CPAR

CPA Review School of the Philippines

MANAGEMENT ADVISORY SERVICES

First Pre-board Examination - FEBRUARY 17 WED 9AM TO 12NN;
AND FEBRUARY 20, 2021 SAT 8AM TO 11AM

1. Management consulting (or management consultancy)

a. is limited to CPAs.
b. is not limited to CPAs.
c. may be practiced by anybody since it is not limited to CPAs.
d. is regulated by law, such that an individual must pass a government licensure
examination first before he could practice the same.

2. Some reasons for hiring management consultants are as follows, except

a. to help define specific problems and implement solutions.
b. to provide specialized skills and experience.
c. to provide confidential service in which the identity of the client is concealed.
d. to render an independent opinion.

3. Which of the following statements is incorrect?

a. Sufficient relevant data are to be obtained, documented, and evaluated in developing
conclusions and recommendations.
b. All significant matters relating to the results of the engagement are to be
communicated to the client.
c. Engagements are to be adequately planned, supervised, and controlled.
d. In performing MAS, a practitioner must act with maturity and objectivity and be
independent in mental attitude.

4. Inflation can have positive and negative effects on an economy. Positive effects of inflation
include
a. loss in stability in the real value of money and other monetary items over time.
b. uncertainty about future inflation may discourage investment and saving.
c. shortages of goods if consumers begin hoarding in anticipation of price increases in
the future.
d. mitigation of economic recessions and debt relief by reducing the real level of debt.

5. A deflationary spiral is a situation where

a. decreases in production lead to decreases in prices, which in turn lead to lower wages
and demand.
b. decreases in prices lead to lower production, which in turn leads to lower wages and
demand, which leads to further decreases in prices.
c. decreases in prices lead to higher production, which in turn leads to higher wages
and demand, which results into increases in prices.
d. increases in prices lead to a vicious cycle, and a problem exacerbates its own cause.

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6. Cov Manufacturing incurs annual fixed costs of P1,200,000 in producing and selling its
product. Estimated unit sales for next month is 17,500. An after-tax income of P28,000 is
desired by management for next month. The company projects its income tax rate at 30
percent. What selling price should be set for the product if the variable cost per unit is P5?
a. P75.86 c. P3.00
b. P13 d. P65.86
7. Manufacturing costs is synonymous with all of the following terms, except:
a. production cost c. product cost
b. period cost d. inventoriable cost

8. Vid Manufacturing formulates and sells three chemicals: C1, C2, and C3. It sells to industrial
users who use and buy these chemicals in the following ratio: 2 liters of C1 for each liter of
C3, and 3 liters of C2 for each liter of C1. The selling prices of C1, C2, and C3, respectively
are P50, P100, and P60. C1 has a profit volume ratio of 30%, C2 has a variable cost ratio
of 75%, and C3 has a contribution margin ratio of 60%. Total fixed costs amount to
P108,000.
How many units of C3 should be sold to breakeven?
a. 4,500 c. 1,000
b. 3,000 d. 500

9. Which of the following statements is correct?

a. A fixed cost is constant per unit of product.
b. Part of a cost such as factory depreciation can end up on the balance sheet as an
asset if goods are uncompleted or unsold at the end of the period.
c. The cost of goods manufactured is an expense in a manufacturing firm.
d. A supervisor’s salary would be considered direct labor if the supervisor works directly
in the factory.

10. The fixed and variable elements of a mixed cost can be expressed in a cost formula which
can be used to predict costs at other levels of activity within the relevant range. This formula
can be expressed as:
Y = a + bx
Where a is:
a. the vertical intercept c. the slope of the line
b. the independent variable d. the total mixed cost

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ITEMS 11 AND 12:

Following is a common size income statement of Rejie Company for the year just ended:

Sales 100%
Cost of sales:
Variable 50%
Fixed 10% 60%
Gross profit 40%
Operating expenses:
Variable 20%
Fixed 12% 32%
Operating income 8%

11. Total sales amounted to P6 million. What is the margin of safety ratio?
a. P1,600,000 c. 26.67%
b. 30% d. 73.33%

12. What is the degree of operating leverage?

a. P480,000 c. 2.75 times
b. 3.75 times d. many times

13. Toyoka Corporation employs 50 personnel to market its cars. The average selling price for
the cars is P800,000, and an 8% commission is paid to the salespersons. Toyoka is
considering changing the scheme to an arrangement that would pay each salesperson a
package of P49,920 assured salary plus a commission of 2% of the sales made by the
person.

