Chapter 8 – Accounting Information and Short-Term Decision-Making

1. In a decision-making case, which of the following costs is generally not relevant to

the decision?
a. Avoidable cost c. Opportunity cost
b. Historical cost d. Differential cost

2. In a decision-making case, which of the following costs is not likely to contain a

relevant cost competent?
a. Labor cost
b. Selling cost
c. Depreciation cost of an existing asset
d. Factory overhead cost

3. Opportunity cost is an important concept in decision-making. This may be described

as
a. The difference in total costs between two choices.
b. The contribution to income that is forgone by not using limited resources in its
best alternative use.
c. A cost that may arise in the future
d. A cost that has already been incurred

4. Which of the following must be considered in determining the relevance of a

particular cost to a decision?
a. Verifiability and accuracy of the cost
b. Potential effect of the cost on the decision
c. Amount of cost
d. Riskiness of the decision

5. Which of the following statements about relevant or differential cost analysis is

correct?
a. All variable costs are relevant.
b. All fixed costs are irrelevant.
c. All variable and fixed costs to be incurred are considered as they change with
each decision alternative.
d. All future costs are relevant.

ITEMS 6 to 9 ARE BASED ON THE FOLLOWING INFORMATION:

Miss Mickey Reyes, a graduate of Cebu University, is going to Manila to review for the
CPA Board Examination. She is considering to stay in a dormitory that is just a stone’s
throw away from the review school during her 5-month stay in Manila. Her aunt,
however, is offering her a room in her house which is about three (3) kilometers away
from the school. She told her aunt that she would first conduct differential analysis
before making her decision on where to stay. She listed the following costs and cost
estimates:
 If she will stay in
Her Aunt’s House A Dormitory
Plane ticket: Cebu-Manila-Cebu P 8,000 P 8,000
Tuition fee (1) 1,000 1,000
Board and lodging fee - 25,000
Share in food and household expenses 10,000 -
Transportation
(Aunt’s house-school-Aunt’s house) 1,700 -
Snacks, etc., while in school 4,000 4,000
Books used in college to be used
during the review 10,000 10,000
New review books to be purchased 2,000 2,000
Clothes to be brought to Manila 6,000 6,000
Personal supplies while in Manila (2) 400 2,000
Other expenses
(for contingencies, gimmicks, etc., ) 3,000 5,000

(1) Being an honor graduate, Mickey has to pay the miscellaneous fee of only P 1,000
for the whole review term.
(2) Her Aunt will shoulder some her personal supplies if she will stay in her (Aunt’s)
house.

Mickey is currently working as an accounting clerk in a Cebu-based firm, earning P

8,000 per month. She could have stayed in Cebu and continue working, but she
wants to review in Manila and fulfill her dream of becoming a CPA.

She informed her boss of her decision to review in Manila. She filed a five-month
study leave (without pay) which her boss approved.

6. If the alternatives are whether to stay in her Aunt’s house or in a dormitory, the
relevant costs are:
Aunt’s house Dormitory
a. P 15,100 P 32,000
b. 46,100 63,000
c. 55,000 16,000
d. 16,000 55,000

7. What is the opportunity cost of reviewing in Manila?

a. P 40,000 c. P 16,900

b. P 8,000 d. zero

8. Mickey will incur some future costs during her stay in Manila. Such items, although
future costs, are considered irrelevant because they do not differ under the
alternatives. The total amount of such irrelevant future costs is
a. P 16,000. c. P 55,000.
 b. P 46,100. d. P 63,000.

9. Included in Mickey’s list are some costs which are considered irrelevant because
they have already been incurred in the past. These costs are called past costs, sunk
costs, or historical costs, and amount to

a. P 16,000. c. P 55,000.

b. P 47,100. d. P 64,000.

ITEMS 10 and 11 ARE BASED ON THE FOLLOWING INFORMATION:

Ramos Corporation, a manufacturer of light bulbs, budgeted sales of 500,000 units

of light bulbs at P100 per unit for the year 200A. Variable manufacturing costs was
budgeted at P40 per unit and fixed manufacturing costs at P25 per unit.

A special order offering to buy 50,000 units of light bulbs for P58 each was received
by Ramos Corporation in March 200A. Ramos Corp. has sufficient plant capacity to
produce the additional units of light bulbs. However, overtime work has to be done at
an additional cost of P8 per unit. No selling expenses would be incurred for this
special order.

