RELEVANT COSTING

1. TOTAL ANALYSIS VS. DIFFERENTIAL ANALYSIS

Leviticus company has a single product called Palo. The company currently sells 8,000 units of Palo at
P40 per unit. The company’s costs at this level of activity are given below:

Variable costs P10

Direct labor 8
Variable overhead 5
Variable selling expense 2
Fixed overhead 50,000
Fixed selling expenses 30,000

Required:

1. What is Leviticus Company’s present profit?

2. Leviticus Company could increase its sales by 25% if it spends P20,000 for advertisements.
Determine the effect on company profit using:
a. Total analysis
b. Differential analysis

2. MAKE OR BUY (OUTSOURCING DECISION)

Numbers company is trying to decide whether it should continue to produce an engine component or
buy it from supplier for P2,200 each. Demand for the coming year is 20 units. The costs of producing a
single unit of the engine component are as follows:

Direct materials P1,000

Direct labor 800
Factory overhead (75% fixed) 1,000

If Numbers buys the components, the facility now used to make the components can be rented out to
another firm for P5,000.

Required:

1. Should Numbers make or buy the components?

2. How much is the difference between the cost of making or buying the components?

3. ACCEPT OR REJECT (SPECIAL ORDER DECISION)

Deuteronomy company produces a single product. The cost of producing and selling a single unit of this
product at the company’s normal activity level of 50,000 units per month is as follows:
 Direct materials P32.50 per unit
Direct labor 7.20 per unit
Variable manufacturing overhead 1.30 per unit
Fixed manufacturing overhead P1,045,000 per month
Variable selling and admin. exp. 1.90 per unit
Fixed selling and admin. exp. P365,000 per month

The regular selling price of the product is P75.00 per unit.

An order has been received from a customer for 3,000 units at a special discounter price of P65.60 per
unit. This order would have no effect on normal sales and would not change the total fixed costs. The
variable selling and administrative expense would be P0.30 less per unit on this order than on normal
sales.

Required: Should Deuteronomy accept or reject the special order? Explain.

4. TOTAL ANALYSIS VS. DIFFERENTIAL ANALYSIS

Gemini Company sells I-phone at a price of P28,000 per unit. The costs per unit are:

Direct materials P8,000

Direct labor 6,000
Variable overhead 4,000
Fixed overhead 2,000
Total P20,000

A special order 1,000 units was received from Exodus, a well-known cell phone dealer. Additional
shipping costs for this sale are P2,000 per unit.

Required:
What is the minimum selling price per unit for the special order if:
A. Gemini is operating at full capacity?
B. Gemini has excess capacity?

5. SHUTTING DOWN OPERATIONS

The most recent monthly income statement for Joshua store is given below:

A Branch B Branch TOTAL

Sales P1,200,000 P800,000 P2,000,000

Less: Variable expenses (840,000) (360,000) 1,200,000
Contribution margin P360,000 P440,000 P 800,000
Less: Traceable fixed expenses (210,000) (180,000) (390,000)
Segment margin P150,000 P260,000 P410,000
Less: Common fixed expenses (180,000) (120,000) (300,000)
Profit (Loss) (30,000) P140,000 P110,000

Joshua store considers eliminating A branch. If A branch were eliminated, then its traceable fixed
expenses could be avoided. The total common fixed expenses are merely allocated and would be
unaffected.

A. What will be the profit (loss) if A branch is eliminated?

B. Assume that if A branch is closed, 20% of its traceable fixed expense would continue unchanged.
Also, closing of A branch would result in a 20% decrease in sales of B branch. What will be the
overall decrease in profit?

6. PRODUCT ELIMINATION POINT

Judges company expects that sales will drop below the current level of 5,000 units per month. An
income statement prepared for the monthly sales of 5,000 units show the following:

Sales (5,000@ P3) P15,000

Less:
Variable costs (5,000@ P2) 10,000
Fixed costs 5,000
Profit/(loss) 0

If plant operations are suspended, a shutdown cost (i.e., plant maintenance and taxes) of P2,000 per
month will remain as incurred. Since there is no immediate possibility of profit under present conditions,
the problem of the company is just how to minimize the loss.

Required:

1. What is the shutdown point in units?

2. Should the company continue or shutdown operations if the company expects demand to be:
a. 4,000 units?
b. 2,000 units?

7. SELL OR PROCESS FURTHER

Ruth company produces four products for a joint cost of P10,000. The firm could sell the products at the
split-off point for the following amounts:

M – P15,000
I – 10,000
L – 2,000
O–0

At present, the products are processed beyond the split-off point and they are sold as follows:
 Products Sales Additional processing cost
M P40,000 P28,000
I 30,000 16,000
L 20,000 14,000
O 2,500 3,000

Required:

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

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

8. BEST PRODUCT COMBINATION

Samuel Co. Produces three products: A,B and C. One machine is used to produce the products. The
contribution margins, sales demands, and time on machine (in hours) are as follows:

Market limit Unit contribution margin Hours on machine

A 100 units P20 10 per unit

B 80 units P18 5 per unit
C 150 units P25 10 per unit

There are 2,400 hours available on the machine during the week. Total fixed cost is P5,000.

Required: How much is the profit associated with the best product combination?