The amount of total monthly car sales at which Toyoka Corporation would be indifferent as
to which plan to select is:
a. P40,000,000 c. P2,496,000
b. 50 cars d. P41,600,000

14. Which of the following is false?

a. The accountant assumes that the relationship between cost and activity is
approximately a straight line within the relevant range.
b. The high-low method is the least accurate method in analyzing mixed costs because
the high and low points may not be representative of costs throughout the entire
relevant range.
c. In all cases, a cost formula produced by the high low points method and a cost formula
produced in the least squares method would be the same within rounding error.
d. The scattergraph method is more accurate than the high low method since all the
observed data points can be taken into account when the straight line is drawn.

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15. Entertainment Company owns and operates a chain of movie theaters. Management is
considering to install machines that will make popcorn in the premises. This proposed
feature would be properly advertised and is intended to increase patronage at the
company’s theaters. These machines are available in two different models with the following
details:
Model 1 Model 2
Annual capacity in number of boxes 100,000 120,000
Costs:
Annual machine rental P100,000 P70,000
Cost of popcorn per box 1.30 1.30
Cost of each box 0.80 0.80
Other variable costs per box 1.10 1.40

The selling price per box would be the same regardless of the machine model to be used.

The level of output in boxes at which the two models would earn the same profit (loss) is:
a. 100,000 c. 120,000
b. 110,000 d. 0

ITEMS 16 TO 19:

Kwintas, Inc. produces and sells necklaces with a locket where you can put your picture as
well as “his/her” picture. Last year, the necklaces sold for P7,500 each, and the variable
cost to produce them were P2,250. The company needed to sell 2,000 units to breakeven.
The net income last year was P5,040,000.

For the coming year, the company expects the selling price to increase by P1,500, the
variable manufacturing cost per unit to increase by one-third, and the fixed costs to increase
by 10%.

16. How many units were sold last year?

a. P2,960 c. 2,960
b. 2,000 d. 672

17. What was last year’s margin of safety ratio?

a. 960 c. 67.57%
b. 70% d. 32.43%

18. What was last year’s degree of operating leverage?

a. 2.08 c. 32.4
b. 3.08 d. 4.4

19. For the coming year,

a. breakeven point will increase by 75 units
b. breakeven point will increase by P2,325,000
c. fixed cost will remain constant at P10,500,000
d. the contribution margin ratio would be higher than that of last year.

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20. Margin of safety

a. exists when the company’s sales exceed its breakeven sales.
b. may be expressed in terms of pesos, as a percentage of sales, and as a per unit
figure.
c. is equal to profit.
d. is the amount of sales which can still be reduced without resulting into a loss.

21. Cost-volume-profit analysis, particularly breakeven and target net profit analysis relies on a
number of assumptions, among which are as follows, except
a. costs can be divided into variable and fixed elements.
b. costs are linear.
c. the price of a product or service will change as the volume of units sales changes.
d. in multi-product situations, the sales mix is constant.

22. Josh, Inc. aims to earn a 30% return on its P1 million investment in equipment used in the
production of Product C. Based on estimated sales of 10,000 units of Product C next year,
the costs per unit were estimated as follows:

Variable manufacturing costs P50

Variable selling and administrative costs 25
Fixed manufacturing costs 10
Fixed selling and administrative costs 20

Product C should be priced at:

a. P135.50 c. P135
b. P300,105 d. P105

23. Simple regression differs from multiple regression in that

a. simple regression uses only one dependent variable and multiple regression uses
more than one dependent variables.
b. simple regression uses only one independent variable and multiple regression uses
more than one independent variables.
c. a multiple regression uses all available data to estimate the cost function whereas
simple regression uses only simple data.
d. simple regression is limited to the use of only the dependent variables and multiple
regression can use both dependent and independent variables.

24. Which of the following statements is false?

a. Businesses hire management consultants to help define specific problems and develop
solutions.
b. Included in the practice of consulting is the provision of confidential service in which
the identity of the client is concealed.
c. CPAs performing management advisory services may be considered to be in the
practice of management consulting.
d. CPAs provide management advisory services to go around the ethical constraints as
mandated by the Accountancy Act.

