MANAGERIAL ACCOUNTING ASIACAREER COLLEGE/CPARCENTER

SHORT-TERM DECISION MAKING DWM.REYNO,CPA,DBA

68. tax mid The trophy received is exempt from taxation but the cash award is only exempt under special
circumstance. According to SEC. 32 of the Republic Act No. 8424, the cash price received by an
employee for an educational achievement is not reported in gross income. And thus, it is exempt from
taxation. The employee must be chosen for the reward without their consent.

ASSIGNMENT PROBLEMS
AP1 Osage Company is currently manufacturing Part Z43, producing 15,000 units annually. The part is used in the production of
several products made by Osage. The cost per unit for Z43 is as follows:

Direct materials P20.00

Direct labor 10.00
Variable 5.00
overhead
Fixed overhead 3.00
Total P38.00

Of the total fixed overhead assigned to Z43, P9,000 is direct fixed overhead (the annual lease cost of machinery used to manufacture
Part Z43), and the remainder is common fixed overhead. An outside supplier has offered to sell the part to Osage for P37. There is no
alternative use for the facilities currently used to produce the part. No significant nonunit-based overhead costs incurred.
Requirements:
1. Should Osage Company make or buy Part Z43?
2. What is the maximum amount per unit that Osage would be willing to pay to an outside supplier?

AP2 Bio Company produces chemicals for the swimming pool industry. In one joint process, 10,000 gallons of GSX are processed in
7,000 gallons of xenolite and 3,000 gallons of banolide. The cost of the joint process, including the GSX, is P19,000. The firm allocates
P13,300 of the joint cost the xenolite and P5,700 of the cost to the banolide. The 3,000 gallons of banolide can be sold at the split-off
point for P2,500, or be processed further into a product called kitrocide. The sales value of 3,000 gallons of kitrocide is P10,000, and
the additional processing cost is P8,100. Should the company sell banolide at split-off point or process it further?

AP3 Leland Manufacturing Company uses 10 units of part KJ37 each month in the production of radar equipment. The cost of
manufacturing one unit of KJ37 is the following:
Direct material P1,000
Material handling (20% of direct material cost) 200
Direct labor 8,000
Manufacturing overhead (150% of direct labor) 12,000
Total manufacturing cost P21,200

Material handling represents the direct variable costs of the Receiving Department that are applied to direct materials and
purchased components on the basis of their cost. This is a separate charge in addition manufacturing overhead. Leland’s annual
manufacturing overhead budget is one-third variable and two-third fixed. Scott Supply, one of Leland’s reliable vendors, has offered
to supply part number KJ37 at a unit price of P15,000.
Requirements:
1. If Leland purchases the KJ37 units from Scott, the capacity Leland used to manufacture these parts would be idle. Should Leland
decide to purchase the parts from Scott, the unit cost of KJ37 would increase or decrease by what amount?
2. Assume Leland Manufacturing is able to rent out all the idle capacity for P25,000 per month. If Leland decides to purchase the
10 units from Scott Supply, Leland’s monthly cost for KJ37 would increase or decrease by what amount?
3. Assume Leland Manufacturing does not wish to commit to a rental agreement but could use its idle capacity to manufacture
another product that would contribute P52,000 per month. If Leland elects to manufacture KJ37 in order to maintain quality
control, what is the net amount of Leland’s cost from using the space to manufacture part KJ37?

AP4 Star Sports, Inc., a manufacturer of premium boats, has just received an offer from a supplier to provide 500 units of a
component used in its main product. The component is currently produced internally. The supplier has offered P6,000 per unit.
Starflight is currently using a functional, unit-based costing system that assigns overhead to jobs on the basis of direct labor hours.
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MANAGERIAL ACCOUNTING ASIACAREER COLLEGE/CPARCENTER
SHORT-TERM DECISION MAKING DWM.REYNO,CPA,DBA

The estimated functional-based full cost of producing the wheel assembly is:
Direct materials P3,700
Direct labor 1,000
Variable overhead 500
Fixed overhead 2,000

Prior to making a decision, the company’s CEO commissioned a special study to see whether there would be any decrease in the
fixed overhead costs. The results of the study revealed the following:
1. 3 setups – P42,000 each (the setups would be avoided, and total spending could be reduced by P42,000 per setup).
2. One less inspector needed, P300,000.
3. One less material handler needed, P270,000.
4. Engineering work: 615 hours, P200/hr. (Although the work decreases by 615 hours, the engineer assigned to the assembly line
also spends time on other products.)