10. Should Ramos Corporation accept the special order, assuming that it would not
affect regular sales?
a. Yes, because operating income would increase to P 500,000.
b. Yes, because operating income would increase by P 500,000.
c. No, because the special price of P58 is much lower than the regular price of
P100.
d. No, because the special price of P58 is lower than the full cost of P65.

11. Assume that the available (excess) capacity for the special order is only 30,000
units, and that if the 50,000 units being ordered is accepted, Ramos Corporation
would reduce its sales to the regular customers. Should the corporation accept the
order?
a. Yes, because operating income would increase by P 500,000.
b. Yes, because operating income would increase by P 2, 500,000.
c. No, because operating income would decrease by P 700,000.
d. No, because operating income would decrease by P 2,100,000.

12. Given for Owen Company are the following information:

Regular production and sales per year 60,000 units
Total fixed costs P 756,000
Total variable costs P 528,000
One-time-only special order received 12,000 units
Regular selling price per unit P20
Special selling price per unit P10
 What is the incremental cost per unit of the special order?
a. P 18.40 c. P 10.00

b. P 9.60 d. P 8.80

ITEMS 13 to 15 ARE BASED ON THE FOLLOWING INFORMATION:

Alex Company is a manufacturer of electronic switches. One of their

products, “Sensory Switch,” is used as a component of most electrical
appliances.

Sensory Switch has the following financial data per unit:

Selling price P180

Variable costs: Materials P24

Labor 18
Factory Overhead 15
Shipping and handling 3 P 60

Fixed costs: Factory overhead P36

Selling and Administrative 14 50

Total P110

During the month, Alex has received a special, one-time order for 1,500 units of
Sensory Switch.

13. Assuming that the company has excess capacity that is enough to produce this
special order without affecting sales to regular customers, and the company wants to
improve its profitability, the price that is acceptable for this special, one-time order is
in excess of
a. P180. c. P60.
b. P110. d. P50.

14. Assume that Alex is operating at full capacity and that it does not want to incur a loss
from this order, the minimum acceptable price is

a. P180. c. P60.

b. P110. d. P50.

15. Assume that the excess capacity available for the special order is only 1,000 units,
so that if the order were accepted, Alex would have to reduce sales to regular
customers. What is the minimum price for this special order?
a. P180. c. P60.
b. P110. d. P100.
16. Bautista Corporation, presently operating at 90% of capacity, has been offered a new
order at a special price at P7.90 per unit, requiring 25% of capacity. At present, there
is no other use for the idle capacity of 10%, but if the special order were accepted,
the additional 15% capacity required shall be subcontracted at a cost of P8.00 per
unit, that is, P0.50 more than the company’s variable manufacturing cost. Should the
special order be accepted?
a. Yes, because the special order has a positive contribution margin of P0.10
per unit.
b. Yes, because the special order has a positive contribution margin of P0.15
per unit.
c. No, because the special price of P7.90 is lower than the subcontracting cost
ofP8.00.
d. No, because the special order cannot be produced entirely using the
company’s plant capacity.

17. Faith Corporation has considerable excess capacity. During the month, it received a
special order at a price much lower than its regular price. The special order’s cost
sheet shows the following:
Materials P 8,000
Labor 12,000
Applied factory overhead costs: Variable 35,000
Fixed 20,000

The applied fixed factory overhead cost includes an allocated P 5,000 for in-house
design costs, although no in-house design cost will be done for the special order.
Instead, the job will require the use of external designers for which the company will
incur P 7,000.

What is the total amount to be included in the calculation to determine the minimum
acceptable price for the special order?

a. P 62,000 c. P 77,000

b. P 55,000 d. P 57,000

18. Production of a special order will increase the company’s profit if the incremental
revenue from the special order is greater than the
a. fixed costs incurred in producing the special order.
b. direct materials and labor costs in producing the order.
c. relevant costs of producing and selling the order, including any opportunity
cost to be incurred if the order is accepted.
d. indirect costs of producing the order.

19. A company is considering to accept a special order which will enable it to use its
currently idle capacity. It wants to conduct a differential cost analysis so it could set
the special price for the order.
 In its cost analysis, which of the following should not be included?
a. Variable overhead c. Direct materials
b. Direct labor d. Depreciation

20. In determining the lowest price that can be quoted for a special order that will use
idle capacity within a production area, the best cost allocation method to use is
a. process costing. c. absorption costing.
b. job order costing. d. variable costing.