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25. When using the graph method, if unit outputs exceed the breakeven point
a. there is loss because the total cost line exceeds the total revenue line.
b. total sales exceed total costs
c. expenses are extremely high relative to revenues.
d. there is profit since the total cost line exceeds the total revenue line.

26. A flexible budget

a. is geared to a range of activities.
b. excludes fixed costs.
c. excludes variable costs.
d. is geared to any level of activity.

ITEMS 27 TO 29:

Tunog Pinoy, Inc., manufactures compact discs and currently sells 9,250 units annually to
producers of sound reproduction systems. Mr. Bing E, the owner, anticipates a 15% increase
in the cost per unit of direct labor at the beginning of next year. HE expects all other costs
and expenses to remain unchanged. The owner has asked you to assist him in developing
the information he needs to formulate a reasonable product strategy for next year.

You are satisfied that volume is the primary factor affecting costs and expenses and have
separated the semi-variable costs and expenses into their fixed and variable elements.
Beginning and ending inventories generally remain at a level of 1,000 units.

Below are the current year data assembled for your analysis:

Selling price per unit P200

Variable costs and expenses per unit:
Materials P60
Labor 40
Factory overhead and selling and
administrative expenses 20 120
Contribution margin per unit P 80

Fixed costs and expenses (factory and others) P400,000

27. What increase in the selling price is necessary to cover the 15% increase in direct labor and
still maintain the current contribution margin ratio?
a. P 30 c. P10
b. P210 d. P 6

28. How many compact discs must be sold to maintain the current operating income if the sales
price remains at P200 and the 15% wage increase goes into effect?
a. 8,600 c. 5,000
b. 10,000 d. 5,405

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29. The owner believes that an additional P600,000 of machinery (to be depreciated at 20%
annually) will increase present capacity of 10,000 units by 40%. If all compact discs
produced can be sold at the present size of P200 per unit and the wage increase goes into
effect, how would the estimated operating income before capacity is increased compare
with the estimated operating income after capacity is increased?
a. Income will remain the same.
b. Income will increase by P176,000.
c. Income will increase by P296,000.
d. Income will decrease by P120,000.

ITEMS 30 TO 32:

Mr. R. Montante is considering invsting in a vending machine operation involving 50 vending

machines located in various plants around the city. The machine manufacturer reports that
similar vending machine routes have produced a sales volume ranging from 500 to 1,000
units per machine per month. The following information is made available to Montante in
evaluating the possible profitability of the operation.

a. An investment of P25,000 will be required, P7,000 for merchandise and P18,000 for
the 50 machines.
b. The machines have a service life of five years and no salvage value at the end of that
period. Depreciation will be computed on the straight-line basis.
c. The merchandise (candy and soft drinks) retails for an average of 15 centavos per
unit and will cost Montante an average of 6 centavos per unit.
d. Owners of the buildings in which the machines are located are paid a commission of
3 centavos per unit of candy and soft drinks sold.
e. One man will be hired to service the machines. He will be paid P700 per month.
f. Other expenses are estimated at P200 per month. These expenses do not vary with
the number of units sold.

30. The estimated breakeven point in units per month is:

a. 75,000 c. 20,000
b. 10,000 d. 240,000

31. What sales volume per year will be necessary to produce a return of 12% before taxes to
Montante’s investment during his first year of operations?
a. 840,000 c. 24,167
b. 290,000 d. 125,000

32. Montante is considering offering the building owners a flat rental of P15 per machine per
month in lieu of the commission of 3 centavos per unit sold. What effect would this change
in commission have on his monthly breakeven volume in terms of units?
a. Breakeven point will increase by 1,667 units.
b. Breakeven point will decrease by 1,667 units.
c. Breakeven point will not change.
d. None of the above.

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33. Management accountants have a responsibility to

a. maintain an appropriate level of professional competence by ongoing development of
their knowledge and skills.
b. perform their professional duties in accordance with laws, regulations and technical
standards.
c. prepare complete and clear reports and recommendations after appropriate analyses
of relevant and reliable information.
d. all of the above.

