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Problem 1

Covid Company is considering replacing its old equipment. Relevant data are given below:

Old Equipment New Equipment

Purchase cost P120,000 P150,000
Accumulated depreciation 70,000 ----
Current salvage value 10,000 ----
Salvage value for 5 years ---- ----
Estimated annual operating costs 90,000 60,000
Remaining useful life 6 years 6 years

REQUIRED:
1. How much is the sunk cost in this decision-making? _______________
2. Should Covid Company retain or replace its old equipment? __________
3. What is the opportunity cost of the better alternative? ______________

Problem 2

The manufacturing capacity of Vaccine Company’s facilities is 50,000 units of product per year. A summary
of operating results for the year ended December 31, 2019 is as follows:

Total Per Unit

Sales (38,000 units) P3,800,000 P100.00
Less: Variable costs and expenses 2,090,000 55.00
Contribution margin 1,710,000 45.00
Less: Fixed costs and expenses 900,000
Operating income P 810,000

Sinovac, a distributor company has offered to buy 12,000 units of P90.00 per unit during 2020. Assume that
all the corporation’s costs would be at the same levels and rates in 2020 as to 2019.

REQUIRED:

1. Assuming the corporation has no alternative use of the idle capacity, should Vaccine accept
or reject the special sales order from Sinovac? _________ Why? (Show supporting amounts)

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2. If the special order is accepted, 2,000 units of regular sales is expected to be lost, should
Vaccine accept or reject the special sales order? _______ Why? (Show supporting amounts)
3. Assuming that a distributor has ordered, 16,000 units and the corporation has to sacrifice
some of its regular customers to accommodate the special order, should Vaccine Company
accept or reject the special sales order? ________ Why? (Show supporting amounts)

Problem 3

Farmer Corporation produces three products at segregation point, Kah, Mooh, Tey. These products could
be processed further then later sold at a higher sales value. The total joint costs in manufacturing these
three products were P3,000,000. The data below were made available by the accounting and production
personnel:
Kah Mooh Tey
Production and sales 10,000 units 40,000 units 50,000 units
Unit sales price at split-off point P80 P100 P200
Unit sales price after further processing 90 120 230
Unit variable costs of subsequent processing 8 18 27

If product Kah is process further, an equipment should be rented at cost of P12,000. To process further
product Mooh, an outside contractor will be engaged for an amount of P90,000 because the company has
no available space and manpower for its subsequent processing. Product Tey could be subsequently
processed by using idle machine and manpower time within the company. The total setup cost of
subsequent processing product Tey is P120,000.

REQUIRED:
1. Which product should be processed further to maximize profit? ________ (Show amounts)

2. To maximize profit, what is the minimum sales price for product Kah that should be set after
it is processed further?___________

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