Problem 1. Calla Company produces skateboards that sell for P50 per unit.

The company
currently has the capacity to produce 90,000 skateboards per year, but is selling 80,000
skateboards per year. Annual costs for 80,000 skateboards follow.

Direct Materials P 800,000

Direct Labor 640,000
Overhead 960,000
Selling expenses 560,000
Administrative expenses 480,000
Total costs and expenses P3,440,000

A new retail store has offered to buy 10,000 of its skateboards for P45 per unit. The store is in a
different market from Calla's regular customers and it would not affect regular sales. A study of
its costs in anticipation of this additional business reveals the following:

 Direct materials and direct labor are 100% variable.

 Thirty percent of overhead is fixed at any production level from 80,000 units to 90,000
units; the remaining 70% of annual overhead costs are variable with respect to volume.
 Selling expenses are 60% variable with respect to number of units sold, and the other
40% of selling expenses are fixed.
 There will be an additional P2 per unit selling expense for this order.
 Administrative expenses would increase by a P1,000 fixed amount.

REQUIRED:

1. Should the company accept this special order? (Yes. 12.3 cm/unit if accepted)
2. Assume that the new customer wants to buy 15,000 units instead of 10,000 units-it will only
buy 15,000 units or none and will not take a partial order. How does this change your answer for
part 2? (Yes, P88,000 incremental profit)

Problem 2. (Outsourcing) Fiber Technologies manufactures fiberglass housings for portable

generators. One part of a housing is a metal latch. Currently, the company produces the 120,000
metal latch units required annually. Company management is considering purchasing the latch
from an external vendor. The following data are available for making the decision:

Cost per Unit to Manufacture

Direct material P1.60
Direct labor 1.36
Variable overhead 0.72
Fixed overhead-applied 1.12
Total cost P4.80
Cost per Unit to Purchase
Purchase price P3.92
Freight charges 0.08
Total cost P4.00

REQUIRED:

1. Assuming that all of Fibre Technologies' internal production costs are avoidable if the
company purchases rather than makes the latch, what would be the net annual cost advantage to
purchasing the latches? (96,000)
2. Assume that some of Fibre Technologies' fixed overhead costs could not be avoided if it
purchases rather than makes the latches. How much of the fixed overhead must be avoidable for
the company to be indifferent as to making or buying the latches? (Avoidable FOH = P.32)

Problem 3. Sherwood Company is currently manufacturing part Z911, producing 40,000 units
annually. The part is used in the production of several products made by Sherwood. The cost per
unit for Z911 is as follows:
Direct materials P 9.00
Direct labor 3.00
Variable overhead 2.50
 Fixed overhead 4.00
Total P18.50

Of the total fixed overhead assigned to Z911, P88,000 is direct fixed overhead (the lease of
production machinery and salary of a production line supervisor-neither of which will be needed
if the line is dropped). The remaining fixed overhead is common fixed overhead. An outside
supplier has offered to sell the part to Sherwood for P16. There is no alternative use for the
facilities currently used to produce the part.

REQUIRED:

1. Should Sherwood Company make or buy part Z911? (Buy 16 vs 16.7)

2. What is the most Sherwood would be willing to pay an outside supplier? (16.7)
3. If Sherwood bought the part, by how much would income increase or decrease? (28,000
increase)
4. Now suppose that all of the fixed overhead is common fixed overhead. – not avoidable
a. Should Sherwood Company make or buy part Z911? (Make 16 vs 14.5)
b. What is the most Sherwood would be willing to pay an outside supplier? (14.5)
c. If Sherwood bought the part, by how much would income increase or decrease? (60,000
decrease)

Problem 4. Operations of Borderland Oil Drilling Services are separated into two geographical
divisions: United States and Mexico. The operating results of each division for 2016 are as
follows:

United States Mexico Total

Sales P7,200,000 P3,600,000 P10,800,000
Variable costs (4,740,000) (2,088,000) (6,828,000)
Contribution margin P2,460,000 P1,512,000 P 3,972,000
Direct fixed costs (800,000) (490,000) (1,290,000)
Segment margin P1,660,000 P1,022,000 P 2,682,000
Corporate fixed costs (1,900,000) (890,000) (2,790,000)
Operating income (loss) P (240,000) P 132,000 P (108,000)

Corporate fixed costs are allocated to the divisions based on relative sales. Assume that all of a
division's direct fixed costs could be avoided by eliminating that division. Because the U.S.
division is operating at a loss, Borderland's president is considering eliminating it.

REQUIRED:

1. If the U.S. division had been eliminated at the beginning of the year, what would have been
Borderland's pre-tax income? (P1,768,000 loss)
2. Recast the income statements into a more meaningful format than the one given. Why would
total corporate operating results change from the P108,000 loss to the results determined in part
(a)?

Problem 5. AB Manufacturing can produce either of two products, Product A and Product B,
with its existing machinery. Making either product requires the use of grinding machines. AB
has 10 grinding machines, each of which can be operated 200 hours per month.

Following are the comparative per-unit data for the two products:

Product A Product B
Selling price P11.00 P17.50
Variable cost P 7.00 P10.00
Grinding time, hours 2 2.5

REQUIRED:

1. If AB can sell as many units of either product as it can make with its limited supply of
grinding machines, which product should AB make and what will AB's total contribution margin
be per month if it makes that product? (Product B; P6,000 cm)
2. The selling price of Product B has only recently risen to P17.50. AB's managers now estimate
that the maximum sales volume of B at that price is 9,000 units per year. They also believe that
at the P11 price, they can sell all of Product A they can make. How should AB use its grinding
machine capacity over the coming year? (That is, how many of each product should AB
produce?) (A =750; B= 9,000)

Problem 6. CONTINUE OR SHUT DOWN OPERATIONS.

Beng Company produces burglar alarms. The company's normal capacity is 20,000 units per
year. It produces and sells 20,000 units each year at a selling price of P60 per unit. The
company's unit costs at this level of activity are given below:

Direct materials P 15.00

Direct labor 16.00
Variable overhead 4.60
Fixed overhead 10.00
Variable selling expenses 2.40
Fixed selling expenses 8.00
Total P56.00

One of the materials used in the production of burglar alarms is obtained from a foreign supplier.
Civil unrest in the supplier's country has caused a cut-off in material shipments that is expected
to last for six months. Beng Company has enough of the material on hand to continue to operate
at 40% of normal levels for the six-month period. As an alternative, the company could close the
plant down entirely for six months. Closing the plant would reduce fixed overhead costs by 80%
during the six-month period; the fixed selling costs would continue at 60% of their normal level
while the plant was closed. However, additional shut-down costs of P9,000 would be incurred
during the shut-down period for security and maintenance.

REQUIRED:

1. What would be the peso advantage or disadvantage of closing the during the six-month
period? (15,000 ADVANTAGE)
2. Compute the shutdown point in units. (11681.82)