34. Verfermin Company uses regression analysis to develop a cost formula for predicting
production costs. The company’s accountant is considering two different cost drivers (units
produced and direct labor hours) as the independent variable [x]. The analysis showed the
following results:
Independent Variable Y-intercept Slope (b) r r2
Units produced P30,000 10 0.85 0.72
Direct labor hours 50,000 20 0.95 0.90

Which cost formula should be used?

a. Cost = 30,000 + 10x c. Cost = 30,000 + 0.85x
b. Cost = 50,000 + 20x d. Cost = 50,000 + 18x

35. Which of the following statements is correct?

a. The accounting system is part of cost accounting that measures costs for decision-
making and financial reporting purposes.
b. Cost accumulation involves collecting costs by natural classification, such as materials
or labor.
c. Cost allocation or cost assignment involves tracing and assigning costs to cost drivers,
such as direct labor hours or number of units.
d. Cost and managerial accounting are goods in the economic sense and, as such, their
costs must exceed their benefits.

36. Evaluate whether the following statements are true or false:

I. Any activity that increases the cost of producing a product is a value-added activity.
II. ABC is particularly useful when overhead costs are an insignificant portion of total
costs.
III. ABC eliminates all arbitrary cost allocations.

A. B. C. D.
Statement I True False False True
Statement II False True False True
Statement III True False False True

37. Which of the following statements about activity-based costing is not true?
A. In activity-based costing, cost drivers are what cause costs to be incurred.
B. Activity-based costing is useful for allocating marketing and distribution costs.
C. Activity-based costing differs from traditional costing systems in that products are not
cross-subsidized.
D. Activity-based costing is more likely to result in major differences from traditional
costing systems if the firm manufactures only one product rather than multiple
products.

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38. GOTEN INC. makes a variety of backpacks. The activity centers and budgeted information
for factory overhead for the year are

Activity Center Overhead Costs Cost Driver Activity Center Rate

Materials Handling P 3,000,000 Weight of materials P 3.00 per pound
Cutting 13,000,000 Number of shapes P30.00 per shape
Assembly 46,000,000 Direct labor hours P120.00per labor hour
Sewing 12,000,000 Machine hoursP 80.00 per machine
hour

Two styles of backpacks were produced in December, the GOKU and the CHICHI. The
quantities and other operating data for the month are
GOKU CHICHI
Direct materials costs P150,000 P200,000
Direct labor cost P300,000 P 50,000
Direct materials weight in pounds 50,000 15,000
Number of shapes 35,000 15,000
Assembly direct labor hours 7,500 1,200
Sewing machine hours 12,500 1,800
Units produced 5,000 1,000

Using ABC, calculate the cost per unit for each backpack.
A. GOKU. P620; CHICHI. P783 C. GOKU, P783; CHICHI, P620
B. GOKU, P1,232; CHICHI, P1,240 D. GOKU, P710; CHICHI, P1,033

Use the following information in answering the next item(s): 39 TO 41

A company has identified the following overhead costs and cost drivers for the coming year.

Overhead Item Cost Driver Budgeted CostBudgeted Activity

Level
Machine setup No. of setups P 20,000 200
Inspection No. of inspections P130,000 6,500
Material handling No. of material moves P 80,000 8,000
Engineering Engineering hours P 50,000 1,000
P280,000
The following information was collected on three jobs that were completed during the year:

Job 101 Job 102 Job 103

Direct materials P5,000 P12,000 P8,000
Direct labor P2,000 P 2,000 P4,000
Units completed 100 50 200
Number of setups 1 2 4
Number of inspections 20 10 30
Number of material moves 30 10 50
Engineering hours 10 50 10

Budgeted direct labor cost was P100,000, and budgeted direct material cost was P280,000.

39. If the company uses activity-based costing, how much overhead cost should be allocable to
Job 101?
A. P1,300 C. P5,000
B. P2,000 D. P5,600

40. If the company uses activity-based costing, compute the cost of each unit of Job 102.
A. P340 C. P440
B. P392 D. P520

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41. The company prices its products at 140% of cost. If the company uses activity-based
costing, the price of each unit of Job 103 would be
A. P98 C. P116
B. P100 D. P140

Use the following information in answering the next item(s): 42 AND 43

ENCHANTRESS CORP. is applying overhead with direct labor hours as its basis. Four direct
labor hours are needed to produce one unit of finished goods. Planned production for the
period was set at 15,000 units. Budgeted manufacturing overhead amounted to P150,000
for the period, of which 40% of this cost is fixed. The 18,000 direct labor hours during the
period resulted in producing 10,000 units. For the current month, the company incurred
variable manufacturing overhead amounting to P65,000 and fixed manufacturing overhead
cost was P50,000.