21. Sandy Corporation produces a product that is sold for P80 each. It uses an
absorption costing system. Plant capacity is 700,000 units per year, but normal
volume is only 500,000 units. Costs per unit at normal volume are as follows:
Materials P20
Labor 10
Factory overhead 24
Selling and administrative 15
Total costs P69

Annual fixed costs are:

Factory overhead P 5,000,000

Selling and administrative 3,000,000

Total costs P 8,000,000

During the month, a customer has offered to buy 80,000 units at P60 per unit. Per the
customer’s specifications, the products will not be packed individually. Instead, they will
be packaged in large cartons, to be picked up by the customer using its own truck. Thus,
variable selling and administrative costs will be reduced by 1/3. No additional fixed costs
will be incurred for this order.

Assuming that the regular and special markets can be distinguished, the company
should

a. reject order because total profit will decrease by P 1,600,000.

b. accept the order because, although it will result into a loss, it will enable the
company to use its idle capacity.
c. reject order because total profit will decrease by P 720,000.
d. accept the order because it will contribute additional profit of P 800,000.

22. In a make or buy decision analysis, the cost to buy is compared with the
a. total cost to make. c. variable manufacturing costs.

b. relevant cost to make d. cost to purchase

23. In a make or buy decision analysis, which of the following qualitative factors is/are
usually considered?
a. Assurance of quality control
b. Skilled labor
c. Special technology
d. All of the above

24. Which of the following statements about a make-or-buy decision analysis is not
correct?
a. Available resources should be used as efficiently as possible before
outsourcing.
b. The analysis should involve available costs only.
c. If the total relevant cost of production is less than the cost to buy the item, it
should be produced in-house.
d. The decision depends on whether the company is operating at or below the
normal capacity.

25. Which of the following qualitative factors favors the buy choice in a make-or-buy
decision?
a. Quality control is critical.
b. There is available idle capacity.
c. The cost to buy is less than the relevant cost to make.
d. The maintenance of long-run relationship with suppliers is desirable.

26. Arian Corporation manufactures a component part with the following standard costs:
Direct materials P6
Direct labor 15
Factory overhead 60
Standard cost per unit P81

Factory overhead is applied at P2 per standard direct labor hour. Thirty percent (30%) of
the applied FOH cost is fixed and is not affected by any make-or-buy decision.

The component part can be purchased from outside suppliers at P73 per unit.

In the decision to “make or buy,” what is the total relevant unit manufacturing cost?

a. P81 c. P73

b. P63 d. P39

27. Abbie Company produces and sells a product with the following unit costs:
Prime costs P10
Variable indirect manufacturing costs 6
Fixed indirect manufacturing costs 4
Variable marketing costs 8
Fixed marketing costs 3
Total unit cost P31
The company is considering whether to continue producing the product or simply buy it
from an outside supplier. It has found a supplier which can produce the product per the
company’s specifications.

If the company buys the product, variable marketing costs would be reduced by 60%,
but fixed marketing costs would remain the same. What is the maximum unit price that
the company would be willing to pay the supplier without decreasing its operating
income?

a. P20.80 c. P31

b. P19.20 d. P24

28. Reggie Corporation produces a subassembly that is used to manufacture one of its
products. The monthly requirement for the subassembly is 10,000 units, presently
produced at P40 per unit, broken down as follows:

Direct materials P10

Conversion costs (20% fixed) 30
Full cost per unit P40

A supplier has offered to sell 10,000 units per month of the subassembly to Reggie
Corporation for P36 per unit. If Reggie Corporation accepts the offer, the facilities
currently being used to manufacture the subassembly can be rented to another company
for P 30,000 per month and 2/3 of the fixed conversion cost could be avoided.

If the objective is to improve the company’s overall profitability, it should

a. buy the subassembly because the purchase price of P36 is less than the full
production cost of P40 per unit.
b. continue making the subassembly because the purchase price of P36 is greater
than the variable cost of P34 per unit.
c. not buy the subassembly because the relevant cost to make is greater than the
net purchase cost.
d. buy the subassembly because this decision would result in additional income of
P 50,000.

ITEMS 29 and 30 ARE BASED ON THE FOLLOWING INFORMATION:

Songer Sewing Machines uses one unit of a component part, the Foot Pedal, for
each unit of its product. The cost to produce a unit of Foot Pedal is as follows:
Direct Materials P500
Materials handling 50
Direct labor 950
Factory overhead 1,900
Total cost per unit P 3,400
 Materials handling costs is applied based on the cost of materials and purchased
components.
Factory overhead is applied based on direct labor cost. Sixty percent (60%) of the
applied factory overhead cost is fixed. Songer is considering to outsource for Foot
Pedal. A supplier, Padyak Corp. a manufacturer of Foot Pedals, has offered to supply
the part to Songer at a price of P2, 200. Songer’s average requirement for Foot
Pedals per month is 500 units. Accordingly, Padyak can meet this requirement
should Songer decide to outsource this component part.