Requirements:
1. Ignore the special study, and determine whether the assembly should be produced internally or purchased from the supplier.
2. Using the special study data, repeat the analysis.
AP5 Barter Company manufactures three products: Alpha, Beta, and Charlie. The selling price, variable costs, and contribution
margin for one unit of each product follow:
Alpha Beta Charlie
Selling price P180 P27 P240
0
Less variable expenses
Direct materials 24 72 32
Other variable expenses 102 90 148
Total variable expenses 126 162 180
Contribution margin P 54 P10 P 60
8
Contribution margin ratio 30% 40% 25%

The same raw material is used in all three products. Barter Company has only 5,000 pounds of material on hand and will not be able
to obtain any more material for several weeks due to a strike in its supplier’s plant. Management is trying to decide which product(s)
to concentrate on next week in filling its backlog of orders. The material costs P8 per pound.

Requirements:
1. Compute the amount of contribution margin that will be obtained per pound of material used in each product.
2. Which orders would you recommend that the company work on next week – the orders for product Alpha, product Beta, or
product Charlie?
3. A foreign supplier could furnish Barter with additional stocks of the raw material at a substantial premium over the usual price.
If there is unfilled demand for all three products, what is the highest price that Barter should be willing to pay for an additional
pound of materials?

AP6 Wilderness Products makes outdoor shirts. Data relating to the coming year’s planned operations are as follows:

Sales (230,000 shirts) P4,140,000

Cost of goods sold 2,760,000
Gross profit P1,380,000
Selling and administrative expenses 805,000
Income P 575,000

The factory has capacity to make 250,000 shirts per year. Fixed costs included in cost of goods sold are P690,000. The only variable
selling, general, and administrative expenses are a 10% sales commission and a P1.50 per shirt licensing fee paid to the designer.

A chain store manager has approached the sales manager of Wilderness Products offering to buy 15,000 shirts at P15 per shirt.
These shirts would be sold in areas where Wilderness’ shirts are not now sold. The sales manager believes that accepting the offer
would result in a loss because the average total cost of a shirt is P15.50 ([2,760,000 + P805,000]/230,000). He feels that even though
sales commissions would not be paid on the order, a loss would still result.

Requirements:
1. Determine whether the company should accept the offer.
2. Suppose that the order was for 40,000 shirts instead of 15,000. What would be the company’s income be if it accepted the
order?

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MANAGERIAL ACCOUNTING ASIACAREER COLLEGE/CPARCENTER
SHORT-TERM DECISION MAKING DWM.REYNO,CPA,DBA
3. Assuming the same facts as in requirement 1, what is the lowest price that the company could accept and still earn P575,000?
4. How many units of sales at the regular price could the company loss before it become unprofitable to accept the order in
requirement 2?

AP7 Andretti Company has a single product called a Dak. The company normally produces and sells 60,000 Daks 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 (P300,000 total)
Variable selling expenses 1.20
Fixed selling expenses 3.50 (P210,000 total)
Total cost per unit P26.5
0

Requirements: A number of questions relating to the production and sale of Daks follow. Each question is independent.
1. Assume that Andretti Company has sufficient capacity to produce 90,000 Daks 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. Would the increased fixed expenses be justified?
2. Assume again that Andretti Company has sufficient capacity to produce 90,000 Daks each year. A customer in a foreign market
wants to purchase 20,000 Daks. Import duties on the Daks 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. You have been
asked by the president to compute the per unit break-even price on this order.
3. The company has 1,000 Daks on hand that have some irregularities and are therefore considered to be “seconds.” Due to the
irregularities, 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?
4. Due to a strike in its supplier’s plant, Andretti Company is unable to purchase more material for the production of Daks. The
strike is expected to last for two months. Andretti Company has enough material on hand to continue to operate at 30% of
normal levels for the two-month period. As an alternative, Andretti could close its plant down entirely 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. What would the peso advantage or disadvantage of closing
the plant for the two-month period?
5. An outside manufacturer has offered to produce Daks for Andretti Company and to ship them directly to Andretti’s customers. If
Andretti Company accepts this offer, the facilities that it uses to produce Daks 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. Compute the unit cost figure that is relevant for
comparison to whatever quoted price is received from the outside manufacturer.

AP8 Delta 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 60,000 units per year is:

Direct materials P5.10

Direct labor 3.80
Variable manufacturing overhead 1.00
Fixed manufacturing overhead 4.20
Variable selling and adm expense 1.50
Fixed selling and adm expense 2.40

The normal selling price is P21 per unit. The company’s capacity is 75,000 units per year. An order has been received from a mail-
order house for 15,000 units at a special price of P14 per unit. This order would not affect regular sales. If the order is accepted, by
how much will annual profits be increased or decreased?