42. How much is the total budget variance?

A. P165,000 F C. P5,000 UF
B. P165,000 UF D. P5,000 F

43. How much is the total spending variance?

A. P38,000 F C. P28,000 UF
B. P38,000 UF D. P 5,000 F

44. LESHRAC CORP. has provided the following information for its first year of operations:
Units sold 25,000 units
Units produced 30,000 units
Costs Incurred:
Direct materials 60,000
Direct labor 90,000
Variable factory overhead 30,000
Fixed factory overhead 210,000
Variable selling expense 40,000
Fixed selling expense 50,000
Variable administrative expense 20,000
Fixed administrative expense 15,000

How much is the total expense presented in income statement under absorption costing?
A. P450,000 C. P485,000
B. P500,000 D. P515,000

45. Generally, who shall be responsible for the following variances?

Materials Price Variance Material Usage Variance

A. Production Procurement
B. Procurement Procurement
C. Production Production
D. Procurement Production

46. BRISTLEBACK CORP. reported P70,000 of operating income for the year by using absorption
costing. The company had no beginning inventory, planned production is 10,000 units while
actual production of 8,000 units, and sales of 5,500 units. Standard variable manufacturing
costs were P15 per unit, and total budgeted fixed manufacturing overhead was P40,000.
All actual costs are equal to their budgeted costs, net income under variable costing would
be
A. P60,000 C. P52,000
B. P57,500 D. P49,500

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47. TINY INC. is famous for its rugby manufacturing. The main ingredient of its rugby is a
chemical material known as “RUGGIBEE”. This material is usually purchased on a 20-
gallon container costing P240 per container. TINY’s supplier usually offers a 5% for
payments within 15-day discount period. TINY takes all available discounts.
Transportation cost and freight cost amounts to P100 for an average shipment of 50
20-gallon containers of RUGGIBEE.

According to TINY’s bill of materials, each bottle of its rugby contains 9.2 quarts of
ruggibee (there are 4 quarts on each gallon). When ruggibee is boiled, about 8% of
the mixture is lost through evaporation and spillage. In addition, inspection reports
show the one out of six bottles rejected at final inspection due to instability of the
solution.

What is the direct material standard cost per unit of TINY’s rugby products?
A. P32.40 C. P36.00
B. P31.70 D. P34.50

48. A debit balance in direct labor efficiency variance may arise by utilizing more experienced
employees rather than inexperienced employees.

A credit balance in direct usage variance may arise from the taking advantage of supplier’s
discounts in purchasing materials.

A. True, false C. False, false

B. False, true D. True, true

Use the following information in answering the next item(s): 49 TO 51

DAZZLE INC. is a manufacturer of chocolates and uses two types of raw materials in the
production of its products. Materials X and Y have the following standards for a standard
yield of 5,000 units:

Material Standard Mix Standard Price

X 3,000 lbs. 2.00 per lbs.
Y 2,000 lbs. 1.00 per lbs.

During the current month, the following actual information was provided in relation to actual
production of 40,000 units:

Material Mix Price

X 25,000 lbs. 2.50 per lbs.
Y 20,000 lbs. 0.90 per lbs.

49. How much is the material price variance?

A. P14,500 UF C. P14,500 F
B. P10,500 UF D. P10,500 F

50. What is the materials mix variance?

A. P4,000 F C. P4,000 UF
B. P2,000 F D. P2,000 UF

51. What is the materials yield variance?

A. P8,000 UF C. P8,000 F
B. P6,000 UF D. P6,000 F

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52. Which one of the following statements is true regarding absorption costing and variable
costing?

I. Variable manufacturing costs are lower under variable costing.

II. If finished goods inventory increases, absorption costing results in higher income
A. I only C. Both I and II
B. II only D. Neither I nor II

53. If the company will use the costing required by generally accepted accounting principles:
A. Income fluctuates with sales.
B. Volume variance is not reported.
C. Cost of ending inventory is higher as well net income.
D. Costs are grouped according to either their function or nature.