29. Assume that should Songer outsource the Foot Pedal, the facilities used to produce
this component part would just remain idle. Which alternative (outsource or insource)
is more advantageous and by how much?
a. Outsource, P 30,000 c. Outsource, P600,000

b. Insource, P 80,000 d. Insource, P 350,000

30. Assume that if the Foot Pedal is purchased, the facilities used to produce it could be
rented to another company for P 100,000. Which alternative (outsource or insource)
is more advantageous and how much is the net advantage?
a. Insource, P 100,000 c. Outsource, 20,000
b. Insource, P 70,000 d. Outsource, P 130,000

ITEMS 31 and 32 ARE BASED ON THE FOLLOWING INFORMATION:

Case Corporation produces cellular phone cases. Each case requires a keypad
which it also manufactures at a cost of P20per unit, inclusive of fixed overhead cost
of P5.

Case Corporation needs 50,000 units of this keypad annually. A supplier, Keypad
Corp., has offered to sell to Case Corp. its keypad requirements at P24 per unit. If
Case decides to buy the keypads, P2 per unit of the fixed overhead based on the
annual estimate could be eliminated, and the facility previously used to produce the
keypad could be rented to another company.

31. If Case Corp. outsources the keypads but does not rent the unused facility, it would
a. save P4 per unit. c. lose P4 per unit.

b. save P2 per unit. d. lose P7 per unit.

32. If the keypads were purchased and the facility rented, how much must the annual
rent on the facility be if Case Corporation wishes to realize annual savings of
P80,000?
a. P 270,000 c. P 280,000

b. P 430,000 d. P 280,000
33. Malubay Corporation operates its own canteen for its factory workers in its
manufacturing plant. Almost always, the canteen’s operation just breaks even, which
is just all right for the company, since it is not supposed to be an income-generating
segment. Annual costs of the canteen are as follows:

Variable: Food P 300,000

Labor 250,000
Overhead 150,000
Fixed overhead 100,000

Eighty thousand pesos (P80, 000) of the fixed overhead is merely allocated to
the canteen segment from the company’s total overhead. The balance represents
the salary of the canteen supervisor.

Recently, a caterer offered to operate the canteen for the company for a fee. The
caterer will shoulder all the cost of food, labor, and variable overhead.

In case the company decides to accept the offer of the caterer, the canteen
supervisor, who is one of Malubay Corporation’s pioneer employees, will be
transferred to another segment of the firm.

What is the maximum amount that Malubay Corporation will be willing to pay the
caterer?
a. P 700, 000 c. P 720, 000
b. P 800, 000 d. P 780, 000

34. Manel Manufacturing Corporation wants to modify one of its machines so it could be
used to fabricate more types of component parts.

An engineering firm offered to do the job for Manel Manufacturing Corporation at flat
fee of P250, 000, inclusive of materials but exclusive of testing costs. Testing would
be done by Manel’s engineers as part of their regular workload.

However, the chief engineer of Manel Manufacturing Corporation’s Engineering

Department said that his department can do the job if the engineering staff would be
allowed to work overtime so as not to affect their regular workload.

He estimated that a total of 200 overtime hours will be required to do the job. Four
engineering staff, whose regular hourly rate is P80, will be assigned to do the
modification. They will be paid an overtime premium of 30%. Materials to be used will
cost about P200, 000. Testing, to be conducted by 1 engineering staff, will require 5
days at 8 hours per day. After the modification, the machine is expected to consume
more electricity, about 20 kilowatt-hours per day at P50 per kilowatt-hour. It will be
operated for 300 days per year.

Based on the given quantitative data, which of the following statements is correct?
a. If the outside engineering firm’s offer is accepted, Manel Manufacturing
Corporation will lose P29, 200.
 b. The testing cost of P3, 200 is relevant in this case.
c. The incremental cost of electricity after the modification of the machine is
relevant.
d. If the outside engineering firm’s offer is accepted, Manel Manufacturing
Corporation will save P74, 000.

35. In joint-product costing analysis, which of the following costs is relevant when
deciding the point at which a product should be sold to maximize profits?
a. Joint costs to the split-off point.
b. Separable costs incurred after the split-off point.
c. Common costs incurred prior to split-off point.
d. Material costs incurred during the joint manufacturing process.

