opportunity costss
50. An opportunity cost commonly associated with a special order is
A. the contribution margin on lost sales
B. the variable costs of the order
C. additional fixed cost that is related to the increased output
D. any of the above
53. Operating at or near full capacity will require a firm considering a special order to recognize the:
A. opportunity cost arising from lost sales
B. value of full employment
C. time value of money
D. need for good management
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Incremental Analysis
Decision rule
82. Production of a special order will increase gross profit when the additional revenue from the special order is greater than
A. The nonvariable costs incurred in producing the order.
B. The direct material and labor costs in producing the order.
C. The fixed costs incurred in producing the order.
D. The marginal cost of producing the order.
51. If the firm is operating under capacity, the minimum special order price should be high enough to cover:
A. all variable costs and incremental fixed costs associated with the special order minus foregone contribution margin on regular units not produced.
B. variable and incremental fixed costs associated with the special order and a profit margin.
C. limited variable costs associated with the special order.
D. neither variable nor fixed costs associated with the special order.
57. Green Giant Foods has some excess manufacturing capacity that it can leave idle, use to produce its own boxes for frozen foods, or use to process another
company‟s frozen foods. It will be more profitable for Green Giant to process the competitor‟s frozen foods as long as the net cost is
A. greater than both the cost to buy the boxes and the cost to leave the plant idle.
B. less than the cost to leave the plant idle and greater than the cost to buy the boxes.
C. greater than the cost to leave the plant idle and lower than the cost to buy boxes from a supplier.
D. less than both the cost to leave the plant idle and the cost to make or buy the boxes.
At full capacity
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Incremental Analysis
56. If a firm is at full capacity, the minimum special order price must cover
A. variable costs associated with the special order.
B. variable and fixed manufacturing costs associated with the special order.
C. variable and incremental fixed costs associated with the special order.
D. variable costs and incremental fixed costs associated with the special order plus foregone contribution margin on regular units not produced.
Product pricing
Variable cost approach
60. Managers who often make special pricing decisions are more likely to use which of the following cost concepts in their work?
A. Total cost. C. Variable cost.
B. Product cost. D. Fixed cost.
Cost-plus approach
59. In using the variable cost concept of applying the cost-plus approach to product pricing, what is included in the markup?
A. Total costs plus desired profit.
B. Desired profit.
C. Total selling and administrative expenses plus desired profit.
D. Total fixed manufacturing costs, total fixed selling and administrative expenses, and desired profit.
62. Which of the following is NOT a cost concept commonly used in applying the cost-plus approach to product pricing?
A. Total cost concept. C. Variable cost concept.
B. Product cost concept. D. Fixed cost concept.
63. The cost-plus pricing formula that takes into consideration all costs -- fixed, variable, and manufacturing, as well as selling and administrative costs -- is called
the percentage of
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Incremental Analysis
Target pricing
43. The concept of target pricing is employed when:
A. a company wishes to set price in order to capture a predetermined market share.
B. a price is pre-set by market conditions.
C. a company wishes to meet marketing goals.
D. All of the above.
Sell-as-is-or-process further
Joint products
67. Two or more manufactured products that have significant sales values and are not uniquely identifiable as individual products until the split-off point are called
A. common products. C. co-mingled products.
B. joint products. D. cooperative products.
Relevant costs
Incremental revenue
32. Incremental revenue is:
A. a difference in costs between two decisions.
B. a concession based on competitive influences.
C. additional revenue across decision choices from potential sales.
D. the difference between selling price and variable costs.
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Incremental Analysis
65. Which of the following costs is relevant in deciding whether to sell joint products at split-off or process them further?
A. The unavoidable costs of further processing.
B. The additional costs of further processing.
C. The variable costs of operating the joint process.
D. The cost of materials used to make the joint products.
68. What are the manufacturing costs incurred beyond the split-off point called?
A. Separable costs. C. Severance costs.
B. Joint costs. D. Common costs.
Decision rule
64. How does a company determine whether to sell a product “as is” or process it further?
A. If the costs to process further exceed the costs of current production, the product should be sold „as is.”
B. If the costs to process further exceed the costs of current production, the product should be processed further.
C. If the increase in revenue from selling the product after further processing is greater than the additional costs incurred in further processing, the company
should opt for further processing.
D. If the revenues generated by processing the product further exceed the revenues from selling the product “as is,” the company should process further.
Keep-or-drop decision
Strategic considerations
66. The decision to keep or drop products or services involves strategic consideration of the:
A. potential impact on remaining products or services
B. impact on employee morale
C. growth potential of the firm
D. All of the above answers are correct
Goal
78. The goal in deciding whether to add or drop products, services, or departments is to obtain the greatest
A. reduction in total costs.
B. contribution possible to cover unavoidable costs.
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Incremental Analysis
Irrelevant cost
80. Which of the following should not enter into decision of whether to drop product?
A. Unavoidable costs
B. Avoidable costs
C. Revenue that would be lost
D. Nonfinancial impacts of the decision
Decision rule
79. As long as its marginal cost is lower than its marginal revenue, a company should
A. suspend additional production and sales activities.
B. perform a cost-benefit balance analysis before producing and selling additional products.
C. engage in additional production and sales activities.
D. examine cost behaviors and develop a cost function to measure the cost of future production.
To relax a constraint
73. Which of the following will relax a constraint?
A. Outsourcing all or part of the bottleneck operation
B. Working overtime at the bottleneck operation
C. Retraining employees and shifting them from the bottleneck
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Incremental Analysis
D. A and B, only
Decision rule
76. A product mix decision involves
A. Influencing the sales volume mix of the products to minimize cost.
B. Influencing the sales volume mix of the products to maximize revenue.
C. Producing the maximum amount of items that provide the highest contribution margin.
D. Producing the maximum amount of items that carry the lowest per-unit cost.
71. A useful device for solving production problems involving multiple products and limited resources is:
A. gross sales per unit of product C. net profit per unit of product
B. contribution per unit of scarce resource D. total benefit
72. When there is only one production constraint and excess demand, it is generally best to focus production and sales on the product with the highest:
A. Contribution per unit of scarce resource C. Contribution margin in pesos
B. Margin of Safety D. Operating Leverage
69. When there is one scarce resource, the product that should be produced first is the product with the highest
A. contribution margin per unit of the scarce resource.
B. sales price per unit of scarce resource.
C. demand.
D. contribution margin per unit.
74. Uranus Company has 2 products that use the same manufacturing facilities and cannot be subcontracted. Each product has sufficient orders to utilize the
entire manufacturing capacity. For short-run profit maximization, Uranus should manufacture the product with the
A. Lower total manufacturing costs for the manufacturing capacity.
B. Lower total variable manufacturing costs for the manufacturing capacity.
C. Greater gross profit per hour of manufacturing capacity.
D. Greater contribution margin per hour of manufacturing capacity.
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Incremental Analysis
Pitfall
81. The major pitfall in the contribution margin approach to pricing is
A. its failure to recognize fixed costs.
B. its failure to recognize depreciation expense.
C. its inability to control waste.
D. its inability to recognize financing costs of the production in question.
PROBLEMS:
Incremental (decremental) cost
i. For the year ended April 30, 2007, Salmo Company incurred direct costs of P800,000 based on a particular course of action. Had a different course of action
been taken, direct costs would have been P650,000. In addition, Salmo‟s fixed costs during the fiscal year were P110,000.
The incremental (decremental) cost was:
A. P 40,000 C. P 150,000
B. P( 40,000) D. P(150,000)
Opportunity cost
ii. Luzon Fabricators, Inc. estimates that 60,000 special components will be used in the manufacture of a specialty steel window for the whole next year. Its
supplier quoted a price of P60 per component. Luzon prefers to purchase 5,000 units per month, but its supplier could not guarantee this delivery schedule. In
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Incremental Analysis
order to ensure availability of these components, Luzon is considering the purchase of all the 60,000 units at the beginning of the year. Assuming Luzon can
invest cash at 8%, the company‟s opportunity cost of purchasing all the 60,000 units at the beginning of the year is
A. P132,000 C. P144,000
B. P150,000 D. P264,000
Defective/obsolete inventory
Incremental net income
iii. Sieney & Company has 24,000 defective units of a product that cost P8 per unit to manufacture, and can be sold for P4 per unit. These units can be reworked
for P2 per unit and sold at their full price of P12 each. If Sieney reworks the defective units, how much incremental net income will result?
A. P144,000 C. P 72,000
B. P 96,000 D. P 48,000
Minimum price
iv. Joji Company manufactures and sell FM radios. Information on last year‟s operations (sales and production of the 2006 model) follows:
Selling price P300
Cost per unit:
Direct materials 70
Direct labor 40
Overhead (50% variable) 60
Selling costs (40% variable) 100
Production in units 10,000
Sales in units 9,500
At this time (May 2007), the 2007 model is in production and it renders the 2006 model radio obsolete. A foreign firm is willing to purchase the obsolete
products at a net price of P140 each. If the remaining 500 units of the 2006 model radios are to be sold through regular channels, what is the minimum price
the company would accept for the radios?
A. P300 C. P270
B. P180 D. P 40
Special order
Unit relevant cost
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Incremental Analysis
v. Venus Company, a manufacturer of lamps, budgeted sales of 400,000 lamps at P20 per unit for the year. Variable manufacturing costs were budgeted at P8
per unit, and fixed manufacturing costs at P 5 per unit. A special order offering to buy 40,000 lamps for P11.50 each was received by Venus in April. Venus
has sufficient plant capacity to manufacture the additional quantity of lamps; however, the production would have to be done by the present work force on an
overtime-basis at an estimated additional cost of P1.50 per lamp. Venus will not incur any selling expenses as a result of the special order. Venus Company
would have a unit relevant cost of
A. P 8.00 C. P 9.50
B. P13.00 D. P14.50
vi. Wawa Enterprises has the capacity to produce 10,000 bearings, but operates at 90% of capacity. Bearings normally sell for P60 each, and cost an average of
P50 to make, including a share of the monthly fixed costs of P180,000. Ilog Corp has offered to buy 1,000 bearings at P40 each. What is the relevant cost per
unit?