Use the following information in answering the next item(s): 54 TO 56

PUGNA CORP. is a company specializing in manufacturing and selling customized and

specialized neck pillows. The selling price of each pillow is P750 per unit. On its first month
of operations, 3,500 units were produced where 2,500 units were sold. Actual fixed costs
are the same as budgeted fixed costs. The company is using a denominator level of activity
of 4,000 units. Information on its costs was as follows:

Variable costs:
Direct materials 500,000
Direct labor 600,000
Manufacturing overhead 300,000
Selling costs 200,000
Administrative costs 90,000

Fixed costs:
Selling costs 50,000
Administrative costs 250,000
Manufacturing overhead 400,000

54. If the company is using variable costing, how much is cost of goods sold and volume
variance, respectively?

A. P1,000,000; 50,000 F C. P1,000,000; 50,000 UF

B. P1,000,000; None D. None; None

55. If the company is using absorption costing, how much is net income or (loss) for the first
month of operations?

A. P 85,000 C. P 35,000
B. (P10,000) D. (P15,000)

56. If a company is using variable costing:

I. Product costs include variable administrative expense.
II. An idle facility variation is calculated.
A. I only C. Both I and II
B. II only D. Neither I nor II

57. Which of the following is among the least controllable variance?

A. Fixed overhead spending variance
B. Variable overhead efficiency variance
C. Fixed overhead volume variance
D. All of the choices

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58. Variable costing cannot be used:

A. for reporting of product lines for internal purposes.
B. GAAP costing
C. for break-even point computation
D. by companies with high fixed costs in relation to other costs.

59. The following information relates to the cost of making a component of PRODUCT MOBA
(based on 20,000 component units):

Direct material P15.00

Direct labor 4.00
Variable overhead 1.70
Fixed overhead* 6.00
*(2.00 allocated, 1.50 rent, 1.50 supervision, 1 depreciation)

Additional information:
• Currently, the company is buying from an outside supplier at P21 per unit.
• If the company will consider the alternative to make the component internally, it must
purchase a new equipment designed to make the component since the old equipment
is completely worn out. The equipment would reduce direct material and direct labor
cost by 30%. The cost of the equipment is P150,000 with a 5 year life depreciated
under straight-line method.

What is the number of component unit that will make the company indifferent on the two
alternatives?
A. 6,667 units C. 200,000 units
B. 15,000 units D. 10,000 units

60. In relation to relevant costing, determine the incorrect statement.

A. Opportunity cost is a relevant cost but unrecorded on the books of accounts.
B. Avoidable cost is a cost that cannot be incurred if an activity is suspended, thus,
relevant cost.
C. If there is no market limitation in a product mix decision, the whole scarce resource
shall be allocated to the product with the highest contribution margin per scarce
resource in order to maximize net benefits.
D. In an accept or reject a special order decision, if the company has an excess capacity
but not enough to cater the special order, lost units from regular sales is equal to the
number of units of the special order.

61. A company is within plant capacity. It is contemplating whether a special order should be
accepted. The order will not impact regular sales. If the company accepts the special order,
what will occur?
A. Incremental costs will not be affected.
B. Net income will increase if the special sales price per unit exceeds the unit
variable costs.
C. There are no incremental revenues.
D. Both fixed and variable costs will increase.

62. The term "opportunity cost" is best defined as:

A. the amount of money paid for an item.
B. the amount of money paid for an item, taking inflation into account.
C. the amount of money paid for an item, taking possible discounts into account.
D. the benefit associated with a rejected alternative when making a choice.
E. an irrelevant decision factor.

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63. Which of the following is NOT relevant in a make-or-buy decision about a part the entity
uses in some of its products?
A. The reliability of the outside supplier.
B. The alternative uses of owned equipment used to make the part.
C. The outside supplier's per-unit variable cost to make the part.
D. The number of units of the part needed each period.

64. A product should be dropped if

A. it has a negative incremental profit.
B. it has a negative contribution margin.
C. dropping it will increase the total profit of the company.
D. it is not essential to the company's product line.