36. A company’s manager wants to make a decision whether to sell Product A or process
it further to produce Product B. In this decision-making analysis, the manager should
consider only the relevant revenues and costs, which are the
a. Final sales value and total costs after processing Product A further.
b. Sales value of Product A and the cost to produce Product B.
c. Increase in sales value if Product B is produced and the cost to process
Product A into Product B.
d. Gross profit from Product A and revenue from Product B.

37. Processor, Inc. produces Product A in a joint manufacturing process. Processor is

studying whether to sell Product A at the split-off point or process it further into
Product AA. The following information pertains to the two products:
1. Selling price of Product A
2. Selling price of Product AA
3. Joint production cost to produce Product A
4. Variable manufacturing cost to produce Product AA
5. Avoidable fixed cost to produce Product AA

In a sell or process further decision analysis, which of the given information

should not be considered?

a. 1, 2, 3, 4, and 5 c. 3 only

b. 3 and 5 d. 1, 3, and 5

38. A company produces two joint products (X and Y) from one unit of raw materials,
which costs P5, 000. Conversion costs incurred in the joint manufacturing process
amount to P10, 000.

The two products can be sold at the split-off point or they can be processed further
and sold at a higher price. The sales values of the two products are:

Sales Value at the Sales Value after

Split-off Point Further Processing
 Product X P1, 000 P1, 900
Product Y 800 1, 500

The additional processing cost is P750 per unit for both Products X and Y.

If the objective is to maximize profit, which product should the company process
beyond the split-off point?
a. Product X only
b. Product Y only
c. Both Products X and Y
d. Neither Product X not Product Y

ITEMS 39 to 40 ARE BASED ON THE FOLLOWING INFORMATION:

Sunga Corporation produces three joint products, X, Y, and Z, from one input. The
products can be sold at the split-off point or processed further. The joint production costs
for the month, allocated among the products based on the relative physical volume of
output, are as follows:
Materials P150, 000
Labor 30, 000
Factory overhead 20, 000
Total joint costs P200, 000

Additional information about the three products is given in the following tabulation:
Production UNITS SALES PRICE Additional
in Units At Split-off If Processed Further Processing Cost

Product X 5,000 P80 P100 P15

Product Y 3,000 45 60 20

Product Z 2,000 60 70 10

39. If the company takes the most profitable action with respect to each of the product, it
should
a. Sell all the products at the split-off point.
b. Process all the products beyond the split-off point.
c. Sell Product Y at the split-off point and process further Products X and Z.
d. Sell products X and Z at split-off point and process Product Y further.

40. How much is the total gross profit if the company took the most profitable action with
respect to each of the three products?
a. P690,000 c. P535,000
b. P430,000 d. P490,000

41. Kulafu, Inc. produces soya beans extract that is used by food processors. During the
month, Kulafu produced 20,000 kilos of the extract at a total cost of P100, 000. The
extract is sold for P8 per kilo.
 A customer, Tofu Corporation, approached Kulafu and said that it would buy all the
extracts produced if the same would be processed further per its (Tofu’s)
specifications.

Kulafu estimates that further processing costs would be P30, 000. Which of the
following alternatives is the most advantageous for Kulafu?
a. Kulafu should sell all the products to Tofu after processing further if the selling
price per kilo after further processing is greater than P9.50.
b. Kulafu should sell all the products to Tofu after processing further if the
selling price per kilo after further processing is greater than P8.00.
c. Kulafu should sell all the products to Tofu after processing further if the selling
price per kilo after further processing is greater than P5.00.
d. Kulafu should decline Tofu’s offer.

42. Liezle Corporation produces Products A and B from a joint process. The total joint
cost during the month was P80, 000 allocated to the joint products based on the
physical volume of output. Other data are as follows:
Units Further Increase in Sales Value

Produced Processing Costs if Processed Further

Product X 4,000 units P5 per unit P10

Y 6,000 7 per unit 6

10,000 units

Which of the following statements is not correct?

a. Product X should be sold after processing further.

b. Product Y should be sold at the split-off point.
c. The total cost of Product X after processing further is P13 per unit.
d. If Product Y is sold at the split-off point, its cost per unit amounts to P15.

43. In a decision-making analysis involving a question on whether to continue or

discontinue selling a product or operating a business segment,
a. the avoidable revenues should be compared with the avoidable costs.
b. the product or business segment whose total cost is greater than its revenue
should be discontinued.
c. all fixed costs are irrelevant.
d. the product or business segment that has a positive contribution margin
should not be discontinued.

44. Which of the following is not relevant to a decision about whether to drop a segment
or not?
a. The available fixed cost direct to that segment.
b. The contribution margin expected to be earned by the segment.
c. The complementary effects of discontinuing the segment.
 d. The indirect cost allocated to the segment.

45. Iya Company plans to discontinue a department with the following average monthly
operating results:
Sales P120, 000
Variable costs 70, 000
Contribution margin P 50, 000
Fixed costs 80, 000
Operating loss P 30, 000

If the department is discontinued, P35, 000 of the fixed costs could be eliminated.
What would be the effect of the discontinuance of the department on Disco
Company’s pretax profit?
a. Decrease of P15, 000.
b. Increase of P15, 000.
c. Increase of P5, 000.
d. Decrease of P5, 000.

46. A company plans to discontinue a division with a P50, 000 contributions to overhead.
Overhead allocated to the division is P80, 000 of which P35, 000 cannot be
eliminated. The effect of this discontinuance on the company’s income before tax is
a/an
a. Increase of P5, 000.
b. Decrease of P5, 000.
c. Increase of P30, 000.
d. Decrease of P30, 000.

47. The Dry Goods Section of a supermarket shows sales of P400, 000, variable costs of
P300, 000, and allocated unavoidable fixed costs of P180, 000, leaving a loss of
P80, 000. Based on this information and assuming that all other things will remain
the same,
a. the Dry Goods Section should be closed.
b. the Dry Goods Section contributes P400, 000 to total profit.
c. discontinuing the operations of the Dry Goods Section will reduce total
company profit by P100, 000.
d. the Dry Goods Section’s operations should be continued only if the peso-
sales volume can be increased by P80, 000.

ITEMS 48 to 49 ARE BASED ON THE FOLLOWING INFORMATION:

The following data pertain to the three products being produced and sold by Kenan
Corporation in a typical month:
Product A Product B Product C Total
Sales P50, 000 P37, 500 P31, 250 P118, 750

Variable Costs 23, 000 18, 750 12, 500 55, 000

Contribution margin P26, 250 P18, 750 P18, 750 P63, 750

Separable (direct) product

 fixed costs 15, 000 8, 750 10, 000 33, 750

Product margin P11, 250 P10, 000 P8, 750 P 30, 000

Allocated fixed costs 8, 250 10, 500 6, 250 25, 000

Profit (Loss) before tax P3, 000 (P500) P2, 500 P5, 000

The company’s lease contract will expire at the end of the current month, and the lessor does
not want to renew the contract. As a result, Kenan Corporation must move to another facility. It
has found a new, smaller place which the company will start occupying next month. Since the
new place is smaller, one of the products has to be eliminated and the total allocated fixed cost
would be reduced by 30%,

48. The company should eliminate

a. Product A. c. Product C
b. Product B. d. Products A, B, and C.

49. After eliminating the appropriate product, Kenan Corporation’s total income before
tax would be

a. P3, 750. c. P21, 250.

b. P2, 500. d. P5, 500.

ITEMS 50 to 54 ARE BASED ON THE FOLLOWING INFORMATION:

Nucup Company operates two stores in Luzon – one in Manila and another in Quezon
City. The operating results for October 200A, which are representatives of all months,
are condensed as follows:
Manila Store Quezon City Store Total
Sales P400, 000 P600, 000 P1, 000, 000
Variable costs 160, 000 420, 000 580, 000
Contribution margin P240, 000 P180, 000 P420, 000
Direct fixed costs 100, 000 200, 000 300, 000
Store margin P140, 000 (P20, 000) P120, 000
Indirect fixed costs, allocated
Based on peso sales 20, 000 30, 000 50, 000
Operating income P120, 000 (P50, 000) P70, 000

Additional information:
1. Thirty percent (30%) of each store’s direct fixed cost cannot be eliminated even if
either store is closed.
2. If the Quezon City store is closed, the Manila Store’s sales would decrease by 20%.
However, closing the Manila Store would not affect the Quezon City Store’s sales.

50. If the objective is to maximize total company profit, which store should be closed?
a. Manila Store
 b. Quezon City Store
c. Both stores should be closed
d. Neither of the two stores should be closed

51. If the Quezon City Store is closed, the company’s total income would increase
(decrease) by
a. P88, 000. c. P180, 000.
b. P40, 000. d. P100, 000.

52. In order to improve the profitability of the Quezon City Store, Nucup Company
considering a promotional campaign that would not affect the Manila Store. The
campaign would cost P300, 000 annually, and it is expected to increase the Quezon City
Store’s sales by 20%.

The promotional campaign would result in a monthly increase (decrease) in Nucup

Company’s operating income of
a. P36, 000 c. P11, 000
b. (P264, 000) d. (P11, 000)

53. Assume at the present, one-half of the Quezon City Store’s sales are from items sold
at variable cost to attract customers to the store. Nucup Company is considering to stop
selling such items.

This action would reduce the remaining sales by 20% and the direct fixed costs to 85%.
These changes would not affect the Manila Store.

The company’s decision to eliminate the items sold at variable cost would result in
monthly increase (decrease) in its operating income by
a. (P36, 000) c. (P30, 000)
b. P134, 000 d. (P6, 000)

54. Assume that the company is considering a promotional campaign for the whole
company, which will:
* increase sales in both stores by 20%;
* double the total indirect fixed cost.

What is the effect of this promotional campaign to Nucup Company’s operating income?
a. P34, 000 increase c. P150, 000 increase
b. P84, 000 increase d. P266, 000 decrease

ITEMS 55 to 56 ARE BASED ON THE FOLLOWING INFORMATION:

Torno Realty, Inc. manages five (5) townhouses in Makati City. The summary income
statements of the townhouses are as follows (in thousand pesos):

TOWNHOUSE 1 2 3 4 5
Rental income P15, 000 P18, 150 P35, 205 P28, 170 P15, 975
Expenses 12, 000 19, 500 39, 000 36, 000 19, 500
Profit (Loss) P3, 000 (P1, 350) P3, 795 (P7, 830) (P3, 525)
When the company President saw the income statements, he was dismayed that only
Townhouse 1 is earning profit. Because of this, he is considering to sell Townhouses 2 to
5 and continue operating Townhouse 1 only. But before making his final decision, he
consulted the company’s accountant first and instructed him to conduct further analysis
and give a recommendation as to which townhouse should really be sold.

The accountant’s study revealed that included in the total expenses is P18, 000, 000 of
corporate overhead allocated to the townhouses based on rental income. The company
will continue to incur this corporate overhead regardless of whether any of the
townhouses is sold.

55. Which townhouse(s) should be sold?

a. Two, Three, Four and Five c. Three, Four, and Five
b. Four d. Four and Five

56. If the appropriate townhouses were sold, the company’s total income would increase
(decrease) by
a. (P4, 301.80) c. P4. 500
b. P4, 301. 80 d. P11, 355

57. When a resource that is need in the production of more than one product has limited
capacity and a decision is to be made as to its most profitable use, the following factors
should be considered, except
a. the contribution margin of each product.
b. the demand for each product.
c. the amount of resource-use required for each unit of product.
d. none of the above.

58. When a multi-product plant operates at full capacity and management wants to make
a decision as to which product(s) to emphasize, the decision is usually made with a
short-run focus.

In making the decision as to which product to emphasize using a limited resource,

managers should select the products with the highest
a. sales volume potential.
b. selling price.
c. contribution margin per unit of the constraining resource.
d. contribution margin per unit of the product.

ITEMS 59 to 60 ARE BASED ON THE FOLLOWING INFORMATION:

The following information pertains to the four products of De Boton Corporation. Direct
materials and direct labor are readily available. The company can acquire as much of
these resources as it requires. However, the company is limited to a maximum of 1,200
machine hours per month:
Product 1 Product 2 Product 3 Product 4
Selling price per unit P75 P90 P100 P125
Variable cost per unit P35 P55 P50 P80
Machine hours required
 per unit 8 5 25 3

59. Assuming that there is no market limit for any of the products, the company should
produce and sell

a. all the products. c. product 3 only.

b. product 4 only. d. products 1 and 2 only.

60. Assume that the maximum demands (market limit) for each product are as follows:

Product 1 500 units

2 300 units

3 no limit

4 250 units

What is the best product combination?

a. 250 units of Product 4 and 300 units of Product 2

b. 250 units of Product 4 and 90 units of Product 2

c. 400 units of Product 4

d. 48 units of Product 3

ITEMS 61 to 63 ARE BASED ON THE FOLLOWING INFORMATION:

Florida Company produces these products with the following characteristics:
Product 1 Product 2 Product 3
Selling price P60 P72 P80
Variable cost per unit 30 52 70
Contribution margin per unit P30 P20 P10
Total fixed costs P500, 000
Machine hours available 100, 000 hours
Units produced per machine hour 1 2 5
Market limit – units none 100, 000 200, 000

61. What is the most profitable product per machine hour?

a. Product 1

b. Product 2

c. Product 3

d. The three products are equally profitable on a per machine-hour basis

62. Considering the market limit and the capacity constraint, the product mix that will
maximize profit is:

Product 1 Product 2 Product 3

a. 0 100, 000 units 200, 000 units

b. 0 0 200, 000

c. 10, 000 units 100, 000 200, 000

d. 10, 000 50, 000 40, 000

63. If there is no market limitation on any of the products, the company should produce

a. 500,000 units of Product 3 only.

b. 20,000 units of Product 3 only.

c. 200,000 units of Product 3 only.

d. all the products, the available hours should be divided among them equally.

64. Duran Company produces three products, X, Y, and Z. One machine is used to
produce the three products.

Additional information is available as follows:

Products CM per Unit Time on Machine Demand

X P50.00 25 minutes 60 units

Y 90.00 50 minutes 40 units

Z 112.50 75 minutes 50 units

The machine can be operated 7 days a week, for 10 hours per day. How many units
should be produced and sold to maximize the weekly contribution margin?

PRODUCTS (units)

X Y Z

a. 60 40 9

b. 60 40 50

c. 56 28 18

d. 168 0 0
65. A. Jimenez Company has the opportunity to increase annual sales by 1.15 million by
selling to new, riskier customers. The manufacturing and selling costs are 65% of sales.
Bad debts would be 10% and collection costs, 5% of sales. The company pays
corporate income tax rate of 32%. If A. Jimenez Company pursues this opportunity, the
after-tax profit will

a. increase by P300,000. c. decrease by p180,000.

b. increase by P510,000. d. increase by P204,000.

ITEMS 66 to 67 ARE BASED ON THE FOLLOWING INFORMATION:

Donnie Motors sells unity vans. It employs 40 sales personnel who are paid on a
commission basis. Each utility van sells for P1, 200,000 and a 5% commission is paid to
each sales person.

The company is considering to change the salesperson’s payment scheme from the flat
5% commission to a package of P50, 000 basic pay per salesperson per month, plus a
commission of 2% of sales made by the salesperson.

If the company can sell 50 units of utility vans in a month regardless of the salespersons’
payment scheme, which scheme will result into a higher income for Donnie Motors, Inc.
and by how much?
a. 5% flat rate by P200,000.
b. P50, 000 + 2% commission package, by P200, 000.
c. 5% flat rate, by P3, 000, 000.
d. The two schemes will yield the same results.

67. How many units of utility vans must the company sell (rounded off to the nearest
unit) so that it would be indifferent as to which payment scheme to select?
a. 50 units c. 33 units
b. 69 units d. 56 units

68. Product pricing is a function of the following factors, except

a. consumer demand. c. the seller’s cost structure.
b. competitive factors. d. the buyer’s profit objective.

69. A manufacturer determined the cost to produce and sell its product, then set a selling
price by adding a markup to the cost. With that selling price, the company will be able to
recover all the costs and earn a desired return on investment. The pricing approach
used by the company is called
a. cost-based pricing. c. competition-based pricing.
b. market-based pricing. d. target pricing.

70. It is the expected market price for a product or service, considering the consumers’
perception of value and the competitors’ responses.
a. transfer price. c. cost-based price.
b. target price. d. selling price.
71. Most companies have traditionally set prices by starting with costs and adding a
markup. However, most companies are turning the equation around and developing
costs based on prices. One approach used involves a strategy in which companies first
determine the target price at which a new product or service can be sold. From this
target price, the desired profit margin is deducted and the result is called
a. markup. c. target cost.
b. variance. d. market price.

72. A manufacturing firm intentionally priced its product below cost to eliminate
competition. It has a reasonable prospect of recovering the resulting loss through higher
prices once competition is eliminated or through a greater share in the market. The
manufacturing firm has engaged in
a. price discrimination. c. collusive pricing.
b. predatory pricing. d. black market pricing.

73. When a firm charges different prices to different customers for essentially the same
product, it is engaged in
a. price discrimination. c. collusive pricing.
b. predatory pricing. d. differential pricing.

74. In the city of Tabang, the sale of sugar is controlled by only three sellers. Last month,
the three sellers agreed to limit the supply of sugar and charged a very high price per
kilo of the said commodity. The three sellers practiced
a. price discrimination. c. collusive pricing.
b. predatory pricing. d. black market pricing.

75. It is a pricing approach which involves basing prices on the product’s perceived
value, rather than on the seller’s cost. For example, a cup of tea may have a higher price
at an expensive restaurant than at a typical company cafeteria.
a. cost-based pricing. c. location-based pricing.
b. buyer-based pricing. d. price discrimination.

76. