PRACTICE PROBLEMS - Relevant Costing and Incremental Analysis

BSA-
Name: Jesseca Boter
2C

Differential cost per

30,000 units
1.) unit
    Make Buy Make Buy
Cost to buy (30,000 units x P210) ₱ 6,300,000 ₱ 210
Cost to make:  
Direct materials (30,000 units x P36) ₱ 1,080,000   ₱ 36
Direct Labor (30,000 units x P100) 3,000,000   100
Variable OH (30,000 units x P24) 720,000   24
Fixed OH (30,000 units x P90) 2,700,000   90  
Total Costs ₱ 7,500,000 ₱ 6,300,000 ₱ 250 ₱ 210

Make Buy
Total Cost ₱ 7,500,000 ₱ 6,300,000
Annual rental 800,000  
₱ 8,300,000 ₱ 6,300,000
 Financial advantage of accepting the outside supplier's
offer: P8,300,000 - P6,300,000 = P2,000,000

2.) Required:
1. If Dos buys its tubes from the outside supplier, how much of its own Chap-Off manufacturing
costs per box will it be able to avoid? (Hint: You need to separate the manufacturing overhead
of P 14.00 per box that is shown above into its variable and fixed components to derive the
correct answer.)
Total manufacturing OH ₱ 14.00
Less: Fixed manufacturing OH (P900,000/100,000) (9.00)
Variable manufacturing OH ₱ 5.00

Cost avoided by purchasing the tubes:

Direct materials (P36 x 25%) ₱ 9.00
Direct labor (P20 x 10%) 2.00
Variable manufacturing OH (P5 x 10%) 0.50
Avoidable manufacturing cost per box of Chap-Off ₱ 11.50

2. What is the financial advantage (disadvantage) per box of Chap-Off if Dos buys its tubes from
the outside supplier?
Avoidable manufacturing cost per box of Chap-Off ₱ 11.50
Less: Price paid to supplier (1.35)
Financial advantage per box of Chap-Off ₱ 10.15
3. What is the financial advantage (disadvantage) in total (not per box) if Dos buys 100,000
boxes of tubes from the outside supplier?
Number of boxes 100,000
Financial advantage per box of Chap-Off ₱ 10.15
Total financial advantage ₱ 1,015,000

4. Should Dos Industries make or buy the tubes?

 Dos Industries should buy the tubes because the avoidable manufacturing cost per
unit of P11.50 exceeds the price paid to the supplier of P1.35.