65. MASAYA CORP. has P200,000 of joint processing costs and is studying whether to process
J and K beyond the split-off point. Information about J and K follows.
Product J Product K
Tons produced 25,000 15,000
Separable variable processing costs beyond split-off P64,000 P100,000
Selling price per ton at split-off 15 52
Selling price per ton after additional processing 21 58

If MASAYA desires to maximize total company income, what should the firm do with regard
to Products J and K?
Product J Product K
A. Sell at split-off Sell at split-off
B. Sell at split-off Process beyond split-off
C. Process beyond split-off Sell at split-off
D. Process beyond split-off Process beyond split-off
E. There is not enough information to judge.

66. LBJ CORP. currently sells 1,000 units of product M for P1 each. Variable costs are P0.40 and
avoidable fixed costs are P400. A discount store has offered P0.80 per unit for 400 units of
product M. The managers believe that if they accept the special order, they will lose some
sales at the regular price. Determine the number of units they could lose before the order
became unprofitable.
A. 267 units C. 600 units
B. 500 units D. Some other number.

67. LAKERS CORP. expects to incur the following costs at the planned production level of 10,000
units:

Direct Materials P100,000

Direct Labor 120,000
Variable Overhead 60,000
Fixed Overhead 30,000

The selling price is P50 per unit. The company currently operates at full capacity of 10,000
units. Capacity can be increased to 13,000 units by operating overtime. Variable costs
increase by P14 per unit for overtime production. Fixed overhead costs remain unchanged
when overtime operations occur. LAKERS has received a special order from a wholesaler
who has offered to buy 1,000 units at P45 each. What is the incremental cost associated
with this special order?

A. P14,000 C. P42,000
B. P28,000 D. P45,000

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First Pre-board Examination - FEBRUARY 17 AND 20, 2021

68. P Co. has only 25,000 hours of machine time each month to manufacture its two products.
Product X has a contribution margin of P50, and Product Y has a contribution margin of
P64. Product X requires 5 hours of machine time, and Product Y requires 8 hours of machine
time. If P wants to dedicate 80 percent of its machine time to the product that will provide
the most income, P will have a total contribution margin of

A. P250,000. C. P210,000.
B. P240,000. D. P200,000.

69. LOLITA MANUFACTURING CORP. produces car lubricant used by most car manufacturing
companies. The following information was obtained from its internal reporting system from
the previous year:

Sales (24,000 units) P720,000

Variable cost 432,000
Contribution margin 288,000
Fixed costs:
Manufacturing 120,000
Non-manufacturing 60,000
Operating income 108,000

It has come to the attention of LOLITA that labor strikes are happening to car manufacturers
due to the request of the labor union for wage increase. This situation heavily affected the
monthly sales of LOLITA for 2 months. Labor strikes caused the monthly sales of LOLITA to
temporarily decrease to only 20% of its normal monthly volume. Due to this drastic drop,
LOLITA’s management is considering to shut down operations. If that happens,
manufacturing fixed costs will decrease by 50% and non-manufacturing fixed costs will
decrease to 40%. Start-up costs at the end of the shut-down period would total P5,000.
What is point where the decision to either shut-down or continue operations will be
indifferent?

A. 8,417 units C. 1,333 units

B. 1,583 units D. 1,750 units

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First Pre-board Examination - FEBRUARY 17 AND 20, 2021

70. JOY CORP. manufactures and sells a product, Product J. Results for last year for the
manufacture and sale of Product J are as follows:

Sales--10,000 units at P160 each P1,600,000

Less costs:
Variable production costs 960,000
Sales commissions--15% of sales 240,000
Salaries of line supervisors 195,000
Traceable fixed advertising expense 180,000
Fixed general factory overhead (allocated to products on the basis
of square feet occupied) .. 170,000
Total costs 1,745,000
Net loss P (145,000)

JOY CORP. anticipates no change in the operating result for Product J in the foreseeable
future if the product is produced. JOY is re-examining all of its products and is trying to
decide whether to discontinue the manufacture and sale of Product J. The company's total
fixed factory overhead cost would not be affected by this decision.

Assume that discontinuing Product J would result in a P30,000 increase in the contribution
margin of other product lines. If JOY chooses to discontinue Product J, then the change in
net income next year due to this action will be a:

A. P145,000 increase. C. P5,000 increase.

B. P145,000 decrease. D. P120,000 increase.

- END OF EXAMINATION -

- END -

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