A. P 20 C. P 40
B. P 30 D. P 50
Incremental cost
viii. Balagtas & Company expects to incur the following costs at the planned production level of 10,000 units:
Direct materials P100,000
Direct labor 120,000
Variable overhead 60,000
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Incremental Analysis
xi. Kaila Company‟s unit cost of manufacturing and selling a given item at an activity level of 10,000 units per month are:
Manufacturing costs
Direct materials P39
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Incremental Analysis
Direct labor 6
Variable overhead 8
Fixed overhead 9
Selling expenses
Variable 30
Fixed 11
The company desires to seek an order for 5,000 units from a foreign customer. The variable selling expenses will be reduced by 40%, but the fixed costs for
obtaining the order will be P20,000. Domestic sales will not be affected by the order.
The minimum break-even price per unit to be considered on this special sale is
A. P 71 C. P 69
B. P 75 D. P 84
xii. Chrisy Company sells a product for P18 per unit and the standard cost card for the product shows the following costs:
Direct materials P 1.00
Direct labor 2.00
Overhead (80% fixed) 7.00
Total P10.00
Chrisy received a special order for 1,000 units of the product. The only additional cost to Chrisy would be foreign import taxes of P1 per unit. If Chrisy is able
to sell all of the current production domestically, what would be the minimum sales price that Chrisy would consider for this special order?
A. P 18 C. P 17
B. P 19 D. P 11
xiii. De Silva Co. is a manufacturer of industrial components. One of their products that is used as a subcomponent in auto manufacturing is KB69. This product
has the following financial structure per unit:
Selling price P150
Direct materials P 20
Direct labor 15
Variable manufacturing overhead 12
Fixed manufacturing overhead 30
Variable shipping and handling 3
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Incremental Analysis
xiv. Sylvania Company. is currently operating at a loss of P15,000. The sales manager has received a special order for 5,000 units of product, which normally sells
for P35 per unit. Costs associated with the product are: direct material, P6; direct labor, P10; variable overhead, P3; applied fixed overhead, P4; and variable
selling expenses, P2. The special order would allow the use of a slightly lower grade of direct material, thereby lowering the price per unit by P1.50 and selling
expenses would be decreased by P1. If Sylvania wants this special order to increase the total net income for the firm to P25,000, what sales price must be
quoted for each of the 5,000 units?
A. P18.50 C. P29.00
B. P24.50 D. P26.50
xvi. Filamer Company currently sells 1,000 units of product M for P2 each. Variable costs are P1.50. A discount store has offered P1.70 per unit for 400 units of
product M. The managers believe that if they accept the special order, they will lose some sales at the regular price. Determine the number of units they could
lose before the order become unprofitable.
A. 200 units. C. 400 units.
B. 160 units. D. 500 units
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Incremental Analysis
packaging requirement will save you an additional P1.50 per unit. However, the additional graphics required on this job will cost you P30,000. Note also that
fixed costs amounting to P400,000 for the production of 50,000 of such products by the firm will not change. You decide to accept this order, but another
customer who buys an average of 2,000 units for the period wants to pay you P22.50 rather than the regular price of P39 a unit. Profit will
A. increase profit by P19,500 C. increase profit by P52,500
B. increase profit by P16,500 D. decrease profit by P52,500
xviii. The Thermo Company has received a special order for 300 units of product X for P6 a unit. It usually sells for P9.50 a unit with a cost of P7.50 a unit
inclusive of 75 cents a unit as sales commission that will not be paid on this order. The cost also includes P3 in manufacturing overhead, was two-third of which
is for the fair share of depreciation, rent, utilities and supervisor's salary. The latter‟s (supervisor's salary) accounts for one-half of this amount. Assuming that
excess capacity is available, and this order requires a mold that costs P150, accepting the order will increase
A. loss by P225 C. gain by P225
B. loss by P375 D. gain by P375
xix. Alejar Company manufactures a product with a unit variable cost of P50 and a unit sales price of P88. Fixed manufacturing costs were P240,000 when 10,000
units were produced and sold. The company has a one-time opportunity to sell an additional 3,000 units at P70 each in a foreign market. This special sale
would not affect its present sales. If the company has sufficient capacity to produce the additional units, acceptance of the special order would affect net income
as follows:
A. Income would decrease by P 12,000.
B. Income would increase by P 12,000.
C. Income would increase by P210,000.
D. Income would increase by P 60,000.
xx. KC Industries manufactures a product with the following costs per unit at the expected production of 30,000 units.
Direct materials P 4
Direct labor 12
Variable manufacturing overhead 6
Fixed manufacturing overhead 8
The company has the capacity to produce 40,000 units. The product regularly sells for P40. A wholesaler has offered to pay P32 a unit for 2,000 units.
If the firm accepts the special order the effect on its operating income would be a
A. P20,000 increase C. P4,000 increase
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Incremental Analysis
xxi. Louderhead Company makes bull-repellent scent according to a traditional Western recipe, which normally sells at P90 per unit. Normal production volume is
10,000 ounces per month. Average cost is P50 per ounce, of which P20 is direct material and P10 is variable conversion cost. This product is seasonal. After
July, demand for this product drops to 6,000 ounces monthly. In November, Garrison Co. offers to buy 1,500 ounces for P60,000. If Louderhead accepts the
order, it must design a special label for Garrison at a cost of P5,000. Each label will cost P2.50 to make and apply. Louderhead should:
A. accept the order, at a gain of P6,250
B. reject the order, at a loss of P18,750
C. reject the order, at a loss of P23,750
D. accept the order, at a gain of P11,250
xxii. What is the minimum price that the division would consider on a “special order” of 1,000 disks to be distributed through normal channels?
A. P 72 C. P 81
B. P 78 D. P 6
xxiii. Assuming that that the Disk Division is producing and selling at capacity. What is the minimum selling price that the division would consider on a “special
order” of 1,000 chips on which no variable period costs would be incurred?
A. P100 C. P 94
B. P 72 D. P 90
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Incremental Analysis
Make-or-buy decision
Relevant costs
xxiv. For the past 12 years, the JLO Company has produced the small electric motors that fit into its main product line of dental drilling equipment. As materials
costs have steadily increased, the controller of the JLO Company is reviewing the decision to continue to make the small motors and has identified the following
facts:
1) The equipment which is used to manufacture the electric motors has a book value of P1,500,000.
2) The space being occupied now by the electric motor manufacturing department could be used to eliminate the need for storage space which is presently
being rented.
3) Comparable units can be purchased from an outside supplier for P597.50.
4) Four of the people who work in the electric motor manufacturing department would be terminated and given eight weeks of separation pay.
5) A P750,000 unsecured note is still outstanding on the equipment that is being used in the manufacturing process.
Which of the items above are relevant to the decision that the controller has to make?
A. 1, 2, 4, and 5 C. 1, 3, 4, and 5
B. 1, 3, and 4 D. 2, 3, and 4
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Incremental Analysis
the production of components. Accordingly, some of the parts must be purchased from outside suppliers. In producing the parts, factory overhead is applied at
P10 per standard machine hour. Fixed capacity costs that will not be affected by any make-or-buy decision represent 60% of the applied overhead.
The available 30,000 machine hours are to be scheduled so that ELM realizes maximum potential cost savings. The relevant unit production costs that should
be considered in the decision to schedule machine time are:
A. P54.00 for Beta and P147.00 for Zeta C. P14.00 for Beta and P127.00 for Zeta
B. P50.00 for Beta and P150.00 for Zeta D. P30.00 for Beta and P135.00 for Zeta
Marketing Costs:
Variable 2.50
Fixed 1.50
The company must decide to continue making the product or buy it from an outside supplier. The supplier has offered to make the product at a level of quality
that the company prescribes. Fixed marketing costs would be unaffected, but variable marketing costs would continue at 30% if the company were to accept
the proposal.
What is the maximum amount per unit that the company can pay the supplier without decreasing its operating income?
A. P8.50 C. P7.75
B. P6.75 D. P5.25
xxvii. Sinta Company can make 1,000 units of a necessary component with the following costs:
Direct Materials P64,000
Direct Labor 16,000
Variable Overhead 8,000
Fixed Overhead ?
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Incremental Analysis
The company can purchase the 1,000 units externally for P104,000. An analysis shows that at this external price, the company is indifferent between making or
buying the part. Sinta Company could avoid P6,000 in fixed overhead costs if it acquires the components externally. If cost minimization is the major
consideration and the company would prefer to buy the components, what is the maximum external price that Sinta Company would accept to acquire the
1,000 units externally?
A. P102,000. C. P 96,000.
B. P 94,000. D. P 88,000.
xxviii. Almeda's Shop can make 1,000 units of a necessary component with the following costs:
Direct Materials P64,000
Direct Labor 16,000
Variable Overhead 8,000
Fixed Overhead ?
The company can purchase the 1,000 units externally for P104,000. None of Almeda Company's fixed overhead costs can be reduced, but another product
could be made that would increase profit contribution by P16,000 if the components were acquired externally. If cost minimization is the major consideration
and the company would prefer to buy the components, what is the maximum external price that Almeda Company would be willing to accept to acquire the
1,000 units externally?
A. P 86,000. C. P 96,000.
B. P110,000. D. P104,000.
xxx. Alfaro's Manufacturing Company can make 100 units of a necessary component part with the following costs:
Direct Materials P80,000
Direct Labor 13,000
28
Incremental Analysis
On income
xxxii. Sylvan Processing Company is considering whether to make 2,000 units of product Whirl which costs P16 a unit or buy it from outside for P15 a unit. A
further analysis shows that if product Whirl is outsourced, fixed costs of P8,000 attributable to this product will be reduced by 25%.
If the product is outsourced, Sylvan will
A. Decrease profit by P2,000 C. Increase profit by P2,000
B. Decrease profit by P4,000 D. Increase profit by P4,000
xxxiii. Sylvan Processing Company is considering whether to make 2,000 units of product Whirl which costs P16 a unit or buy it from outside for P15 a unit. A
further analysis shows that if product Whirl is outsourced, fixed costs of P8,000 attributable to this product will be reduced by 25%. If Sylvan Processing
Company purchased the product Whirl, the space could be rented out for P6,000. If the product is outsourced, profit would
A. decrease, P2,000 C. increase, P2,000
29
Incremental Analysis
xxxiv. It costs P450,000 to make 15,000 units of a part in this plant. This cost includes material of P90,000, direct labor of P120,000, variable overhead of
P15,000, and P225,000 in fixed overhead inclusive of P45,000 in depreciation and common overhead allocation of P150,000. The balance is for the section
supervisor's salary. The part can be purchased for P20 a unit. If the part is purchased, the space released can be rented for P65,000. If the part is purchased,
the company will
A. lose P20,000 C. gain P20,000
B. lose P45,000 D. gain P45,000
xxxv. Lane Co. manufactures ballpoint pens. Another manufacturer has offered to supply Lane with the 5,000 ink cartridges that it needs annually. The cost to
buy the cartridges would be P15 each. In producing its own cartridges, Lane has incurred P10 in fixed costs and P8 in variable costs. If Lane buys the
cartridges, its net income will:
A. not change C. increase by P35,000
B. decrease by P35,000 D. increase by P25,000
xxxvi. The Rainbow Company manufactures Part No. 498 for use in its production cycle. The cost per unit if 20,000 units of Part No. 498 are manufactured are as
follows:
Direct materials P6
Direct labor 30
Variable overhead 12
Fixed overhead applied 16
Total unit cost P64
The Reeves Company has offered to sell 20,000 units of part No. 498 to Rainbow for P60 per unit. Rainbow will make the decision to buy the part from Reeves
if there is a savings of P25,000 for Rainbow. If Rainbow accepts Reeves‟s offer, P9 per unit of the fixed overhead applied would be totally eliminated.
Furthermore, Rainbow has determined that the released facilities could be used to save relevant costs in the manufacture of part No. 575. In order to have a
savings of P25,000, the amount of the relevant costs that would be saved by using the released facilities in the manufacture of Part No. 575 would have to be
A. P 80,000 C. P125,000
B. P 85,000 D. P140,000
xxxvii. Leis Manufacturing Co. uses 10 units of Part Number WS73 each month in the production of computer printer. The unit cost to manufacture one unit of
30
Incremental Analysis
xxxviii. The Rural Cooperative, Inc. produces 1,000 units of Part M per month. The total manufacturing costs of the part are as follows:
Direct materials P10,000
Direct labor 5,000
Variable overhead 5,000
Fixed overhead 30,000
Total manufacturing cost P50,000
An outside supplier has offered to supply the part at P30 per unit. It is estimated that 20% of the fixed overhead being assigned to Part M will no longer be
incurred if the company purchases the part from the outside supplier.
If Rural Cooperative purchases 1,000 units of Part M from the outside supplier, its monthly operating income will
A. decrease by P 4,000 C. increase by P 1,000
B. decrease by P20,000 D. increase by P20,000
xxxix. Migs Corporation currently manufactures all component parts used in the manufacture of various hand tools. A steel handle is used in three different tools.
The budgeted costs per unit based on 20,000 units are:
Direct material P6.00
Direct labor 4.00
31
Incremental Analysis
xl. The Minolta, Inc. produces 1,000 units of Part M per month. The total manufacturing costs of the part are as follows:
Direct materials P10,000
Direct labor 5,000
Variable overhead 5,000
Fixed overhead 30,000
Total manufacturing cost P50,000
An outside supplier has offered to supply the part at P30 per unit. It is estimated that 20% of the fixed overhead assigned to Part M will no longer be incurred if
the company purchases the part from the outside supplier.
If Minolta purchases 1,000 units of Part M from the outside supplier per month, then its monthly operating income will
A. decrease by P 4,000 C. increase by P 1,000
B. decrease by P20,000 D. increase by P20,000
xli. Bulacan Company manufactures part G for use in the production of its principal product. The costs per unit for 10,000 units of part G are as follows:
Direct materials P 3
Direct labor 15
Variable overhead 6
Fixed overhead 8
Total P32
Pampanga Company has offered to sell Bulacan 10,000 units of part G for P30 per unit. If Bulacan accepts Pampanga‟s offer, the released facilities could be
used to save P45,000 in relevant costs in the manufacture of part H. In addition, P5 per unit of the fixed overhead applied to part G would continue.
32
Incremental Analysis
xlii. Blade Division of Dana Company produces hardened steel blades. One-third of the Blades Division‟s output is sold to the Lawn Products Division of Dana; the
remainder is sold to outside customers. The Blade Division‟s estimated sales and standard costs data for the fiscal year ending June 30 are as follows:
Lawn Products Outsiders
Sales P15,000 P40,000
Variable costs (10,000) (20,000)
Fixed costs (3,000) (6,000)
Gross margin P 2,000 14,000
Unit sales 10,000 20,000
The Lawn Products Division has an opportunity to purchase 10,000 identical quality blades from an outside supplier at a cost of P1.25 per unit on a continuing
basis. Assume that the Blade Division cannot sell any additional products to outside customers.
Should Dana allow its Lawn Products Division to purchase the blades from the outside supplier, and why?
A. Yes, because buying the blades would save Dana Company P500.
B. No, because making the blades would save Dana Company P1,500.
C. Yes, because buying the blades would save Dana Company P2,500.
D. No, because making the blades would save Dana Company P2,500
xliii. The Connell Company uses 5,000 units of Part 501 each year. The cost of manufacturing one unit Part 501 at this volume is as follows:
Direct materials P2.50
Direct labor 3.50
Variable overhead 1.50
Fixed overhead 1.00
Total P8.50
An outside supplier has offered to sell Connell unlimited quantities of Part 501 at a unit cost of P7.75. If Connell accepts this offer, it can eliminate 50 percent of
the fixed costs assigned to part 501. Furthermore, the space devoted to the manufacture of Part 501 would be rented to another company for P6,000 per year.
If Connell accepts the offer of the outside supplier, annual profits will
33
Incremental Analysis
Profit maximization
Point of indifference
xlvi. Dipsum Soft Drinks makes three products: iced tea, soda, and lemonade. The following data are available:
Iced Tea Soda Lemonade
Sales price per unit P9.00 P6.00 P5.00
Variable cost per unit 3.00 1.50 1.00
34
Incremental Analysis
Optimal mix
xlvii. Product A sells for P12 per unit and its variable cost per unit is P10. Product B sells for P15 per unit and its variable cost per unit is P12. The plant capacity
is 350,000 machine hours and both products require one machine hour to manufacturer. Which of the following will provide the best sales mix of Product A and
Product B assuming the market limitation of Product A is 200,000 units and the market limitation of Product B is 250,000 units?
A. 250,000 units of Product A, 100,000 units of Product B
B. 50,000 units of Product A, 300,000 units of Product B
C. 100,000 units of Product A, 250,000 units of Product B
D. 150,000 units of Product A, 200,000 units of Product B
xlviii. The Hingis Corporation manufactures two products: X and Y. Contribution margin per unit is determined as follows:
Product X Product Y
Revenue P130 P80
Variable costs 70 P38
Contribution P 60 P42
margin
Total demand for X is 16,000 units and for Y is 8,000 units. Machine hour is a scarce resource. 42,000 machine hours are available during the year. Product
X requires 6 machine hours per unit while product Y requires 3 machine hours per unit.
How many units of X and Y should Hingis Corporation produce?
A. B. C. D.
Product X 16,000 8,000 7,000 3,000
35
Incremental Analysis
xlix. Mary Manufacturing has assembled the following data pertaining to two popular products.
Blender Electric
mixer
Direct materials P 6 P11
Direct labor 4 9
Factory overhead @ P16 per hour 16 32
Cost if purchased from an outside 20 38
supplier
Annual demand (units) 20,000 28,000
Past experience has shown that the fixed manufacturing overhead component included in the cost per machine hour averages P10. Mary has a policy of filling
all sales orders, even if it means purchasing units from outside suppliers.
If 50,000 machine hours are available, and Mary Manufacturing desires to follow an optimal strategy, it should
A. produce 25,000 electric mixers, and purchase all other units as needed
B. produce 20,000 blenders and 15,000 electric mixers, and purchase all other units as needed
C. produce 20,000 blenders and purchase all other units as needed
D. produce 28,000 electric mixers and purchase all other units as needed
Decision
l. A company can sell all the units it can produce of either Product A or Product B but not both. Product A has a unit contribution margin of P36 and takes two
machine hours to make and Product B has a unit contribution margin of P45 and takes three machine hours to make. If there are 1,000 machine hours
available to manufacture a product, income will be
A. P3,000 more if Product A is made. C. P3,000 less if Product A is made.
B. P3,000 less if Product B is made. D. the same if either product is made.
li. The Baco Company produces three products with the following costs and selling prices:
A B C
Selling price per unit P16 P21 P21
Variable cost per unit 7 11 13
36
Incremental Analysis
lii. Scarce Company has been producing two types of bearings, Plastic and Metal, for its own use in the production of main products. The data regarding these
two bearings follow:
Plastic Metal
Machine hours required per 3.0 4.5
unit
Standard cost per unit
Prime costs P 8.00 P 9.00
Variable overhead* 3.00 4.00
Fixed overhead** 4.50 6.75
Total P15.50 P19.75
Scarce‟s annual requirements for these bearings is 7,000 units of Plastic and 11,000 units of Metal. Recently, Scarce‟s management decided to devote
additional machine hours to other product lines resulting to only 48,000 machine hours per year that can be dedicated to the production of the bearings. An
outside company has offered to sell Scarce the annual supply of the bearings at prices of P15.50 for Plastic and P17.50 for Metal. Scarce wants to schedule
the otherwise idle 48,000 machine hours to produce bearings so that the company can minimize its costs (maximize its net benefits).
Scarce Company will maximize its net benefits by purchasisng
A. 7,000 units of Plastic and manufacturing the remaining bearings.
B. 11,000 units of Metal and manufacturing 7,000 units of Plastic.
37
Incremental Analysis
liii. HILO Company manufactures electric carpentry tools. The production department had met all production requirements for the current month and has an
opportunity to produce additional units of product with its excess capacity. Unit selling prices and unit costs for three different drill models are as follows:
Home Deluxe Pro Model
Model Model
Selling price P58 P65 P80
Direct material 16 20 19
Direct labor (P10 per 10 15 20
hour)
Variable overhead 8 12 16
Fixed overhead 16 5 15
Variable overhead is applied on the basis of direct-labor pesos, while fixed overhead is applied on the basis of machine hours. There is sufficient demand for
the additional production of any model in the product line. If it has excess machine capacity but a limited amount of labor time, to which product or products
should HILO Company devote its excess production?
A. Home model C. Deluxe model
B. Pro Model D. Equally
liv. Product A sells for P12 per unit and its variable cost per unit is P10. Product B sells for P15 per unit and its variable cost per unit is P12. The plant capacity is
350,000 machine hours and Product A requires 48 minutes to complete while Product B requires 75 minutes. Which of the following will provide the best sales
mix of Product A and Product B assuming the market limitation of Product A is 200,000 units and the market limitation of Product B is 250,000 units?
A. 46,875 units of Product A, 250,000 units of Product B
B. 200,000 units of Product A, 152,000 units of Product B
C. 152,000 units of Product A, 200,000 units of Product B
D. 100,000 units of Product A, 250,000 units of Product B
lv. Dimasalang Company has only 25,000 hours of machine time each month to manufacture its two products. Product X has a contribution margin of P50 and
Product Y has a contribution margin of P64. Product X requires 5 machine hours and Product Y, 8 hours. If Dimasalang wants to dedicate 80% of its machine
time to the product that will provide the most income, it will have a total contribution margin of
38
Incremental Analysis
A. P250,000 C. P210,000
B. P240,000 D. P200,000
Sell-as-is-or-process-further
Minimum sales
lvi. Snow Clean Corporation produces cleaning compounds and solutions for industrial and household use. While most of its products are processed
independently, a few are related. Grit 337, a coarse cleaning powder with many industrial uses, costs P16 a pound to make and sells for P20 a pound. A small
portion of the annual production of this product is retained for further processing in the Mixing Department, where it is combined with several other ingredients
to form a paste, which is marketed as a silver polish selling for P40 per jar. This further processing requires ¼ pound of Grit 337 per jar. Costs of other
ingredients, labor, and variable overhead associated with this further processing amount to P25 per jar. Variable selling costs are P3 per jar. If the decision
were made to cease production of the silver polish, P56,000 of Mixing Department fixed costs could be avoided. Snow Clean has limited production capacity
for Grit 337, but unlimited demand for the cleaning powder.
What is the minimum number of jars of silver polish that would have to be sold to justify further processing of Grit 337.
A. 8,000 C. 7,000
B. 5,600 D. 4,667
Decision
lvii. Beal Company is starting business and is unsure of whether to sell its product assembled or unassembled. The unit cost of the unassembled product is P40
and Beal Company would sell it for P90. The cost to assemble the product is estimated at P18 per unit and Beal Company believes the market would support a
price of P116 on the assembled unit.
What is the correct decision using the sell or process further decision rule?
A. Sell before assembly, the company will be better off by P18 per unit.
B. Sell before assembly, the company will be better off by P26 per unit.
C. Process further, the company will be better off by P26 per unit.
D. Process further, the company will be better off by P8 per unit.
lviii. Sales of 25,000 units at P7.20 per unit are made monthly. The unit cost is P5.90. Incremental costs of P1.35 per unit to further process the units will result
in the 25,000 units being sold for P8.75 each. Which course of action should the company take?
A. Commit its resources to a different product
B. Sell the units at the current stage of completion
39
Incremental Analysis
lix. Aaron Company produces a product that can be sold for P250,000 at an intermediate stage. If Aaron finishes the product, they will incur P75,000 of additional
material costs and another P15,000 in labor and overhead costs. When finished, Aaron will be able to sell the product for P350,000.
Which of the following answers is correct?
A. Sell now
B. Finish the product because profits will increase by P25,000
C. Finish the product because profits will increase by P12,500
D. Finish the product because profits will increase by P10,000
Effect of decision
lx. Ottawa Corporation produces two products from a joint process. Information about the two joint products follows:
Product X Product Y
Anticipated production 2,000 lbs 4,000 lbs
Selling price per pound at split-off P30 P16
Additional processing costs/pound after P15 P30
split-off (all variable)
Selling price/pound after further P40 P50
processing
The joint cost is P85,000. Ottawa currently sells both products at the split-off point. If Ottawa makes decision which maximizes profit, its profit will increase by
A. P16,000 C. P 4,000
B. P50,000 D. P10,000
lxi. The cost to manufacture an unfinished unit is P40 (P30 variable and P10 fixed). The selling price per unit is P50. The company has unused production
capacity and has determined that units could be finished and sold for P65 with an increase in variable costs of 40%. What is the additional net income per unit
to be gained by finishing the unit?
A. P 3 C. P10
B. P15 D. P12
40
Incremental Analysis
Keep-or-drop decision
Analysis
lxiii. A company is deciding whether or not to eliminate a segment of its business. The segment generates total sales of P104,000, its direct expenses are
P22,000, and its indirect expenses are P26,000. Its cost of goods sold is P64,000. Six thousand pesos of the direct expenses and P8,000 of its indirect
expenses are avoidable expenses. Which of the following is not true?
A. This segment has a net loss of P8,000.
B. This segment's revenue is greater than its avoidable costs.
C. This segment is a good candidate for elimination.
D. This segment's avoidable costs are greater than unavoidable costs.
lxv. Mina Co. mines three products. Gold Ore sells for P1,000,000 per ton, variable costs are P600,000 per ton, and fixed mining costs are P6,000,000. The
segment margin for 2007 was P1,200,000. The management of Mina Co. was considering dropping the mining of Gold Ore. Only one-half of the fixed
41
Incremental Analysis
expenses are direct and would be eliminated if the segment was dropped. If Gold Ore were dropped, net income for Mina Co. would
A. Increase by P2,000,000 C. Decrease by P2,000,000
B. Increase by P1,200,000 D. Decrease by P1,200,000
lxvi. Agimat Company plans to discontinue a segment with a P32,000 segment margin. Common expenses allocated to the segment amounted to P45,000, of
which P20,000 cannot be eliminated if the segment were closed. The effect of closing down the segment on Agimat Company‟s before tax profit would be
A. P12,000 decrease C. P12,000 increase
B. P 7,000 decrease D. P 7,000 increase
Shutdown point
lxvii. Bulusan Company normally produces and sells 30,000 units of E14 each month. E14 is a small electrical relay used in the automotive industry as a
component part in various products. The selling price is P22 per unit, variable costs are P14 per unit, fixed manufacturing overhead costs total P150,000 per
month, and fixed selling costs total P30,000 per month.
Employment-contract strikes in the companies that purchase the bulk of the E14 have caused Bulusan Company‟s sales to temporarily drop to only 9,000 units
per month. Bulusan Company estimates that the strikes will last for about two months, after which time sales of E14 should return to normal. Due to the
current low level of sales, however, Bulusan Company is thinking about closing down its own plant during the two months that the strikes are on. If Bulusan
Company does close down its plant, it is estimated that fixed manufacturing overhead costs can be reduced to P105,000 per month and that fixed selling costs
can be reduced by 10%. Start-up costs at the end of the shutdown period would total P8,000. Since Bulusan Company uses just-in-time production method,
no inventories are on hand.
At what level of unit sales for the two-month period should Bulusan Company be indifferent between temporarily closing the plant or keeping it open?
A. 11,000 C. 10,000
B. 24,125 D. 8,000
Equipment replacement
lxviii. MNL Company has an opportunity to acquire a new machine to replace one of its present machines. The new machine would cost P90,000, have a 5-year
life and no estimated salvage value. Variable operating costs would be P100,000 per year. The present machine has a book value of P50,000 and a
remaining life of 5 years. Its disposal value now is P5,000, but it would be zero after 5 years. Variable operating costs would be P125,000 per year. Ignore
income taxes. Considering the 5 years in total, what would be the difference in profit before income taxes by acquiring the new machine as opposed to
42
Incremental Analysis
Lease
lxix. Darren Co. is considering disposing an equipment that costs P50,000 and has P40,000 of accumulated depreciation to date. Darren Co. can sell the
equipment through a broker for P25,000 less 5% commission. Alternatively, Minton Co. has offered to lease the equipment for five years for a total of P48,750.
Darren will incur repair, insurance, and property tax expenses estimated at P10,000. At lease-end, the equipment is expected to have no residual value. The
net differential income from the lease alternative is:
A. P15,000. C. P25,000.
B. P 5,000. D. P12,500.
Comprehensive
Questions 70 through 74 are based on the following information:
Adrenal Company has a single product called a CAD. The company normally produces and sells 60,000 CADS each year at a selling price of P32 per unit. The
company‟s unit costs at this level of activity are given below:
Direct materials P10.00
Direct labor 4.50
Variable manufacturing overhead 2.30
Fixed manufacturing overhead 5.00
Variable selling expenses 1.20
Fixed selling expenses 3.50
Total cost per unit P26.50
lxx. Assume that Adrenal Company has sufficient capacity to produce 90,000 CADS each year without any increase in fixed manufacturing overhead costs. The
company could increase its sales by 25% above the present 60,000 units each year if it were willing to increase the fixed selling expenses by P80,000. The
increase in income if the production is increased by 25% is
A. P130,000 C. P 25,000
B. P108,333 D. P 20,800
43
Incremental Analysis
lxxi. Assume again that Adrenal Company has sufficient capacity to produce 90,000 CADS each year. A customer in a foreign market wants to purchase 20,000
CADS. Import duties on the CADS would be P1.70 per unit, and costs for permits and licenses would be P9,000. The only selling costs that would be
associated with the order would be P3.20 per unit shipping cost. What is the break-even price on this order?
A. P23.35 C. P22.15
B. P28.65 D. P21.70
lxxii. The company has 1,000 CADS on hand that have some deformities and are therefore considered to be “seconds.” Due to the deformities, it will be
impossible to sell these units at the normal price through regular distribution channels. What unit cost figure is relevant for setting a minimum selling price?
A. P16.80 C. P 4.70
B. P18.00 D. P 1.20
lxxiii. Due to a strike in its supplier‟s plant, Adrenal Company is unable to purchase more material for the production of CADS. The strike is expected to last for
two months. Adrenal Company has enough material on hand to continue to operate at 30% of normal levels for the two months. If the plant were closed, fixed
overhead costs would continue at 60% of their normal level during the two-month period; the fixed selling costs would be reduced by 20% while the plant was
closed. How much is the advantage or disadvantage of closing the plant for the two-month period?
A. Disadvantage, P144,000 C. Disadvantage, P15,000
B. Advantage, P144,000 D. Advantage, P15,000
lxxiv. An outside manufacturer has offered to produce CADS for Adrenal Company and to ship them directly to Adrenal‟s customers. If Adrenal Company accepts
this offer, the facilities that it uses to produce CADS would be idle; however, fixed overhead costs would be reduced by 75% of their present level. Since the
outside manufacturer would pay for all the costs of shipping, the variable selling costs would be only two-thirds of their present amount. What is the unit cost
figure that is relevant for comparison to whatever quoted price is received from the outside manufacturer?
A. P20.95 C. P20.55
B. P21.35 D. P16.80
example, the average labor time per unit declines by 20 percent. Past experience indicates that learning tends to cease by the time 800 parts are produced.
Henderson‟s manufacturing costs for cylinders are as follows:
Direct labor P120.00 per hour
Variable overhead 100.00 per direct labor hour
Fixed overhead 166.00 per direct labor hour
Direct material 40.50 per unit
Henderson has received a quote of P75 per unit from the Leyte Machine Company for the additional 750 cylinders needed. Henderson frequently subcontracts
this type of work and has always been satisfied with the quality of the units produced by Leyte. Recently, Henderson Equipment Company has been operating at
considerably less than full capacity.
lxxv. How many direct-labor hours are expected to be used for the production of 800 cylinders (including the pilot run)?
A. 93.4 hours C. 79.1 hours
B. 74.7 hours D. 67.6 hours
lxxvi. The production of 800 cylinders, including the pilot run, requires total incremental costs of:
A. P48,834 C. P68,452
B. P49,802 D. P52,948
lxxvii. The effect on profit of producing 750 units instead of buying them from Leyte Machine Company a(an)?
A. Increase of P 8,470. C. Increase of P12,676.
B. Increase of P 7,052. D. Decrease of P22,560.
CLASP‟s manufacturing manager identified the costs already incurred in the production of the special machinery for Tigok as follows:
45
Incremental Analysis
Another company, Kay Corporation, will buy the special machinery if it is reworked to Kay‟s specifications. CLASP offered to sell the reworked machinery to Kay
as a special order for P68,400. Kay agreed to pay the price when it takes delivery in two months. The additional identifiable costs to rework the machinery to
Kay‟s specifications are as follows:
A second alternative available to CLASP is to convert the special machinery to the standard model, which sells for P62,500. The additional identifiable costs for
this conversion are as follows:
A third alternative for CLASP is to sell the machine as is for a price of P52,000. However, the potential buyer of the unmodified machine does not want it for 60
days. This buyer has offered a P7,000 down payment, with the remainder due upon delivery.
1. The sales commission rate on sales of standard models is 2 percent, while the rate on special orders is 3 percent.
2. Normal credit terms for sales of standard models are 2/10, net/30. This means that a customer receives a 2 percent discount if payment is made within 10
46
Incremental Analysis
days, and payment is due no later than 30 days after billing. Most customers take the 2 percent discount. Credit terms for a special order are negotiated with
the customer.
3. The allocation rates for manufacturing overhead and fixed selling and administrative costs are as follows:
Manufacturing costs:
Variable 50% of direct-labor costs
Fixed 25% of direct-labor costs
Fixed selling and administrative costs 10% of the total manufacturing costs
lxxviii. How much peso contribution would the sale to Kay Corporation add to CLASP‟ before-tax profit?
A. P53,848 C. P55,900
B. P55,948 D. P 9,300
lxxix. How much peso contribution would the alternative of converting the special machinery to standard model add to CLASP‟s before-tax profit?
A. P52,200 C. P52,825
B. P54,475 D. P 7,650
lxxx. If Kay makes CLASP a counteroffer, what is the lowest price CLASP should accept for the reworked machinery from Kay?
A. P10,400 C. P10,722
B. P12,500 D. P12,887
lxxxi. How much would the alternative of selling unmodified machinery to the potential buyer contribute to CLASP‟s before-tax profit?
A. P50,440 C. P49,920
B. P 1,740 D. P49,400
47
Incremental Analysis
Constraint Company‟s management is planning its production schedule for the next few months. The planning is complicated, because there are labor shortages
in the community and some machines will be down several months for repairs.
Management has assembled the following information regarding available machine and labor time by department and the machine hours and direct-labors required
per unit of product. These data should be valid for the next six months.
DEPARTMENT
Monthly Capacity Available 1 2 3 4
Norman machine capacity in 3,500 3,500 3,000 3,500
MH
Capacity of machines being
repaired in machine hours ( 500) ( 400) ( 300) ( 200)
Available machine capacity in 3,000 3,100 2,700 3,300
MH
Available direct labor hours 3,700 4,500 2,750 2,600
(DLH)
48
Incremental Analysis
The sales department believes that the monthly demand for the next six months will be as follows:
Inventory levels are satisfactory and need not be increased or decreased during the next six months. Unit price and cost data that will be valid for the next six
months are as follows:
P R O D U C T S
401 403 405
Unit costs:
Direct material P 7 P 13 P 17
Direct labor
Department 1 12 6 12
Department 2 21 14 14
Department 3 24 -- 16
Department 4 9 18 9
Variable overhead 27 20 25
Fixed overhead 15 10 32
Variable selling expenses 3 2 4
Unit selling price P196 P123 P167
B. Department 2 D. Department 4
lxxxiii. The total Machine Hours required by estimated monthly unit sales are:
A. 10,600 C. 11,600
B. 12,100 D. 13,500
lxxxiv. The total number of labor hours as constraint for a month is:
A. 50 C. 300
B. 750 D. No constraint
lxxxv. In order to maximize its monthly profit, Constraint Company should produce:
A. B. C. D.
401 250 250 500 500
403 0 400 400 0
405 1,000 1,000 625 625
50
Incremental Analysis
The depreciation charges are for machines used in the respective product lines. The power charge is apportioned on the estimate of power consumed. The rent is
for the building space which has been leased for 10 years at P140,000 per year. The rent and heat and light are apportioned to the product lines based on amount
of floor space occupied. All other costs are current expenses identified with the product line incurring them.
A valued custom parts customer has asked Mr. Syjuco to manufacture 5,000 special units for him. Mr. Syjuco is working at capacity and would have to give up
some other business to take this business. He cannot renege on custom orders already agreed to but he could reduce the output of his standard product by about
one-half for one year while producing the specially requested custom part. The customer is willing to pay P140 for each part. The material cost will be about P40
per unit and the labor will be P72 per unit. Mr. Syjuco will have to spend P40,000 for a special device which will be discarded when the job is done.
lxxxvi. What is the incremental cost of the special order of 5,000 units?
A. P600,000 C. P779,000
B. P421,000 D. P371,000
lxxxviii. The amount of opportunity cost of taking the special order is:
A. P183,000 C. P250,000
B. P 71,000 D. P124,600
lxxxix. What is the effect on the overall profit if the special order is accepted?
A. P450,000 C. P( 25,000)
B. P( 85,000) D. P 29,000
51
Incremental Analysis
order to stabilize sales over the year. A natural area for the company to consider is the production of special lotion and cream to prevent dry and chapped skin.
After considerable research, a special product line has been developed. However, because of the conservatism of the company management, Verbatim‟s
president has decided to introduce only one of the new products for this coming rainy season. If the product is a success, further expansion will be initiated in
future years.
The product selected (called Chaps) is a lip balm that will be sold in a lipstick-type tube. The product will be sold to wholesalers in boxes of 24 tubes for P800 per
box. Because of available capacity, no additional fixed charges will be incurred to produce the product. However, a P10,000,000 fixed charge will be absorbed by
the new product to allocate a fair share of the company‟s present fixed costs to it.
Using the estimated sales and production of 100,000 boxes of Chaps as the standard volume, the accounting department has developed the following costs:
Verbatim has approached a cosmetics manufacturer to discuss the possibility of purchasing the tubes for Chaps. The purchase price of the empty tubes from the
cosmetics manufacturer would be P90 per 24 tubes. If the Verbatim Corporation accepts the purchase proposal, it is estimated that direct labor and variable
overhead costs would be reduced by 10% and direct material costs would be reduced by 20%.
xci. What is the material cost per box of Chaps saved by purchasing them?
A. P300 C. P 60
B. P240 D. P 30
xcii. How much would it cost Verbatim to produce the tubes per box?
52
Incremental Analysis
A. P 60 C. P 90
B. P 85 D. P120
xciii. How much would Verbatim incur by making 125,000 boxes, assuming that additional equipment, at an annual rental of P1,000,000, must be acquired to
produce this volume?
A. P10,625,000 C. P11,250,000
B. P11,625,000 D. P12,500,000
xciv. Referring to Question No. 93, what is the impact on its profit if Verbatim were to buy 125,000 boxes?
A. Additional profit of P1,000,000. C. Additional profit of P375,000.
B. Additional profit of P1,250,000. D. Decrease in profit of P625,000.
Unless otherwise stated, assume there is no connection between the situations described in the questions; each is to be treated independently. Unless otherwise
stated, a regular selling price of P7,400 per unit should be assumed. Ignore income taxes and other costs that are not mentioned in the cost schedule or in a
question itself.
53
Incremental Analysis
xcv. What is the monthly breakeven units for Medical Supply Company?
A. 2,000 C. 1,950
B. 2,689 D. 2,614
xcvi. Market research estimates that volume could be increased to 3,500 units, which is well within hoist production capacity limitations, if the price were ct from
P7,400 to P6,500 per unit. Assuming the cost behavior patterns implied by the data in the cost schedule is correct, would you recommend this action be
taken?
A. Yes, because the profit will increase by P1,500,000.
B. Yes, because the profit will increase by P 200,000.
C. No, because the profit will decrease by P1,200,000.
D. No, because the profit will decrease by P2,400,000.
xcvii. On March 1, a contract offer is made to Medical Supply Company by the Veterans‟ Hospital to supply 500 units for delivery by March 31. Because of an
unusually large number of rush orders form their regular customers. Medical Supply plans to produce 4,000 units during March, which will use all available
capacity. If the Veterans‟ Hospital‟s order is accepted, 500 units normally sold to regular customers would be lost to a competitor. The contract given by the
hospital would reimburse the Veterans‟ Hospital‟s share of March manufacturing costs, plus pay a fixed fee (profit) of P500,000. (There would be no variable
marketing costs incurred on the hospital‟s unit.) What impact would accepting the Veterans‟ Hospital contract have on March income?
A. P 1,100,000 C. P(1,350,000)
B. P( 850,000) D. P 500,000
xcviii. Medical Supply Company has an opportunity to enter a foreign market in which price competition is keen. An attraction of the foreign market is that demand
there is greatest when demand in the domestic market is quite low; thus idle production facilities could be used without affecting domestic business.
An order for 1,000 units is being sought at a below-normal price in order to enter this market. Shipping costs for this order will amount to P750 per unit, while
total costs of obtaining the contract (marketing costs) will be P40,000. No other variable marketing costs would be required on this order. Domestic business
would be unaffected by this order. What is the minimum unit price should Medical Supply Company consider for this order of 1,000 units?
A. P3,750 C. P3,790
B. P3,000 D. P4,290
xcix. An inventory of 230 units of an obsolete model of the hoist remains in the stockroom. These must be sold through regular channels at reduced prices, or
the inventory will soon be valueless. What is the minimum price that would be acceptable in selling these units?
54
Incremental Analysis
A. P3,500 C. P3,000
B. P4,200 D. P 500
c. A proposal is received from an outside contractor who will make and ship 1,000 hydraulic hoist units per month directly to Medical Supply‟s customers as
orders are received from Medical Supply‟s sales staff. Medical Supply‟s fixed marketing costs would be unaffected, but its variable marketing costs would be
cut by 20 percent for these 1,000 units produced by the contractor. Medical Supply‟s plant would operate at two thirds of its normal level, and total allocated
fixed manufacturing costs for these 1,000 units would be cut by 30 percent. What in-house unit cost should be used to compare with the quotation received
from the supplier?
A. P 3,760 C. P 4,240
B. P 3,000 D. P 3,460
ci. Assume the same facts as in requirement No. 101 except that the idle facilities would be used to produce 800 modified hydraulic hoists per month for us in
hospital operating rooms. These modified hoists could be sold for P9,000 each, while the costs of production would be P5,500 per unit variable manufacturing
expense. Variable marketing costs would be P1,000 per unit. Fixed marketing and manufacturing costs would be unchanged whether the original 3,000
regular units hoists were manufactured or the mix of 2,000 regular hoists plus 800 modified hoists were produced. What is the maximum purchase price per
unit that Medical Supply should be willing to pay the outside contractor?
A. P 5,100 C. P 5,500
B. P 3,100 D. P 5,600
Marcus has recently received a request to bid on the manufacture of 800,000 blankets scheduled for delivery to several military bases. The bid must be started at
full cost per unit plus a return on full cost of no more than 9 percent after income taxes. Full cost has been defined as including all variable costs of manufacturing
the product, a reasonable amount of fixed overhead, and reasonable incremental administrative costs associated with the manufacture and sale of the product.
The contractor has indicated that bids in excess of P25 per blankets are not likely to be considered.
In order to prepare the bid for the 800,000 blankets, Andrea Lighter, cost accountant, has gathered the following information about the cost associated with the
55
Incremental Analysis
cii. The minimum price per blanket that Marcus Fibers, Inc., could bid without reducing the company‟s net income is
A. P24.00 C. P50.25
B. P21.50 D. P40.25
ciii. Using the full-cost criteria and the maximum allowable return specified, Marcus Fibers‟ bid price per blanket would be:
A. P24.00 C. P26.00
B. P29.90 D. P27.90
ANSWER EXPLANATIONS
i. Answer: C
Cost of alternative selected P800,000
Cost of alternative rejected 650,000
Incremental cost P150,000
ii. Answer: A
The company needs to purchase 55,000 units earlier than their scheduled 5,000-unit monthly purchase. Hence, the average investment for the inventory is (55,000 x P60 ÷ 2) or P1,650,000. The
opportunity cost is P132,000 or (P1,650,000 x 0.08).
iii. Answer: A
56
Incremental Analysis
iv. Answer: B
The only relevant out-of pocket cost is the variable selling expense which is P40. The sale thru the regular channels involves an opportunity cost of P140.
Variable selling expense (40% x 100) 40
Opportunity cost 140
Total 180
v. Answer: C
Regular variable cost P8.00
Overtime premium 1.50
Relevant cost per unit P9.50
vi. Answer: B
Full cost 50.00
Fixed overhead (180,000/9,000) 20.00
Relevant unit cost 30.00
vii. Answer: C
Cost of 1,000 kg at latest price (1,000 x 8.70) 8,700
Add excess price include on the remaining 4,000 kg. 4,000 x (8.70 – 8.30) 1,600
Relevant cost 10,300
viii. Answer: B
Direct materials (2,000 @ 10) 20,000
Direct labor (2,000 @ 12) 24,000
Variable overhead (2,000 @ 6) 12,000
Increase in variable cost due to overtime (2,000 @ 14) 28,000
Incremental cost 84,000
ix. Answer: B
Variable costs P56,250
Additional fixed costs 13,750
Minimum bid price P70,000
x. Answer: B
Direct material (360,000 ÷ 24,000) P15.00
57
Incremental Analysis
xi. Answer: B
Relevant cost to make and sell:
Direct materials 39
Direct labor 6
Variable OH 8
Reduced selling expenses (30 x 0.06) 18
Add‟l fixed cost (20,000 † 5,000) 4
Minimum selling price 75
xii. Answer: B
The company has no existing capacity. The minimum selling price for this special sales should equal the regular selling price plus additional expenses.
Regular selling price P18
Additional expenses 1
Minimum selling price P19
xiii. Answer: A
Direct materials 20.00
Direct labor 15.00
Variable overhead 12.00
Variable shipping and handling 3.00
Lost contribution margin – LB46 (10,000 ÷ 1,000) 10.00
Minimum price 60.00
The lost contribution margin on regular sale is relevant because the company is operating at capacity. In a special sale wherein the company has to give up some of its regular units, the relevant costs
consist of incremental costs plus any opportunity costs.
xiv. Answer: D
Direct materials 4.50
Direct labor 10.00
Variable overhead 3.00
Variable selling expense 1.00
Additional profit (40,000/5,000) 8.00
Required selling price 26.50
58
Incremental Analysis
xv. Answer: C
The maximum number of units in regular sales that Benjing could afford to lose equals the quantity that provides regular contribution margin that matches the contribution margin provided by special sale.
Contribution margin from special sale 1,000 (14 – 8) 6,000
Divided by regularCM (20 – 8) ÷ 12
Maximum Number of units 500
xvi. Answer: B
The maximum decrease in regular sale = Contribution margin from special sale/Unit contribution margin on regular sale
(400 x 0.20) ÷ (2.00 -1.50) = 160
xvii. Answer: A
Total contribution margin from special sale(15,000 x P5.50) P82,500
Less Additional fixed costs 30,000
Profit from special sale P52,500
Less Decrease in contribution margin on regular
Sale 2,000(P39 – P22.50) 33,000
Additional profit P19,500
Please refer to Solution for Number regarding details of contribution margin per unit.
xviii. Answer: C
Selling price P6.00
Relevant cost per unit:
Regular cost per unit P7.50
Less: Commission P0.75
Fixed overhead (P3 x 2/3) 2.00 (2.75)
Net amount P4.75
Incremental fixed cost (P150 300) 0.50 5.25
Advantage per unit, Buy P0.75
Number of units 300
Increase in profit P 225
xix. Answer: D
Additional profit: 3,000 x (70 – 50) = 60,000
59
Incremental Analysis
xx. Answer: A
Special price 32
Relevant cost:
Direct materials 4
Direct labor 12
Variable overhead 6 22
Unit contribution margin 10
Units ordered 2,000
Additional profit 20,000
xxi. Answer: A
Sales 60,000
Less: Variable production cost (1,500 x 30) 45,000
Additional Fixed cost 5,000
Labeling cost (1,500 x 2.50) 3,750 53,750
Profit 6.250
xxii. Answer: B
The minimum selling price should equal the relevant cost to produce and sell a unit of product.
Direct materials P50
Direct labor 20
Variable overhead (P10 x 0.2) 2
Selling expense (P15 x 0.4) 6
Minimum selling price P78
xxiii.Answer: C
The company has no excess capacity to be devoted to the production of additional units for special sale. In a special sale decision where there is no excess capacity, the minimum selling price must be
equal to the market price less any avoidable expenses.
Selling price P100
Less Avoidable selling expense (P15 x 0.4) 6
Minimum selling price P 94
xxiv. Answer: D
The book value of the old equipment is a sunk cost and therefore not a relevant one. Also, the related cost on outstanding note are irrelevant. They are not affected by a decision.
xxv. Answer: D
Relevant Costs
Beta Zeta
60
Incremental Analysis
xxvi. Answer: C
Direct material 2.00
Direct labor 2.40
Variable overhead 1.60
Avoidable marketing cost (0.7 x 2.50) 1.75
Relevant cost Make 7.75
The maximum purchase price, if ever the company has to decide buying the product, is P6.75. Any amount higher than P6.75 will necessarily increase the unit cost of the product.
xxvii. Answer: B
Direct materials 64,000
Direct labor 16,000
Variable overhead 8,000
Avoidable fixed overhead 6,000
Total relevant cost to make 94,000
xxviii. Answer: D
Direct materials 64,000
Direct labor 16,000
Variable overhead 8,000
Additional contribution margin 16,000
Total relevant cost to make 104,000
xxix. Answer: B
Variable cost to make parts (30,000 x 12) 360,000
Cost buy (30,000 x 15) 450,000
Cost savings – “Make” decision 90,000
xxx. Answer: A
Direct materials 80,000
Direct labor 13,000
Variable overhead 40,000
Avoidable fixed overhead 4,000
Relevant cost – make 137,000
Purchase price 145,000
61
Incremental Analysis
xxxi. Answer: A
Direct materials 64,000
Direct labor 16,000
Variable overhead 8,000
Total variable cost 88,000
Less Purchase cost 104,000
Avoidable fixed cost 16,000
Add unavoidable FC 5,000
Total fixed overhead 21,000
xxxii. Answer: B
Purchase cost (2,000 x P15) P30,000
Relevant cost to make:
Variable cost (2,000 x P16) – 8,000 P24,000
Avoidable fixed cost (8,000 x 0.25) 2,000 26,000
Additional cost – Buy (Decrease in profit) P 4,000
xxxiii. Answer: C
Cost of purchase (2,000 x P15) P30,000
Relevant cost – make:
Variable cost (2,000 x P16) – P8,000 P24,000
Avoidable fixed cost (P8,000 x 0.25) 2,000
Opportunity cost – rent 6,000 32,000
Cost savings – Buy (increase in profit) P( 2,000)
xxxiv. Answer: C
Relevant costs to make
Direct materials P 90,000
Direct labor 120,000
Variable overhead 15,000
Supervisor‟s salary 30,000
Opportunity costs, rent 65,000
62
Incremental Analysis
Total 320,000
Relevant cost to buy (15,000 x P20) 300.000
Advantage - Buy P 20,000
If the company would purchase the units, it would save P20,000.
xxxv. Answer: B
Cost of ink cartridges (5,000 x P15) P75,000
Less: Relevant cost to produce (5,000 x P8) 40,000
Additional cost if ink cartridges are purchased P35,000
xxxvi. Answer: B
Direct material (20,000 @ 6) 120,000
Direct labor (20,000 @30) 600,000
Variable overhead (20,000 @ 120 240,000
Avoidable fixed cost (20,000 @ 9) 180,000
Total relevant costs - Make 1,140,000
xxxvii. Answer: A
Purchase price 15,000
Handling cost (20% x P15,000) 3,000
Total 18,000
Cost to make (21,200 – 8,000)* 13,200
Increase in unit cost if goods are purchased 4,800
xxxviii. Answer: A
Cost to make:
Direct materials P10,000
Direct labor 5,000
Variable overhead 5,000
Avoidable fixed OH (20% x 30,000) 6,000
Relevant cost P26,000
63
Incremental Analysis
xxxix. Answer: B
Relevant costs to make per unit:
Direct materials 6.00
Direct labor 4.00
Variable overhead 1.00
Relevant cost – “to make” 11.00
Purchase price per unit 12.50
Increase in per unit cost if purchased 1.50
xl. Answer: A
Direct materials 10,000
Direct labor 5,000
Variable overhead 5,000
Avoidable fixed overhead (30,000 x 0.2) 6,000
Total relevant cost 26,000
Purchase cost 30,000
Additional cost if purchased 4,000
xli. Answer: C
Direct materials 3.00
Direct labor 15.00
Variable overhead 6.00
Avoidable fixed cost 3.00
Total per unit 27.00
Number of unit x10,000
Total 270,000
Add savings from the manufacture of other product 45,000
Total relevant cost – make 315,000
Total purchase cost (10,000 x 30) 300,000
Advantage “Buy” 15,000
xlii. Answer: D
Though the problem deals with transfer of goods from one division to another division, the solution focuses on make on buy decision approach.
Purchase price, outside supplier 1.25
Variable cost to make (10,000 ÷ 10,000) 1.00
Additional unit cost to the company 0.25
64
Incremental Analysis
xliii. Answer: C
Total purchase cost (5,000 x 7.75) 38,750
Less Relevant cost to make
Direct materials @ 2.5 12,500
Direct labor @ 3.5 17,500
Variable overhead @ 1.5 7,500
Avoidable fixed cost @ 0.5 2,500
Opportunity cost 6,000 46,000
Net saving – purchase (7,250)
xliv. Answer: D
The solution is made in equation form, using y = a + bx for 2 alternatives:
Let x = indifference point in units
Make: y = 150,000 + 11x
Buy: y = 60,000 + 12.875x
150,000 + 11x = 60,000 + 12.875x
1.875x = 60,000
x = 48,000
xlv. Answer: C
Direct materials 80,000
Direct labor 13,000
Variable overhead 40,000
Avoidable fixed overhead 20,000
Total relevant cost 153,000
xlvi. Answer: B
Soda Lemomade
Selling price 6.00 5.00
Variable cost 1.50 1.00
Contribution margin 4.50 4.00
Processing hours 3 4
CM/Hr 1.50 1.00
For the Lemonade to be as profitable as Soda, its contribution margin per hour should be P1.50.
65
Incremental Analysis
Therefore the required selling price for Lemonade is P7, calculated as:
Contribution margin per unit (4 hours x P1.50) P6.00
Variable cost per unit 1.00
Selling price P7.00
xlvii.Answer: C
Product B has a greater contribution margin per unit (P15 - P12 = P3) than Product A (P12 - P10 = P2). The company should produce the maximum units it can sell of Product B (250,000) and use the
rest of the machine hour capacity to produce 100,000 units of Product A.
xlviii. Answer: D
Production order: Y, X
Product X: 60 ÷ 6 = 10
Product Y: 42 ÷ 3 = 14
Total capacity – MH 42,000
Machine hours devoted to Product Y (8,000 x 3) 24,000
Hours available to X 18,000
Production of X: 18,000 ÷ 6 = 3,000
xlix. Answer: B
Production order:
Blender Electric Mixer
Purchase price 20 38
Variable cost to make:
Direct materials 6 11
Direct materials 4 9
Overhead *(16 – 10) @ 6 12
Total ( 16) (32)
Additional cost if purchased 4 6
Additional cost per hour (Blender, 1 hr;
Mixer 2 hours) 4 3
Since it will cost Mary P4 per hour to buy Blender and only P3 if Electric Mixer is purchased, it will produce all of Blender‟s requirement and just purchase units of electric mixer that cannot be
accommodated by the remaining capacity.
Product:
Blender 20,000
Electric Mixer [50,000 – (20,000 @ 1)] ÷ 2 15,000
Purchase:
Electric Mixer (28,000 – 15,000) 13,000
66
Incremental Analysis
l. Answer: A
CM – Product A 36/2 x 1,000 18,000
CM – Product B 45/3 x 1,000 15,000
Difference in contribution margin 3,000
li. Answer: A
Based on DLH
Products UCM DLH/unit CM/DLH Priority
A 9 1.0 9.0 1ST
B 10 1.5 6.67 2nd
C 8 2.0 4.00 3rd
Based on MH
Products UCM MH/unit CM/MH Priority
A 9 4.5 2.0 3rd
B 10 2 5.0 1st
C 8 2.5 3.2 2nd
lii. Answer: D
Plastic Metal
RC – make 11.00 13.00
RC – Buy 15.50 17.50
Additional Cost-Buy 4.50 4.50
Hours required/unit ÷ 3 ÷ 4.5
Additional cost /hr. 1.50 1.0
Priority 1st 2nd
Capacity (machine hours) 48,000
MH used - Plastic (7,000 x 3) 21,000
Available MH to Metal 27,000
MH used - Metal (6,000 x 4.50) (27,000)
Purchase of Metal (11,000 – 6,000) 5,000
liii. Answer: A
Home Deluxe Pro
Selling price 58 65 80
Direct materials (16) (20) (19)
67
Incremental Analysis
liv. Answer: B
Unit contribution margin:
Product A P12 – P10 P2
Product B P15 – P12 P3
Product A has higher contribution margin per hour. The company should produce the maximum units it can sell of Product A and use the rest of the machine hour capacity to produce units of Product A in
order to maximize its profit.
lv. Answer: B
CM per hour:
Product X: 50/5 10
Product Y: 64/8 8
The 20,000 hours (0.8 x 25,000) will be devoted to the production of X.
Total contribution margin: (20,000 x 10) + (5,000 x 8) 240,000
lvi. Answer: A
Selling price per unit – silver polish P40
Less variable costs:
Grit 337 (P20 ÷ 4) P 5
Ingredients, direct labor and variable OH 25
68
Incremental Analysis
The solution used the selling price of P20 as cost of Grit337 because there was unlimited demand for the cleaning powder. If, however, the demand for the cleaning powder is limited, the recommended
solution would use P16 as the cost of Grit 337.
lvii. Answer: D
Increase in selling price 116 – 90 26
Additional processing cost 18
Addition profit per unit 8
lviii. Answer: C
Selling price after further processing P8.75
Selling price if not processed further 7.20
Additional sales per unit 1.55
Number of units 25,000
Additional total sales P38,750
Less additional processing costs 33,750
Increase in profit if the product is processed P 5,000
Because further processing will provide more profit per unit, the company should process further.
lix. Answer: D
Additional sales (350,000 – 250,000) P100,000
Additional costs (75,000 + 15,000) 90,000
Additional profit P 10,000
lx. Answer: A
X Y
Additional sales value 10 34
Additional processing costs 15 30
Incremental (decremental) profit per unit (5) 4
If Product Y is processed further, profit will increase by P16,000 (4,000 x 4).
lxi. Answer: A
Additional Sales Price (65 – 50) 15.00
69
Incremental Analysis
lxii. Answer: C
Product to be processed further: Prod M Prod N
Final selling price 31 23
Selling price at split-off point 25 19
Increase in selling price 6 4
Units 15,000 30,000
Total increase in sales 90,000 120,000
Additional processing costs 100,000 110,000
Increase (decrease) in profit (10,000) 10,000
lxiii. Answer: C
Revenues P104,000
Avoidable costs:
Cost of goods sold P 64,000
Avoidable expenses (P6,000 + P8,000) 14,000 78,000
Segment margin P 26,000
A segment is a potential candidate for elimination if its revenues are less than its avoidable costs. This is not the case for this segment. The company will lose P26,000 of income if this segment is
eliminated.
lxiv. Answer: A
Avoidable fixed cost (benefit) 210,000
Lost contribution margin 240,000
Decrease in profit 30,000
lxv. Answer: D
The question did not require any computation. If Mina Co. drops the Gold Ore, it will lose the segment margin of P1,200,000, a decrease in Mina Co.‟s income. The amount of direct fixed expenses that
would be eliminated were previously deducted from contribution margin, and therefore, not considered in the determination of the effect on income.
lxvi. Answer: B
Avoidable common expenses (45,000 – 20,000) P 25,000
Segment margin lost 32,000
Decrease in profit P (7,000)
lxvii.Answer: A
Avoidable fixed expenses:
70
Incremental Analysis
lxviii. Answer: D
Total Savings 5 year (125,000 – 100,000 ) 5 125,000
Less:
Additional depreciation (90,000 – 50,000) (40,000)
Loss on sale of old machine (5,000 – 50,000) (45,000)
Increase in profit 40,000
lxix. Answer: A
Lease arrangement:
Rental income (5 years) 48,000
Cost of repairs, insurance and property taxes 10,000
Net income 38,750
Sale arrangement:
Net proceeds (25,000 x 0.95) 23,750
Differential income –lease 15,000
lxx. Answer: A
Additional contribution (60,000 x 0.25 x 14) 210,000
Additional fixed selling costs 80,000
Additional profit 130,000
lxxi. Answer: C
Direct materials 10.00
71
Incremental Analysis
Import duties are assumed to be paid by Adrenal Company because of the nature of the sale.
lxxii.Answer: D
The relevant cost in selling the units on hand (inferior quality) is P1.20, the variable selling costs the production costs, though variable, are considered irrelevant because they are historical (sunk) costs.
lxxiii. Answer: C
Avoidable fixed costs:
Manufacturing (0.40 x 50,000) 20,000
Selling (35,000 x 0.20) 7,000
Total 27,000
Contribution margin if the company has to operate (60,000 ÷ 6 x 0.30 x 14) 42,000
Disadvantage, closing the plant (15,000)
lxxiv. Answer: A
Direct materials 10.00
Direct labor 4.50
Variable overhead 2.30
Avoidable fixed overhead (0.75 x 5) 3.75
Avoidable variable expense (1.20 x 1 ÷ 3) 0.40
Relevant cost – Make 20.95
lxxv. Answer: A
Batch (each 50 units) Cum Ave. Hrs
1 14.25
2 11.40
4 9.12
8 7.296
16 5.8368
72
Incremental Analysis
lxxvi. Answer: D
Materials (800 x 40.50) 32,400
Direct labor (93.40 x 120) 11,208
Variable OH (93.40 x 100) 9,340
Total 52,948
lxxvii. Answer: A
Production cost – 750 units:
Materials (750 x 40.00) 30,375
Direct labor (93.40 – 14.25) 120 9,498
VOH (93.40 – 14.25) 100 7,915
Total 47,780
Purchase cost (750 x 75)
Advantage – make 56,250
8,470
lxxviii. Answer: A
Sales price to Kay Corp. 68,400
Rework costs:
Direct materials 6,200
Direct labor 4,200
Variable OH (4200 x 50%) 2,100 (12,500)
Commission (68,400 x 0.03) ( 2,052)
Before – tax peso contribution 53.848
lxxix. Answer: A
Regular price 62,500
Deduct:
2% commission (62,500 x 0.02) 1,250
Sales discount (62,500 x 0.02) 1,250 2,500
Net price 60,000
Less additional conversion costs:
Direct materials 2,850
Direct labor 3,300
Variable OH - 50% 1,650 7,800
Net before – tax contribution 52,200
lxxx. Answer: D
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Incremental Analysis
lxxxi. Answer: A
Sales price 52,000
Less: Commission (52,200 x 0.03) 1,560
Net contribution 50,440
lxxxii. Answer: C
Department 3 has constraint in labor hours of 750.
Dept. 1 Dept. 2 Dept. 3 Dept. 4
Available DLH 3,700 4,500 2,750 2,600
DLH required
401 1,000 1,500 1,500 500
402 400 800 -- 800
403 2,000 2,000 2,000 1,000
Total 3,400 4,300 3,500 2,300
Excess 300 200 ( 750) 300
(Constraint)
lxxxiii. Answer: A
The available machine hours are sufficient to produce the estimated monthly sales. The schedule for monthly production should consider maximizing the use of available direct labor hours in Department
3 because it is the only one with constraint.
Dept. 1 Dept. 2 Dept. 3 Dept. 4
Available MH 3,000 3,100 2,700 3,300
MH required
401 500 500 1,000 1,000
402 400 400 -- 800
403 2,000 2,000 1,000 1,000
Total 2,900 2,900 2,000 2,800
Excess 100 200 700 500
(Constraint)
Total machine hours required by monthly unit sales: (2,900 + 2,900 + 2,000 + 2,800) 10,600
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Incremental Analysis
lxxxiv. Answer: B
The table showing the comparison of available hours and required hours to produce all the required units in number 82 indicated that Department 3 is short by 750 hours. Any excess direct labor hours in
the other departments cannot be switched to Department 3.
lxxxv. Answer: B
The production plan that will maximize monthly profit should be based on the profitability of the three products in terms of the use of direct labor hours in Department 3.
P R O D U C T S
401 403 405
Selling price per unit P196 P123 P167
Variable unit costs
Direct material 7 13 17
Direct labor 66 38 51
Variable overhead 27 20 25
Selling expenses 3 2 4
Total variable cost 103 73 97
Unit contribution margin P 93 P 50 P 70
No. of DLH required – Dept 3 - 2
3
Contribution margin per P 31 - P 35
DLH
Based on the above schedule, Product 405 is more profitable per hour than Product 401‟s and, therefore, all of the units required for Product 405 should be produced. Product 403 would not use any
direct labor hours in Department 3 and so all of the required units for Product 403 can be produced.
Production:
Product 401 250
Product 403 400
Product 405 1,000
Alternative Solution:
75
Incremental Analysis
Since Product 401 is the less profitable per DLH, Product 403 and 405 will be produced in full and Product 401 will be partially produced.
Alternative question: What is the maximum monthly contribution margin that Constraint Company can earn?
Product 401 250 @ P93 P 23,250
Product 403 400 @ P50 20,000
Product 405 1,000 @ P70 70,000
Total contribution margin P113,250
lxxxvi. Answer: B
Costs incurred to make the order:
Material (5,000 x 40) P200,000
Labor (5,000 x 72) 360,000
Incremental fixed cost (special device) 40,000
Costs to be incurred P600,000
The amounts for depreciation, rent, and heat and light are assumed to be not affected by the special order. There is no information provided as to how power cost was exactly incurred.
lxxxvii. Answer: D
Costs to be incurred for special order P600,000
Fixed costs:
Depreciation (0.5 x 72,000) P36,000
Power (0.5 x 8,000) 4,000
Rent (0.5 x 20,000) 10,000
Heat and Light (0.5 x 2,000) 1,000 51,000
Total cost P651,000
The amount of fixed costs allocated to special order would be the costs that should have been assigned to the standard sales that would be cancelled.
lxxxviii. Answer: B
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Incremental Analysis
lxxxix. Answer: D
Special sales (5,000 x 140) P700,000
Variable costs 600,000
Contribution margin from special sale 100,000
Less opportunity costs 71,000
Increase in profit P 29,000
xc. Answer: C
Total overhead rate per box P150
Less fixed overhead allocated per boxP10,000,000 ÷ 100,000 boxes 100
Variable overhead rate per box P 50
xci. Answer: C
The cost of materials saved by a decision of purchasing the tubes: is P300 x 0.20 = P 60
xcii. Answer: B
The relevant cost to make the tubes by Verbatim should equal the amount of cost savings as follows:
Savings on materials 0.2 x P300 P 60
Labor 0.1 x P200 20
Overhead 0.1 x P 50 5
Total savings (relevant cost) P 85
The maximum amount that Verbatim is willing to pay per box of 24 tubes must be P85.
xciii.Answer: B
Cost of making 125,000 boxes:
Variable costs 125,000 x 85 10,625,000
Additional fixed costs 1,000,000
Total 11,625,000
xciv. Answer: C
Total purchase cost 125,000 x 900 11,250,000
Total cost to make 125,000 x 85 11,625,000
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Incremental Analysis
xcv. Answer: A
Fixed costs:
Manufacturing 3,000 x 1,200 P3,600,000
Marketing 3,000 x 1,400 4,200,000
Total P7,800,000
xcvi. Answer: C
In as much that there would be no change in the amount of fixed costs, the recommended solution was made by just comparing the amounts of contribution margin based on the revised data and the
original information:
Alternative Solution:
Total contribution margin 3,000 x (7,400 – 3,500) 11,700,000
Less Fixed costs 7,800,000
Current profit 3,900,000
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Incremental Analysis
xcvii. Answer: B
Fixed fee P 500,000
Fixed overhead reimbursement 500 x 1,200 600,000
Total 1,100,000
Less lost contribution margin on regular customers (500 x 3,900) 1.950,000
Decrease in profit P( 850,000)
The reimbursement for fixed overhead is an income for Medical Hospital Company because the special order does not entail additional fixed overhead.
xcviii. Answer: C
Direct materials 1,000
Direct labor 1,500
Variable overhead 500
Shipping cost 750
Cost of obtaining the order 40,000 ÷ 1,000 40
Minimum selling price 3,790
xcix. Answer: D
All the production costs, both variable and fixed, are no longer relevant because they are sunk costs. To be relevant to a decision, the cost must be both valid and relevant. Therefore, the only relevant
cost is the variable marketing cost, because if the units will be sold through regular channel, P500 will be incurred.
c. Answer: D
The maximum price at which the price charged by the contractor would indifferent to the cost to make the hoist is the total differential cost or avoidable cost.
Direct materials 1,000
Direct labor 1,500
Variable overhead 500
Avoidable fixed overhead 1,200 x 0.30 360
Avoidable variable marketing cost 500 x 0.2 100
Maximum purchase price 3,460
ci. Answer: A
Direct materials 1,000
Direct labor 1,500
Variable overhead 500
Avoidable marketing costs 100
Opportunity cost [800 x (9,000 – 5,500 – 1,000)] ÷ 1,000 2,000
Maximum purchase price 5,100
A better understanding of the solution can be made by drawing a schedule to compute income for this alternative and compare it with the income shown in solution for Question No. 97 as follows:
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Incremental Analysis
Modified Regular
Sales 7,200,000 22,200,000
Variable production costs:
In house production
(2,000 x 3,000) 6,000,000
(800 x 5,500) 4,400,000
Contractor‟s cost 1,000 x 5,100 5,100,000
Variable marketing costs
Regular (2,000 x 500) + (1,000 x 400) 1,400,000
Modified (800 x 1,000) 800,000
Fixed costs . . 7,800,000
Profit 2,000,000 1,900,000
cii. Answer: A
Direct material (6 lbs. P1.50) P9.00
Direct labor (0.25 hr. P7) 1.75
Direct machine cost (P10/blanket) 10.00
Variable overhead (0.25 hr. P3) 0.75
Administrative costs (P2,500/1,000) 2.50
Minimum bid price P24.00
ciii. Answer: B
Using the full-cost criteria and the maximum allowable return specified, Marcus Fibers‟ bid price per blanket would be:
Relevant costs (from Requirement 1) P24.00
Fixed overhead (0.25 hr. P8) 2.00
Subtotal P26.00
Allowable return (0.15* P26) 3.90
Bid price P29.90
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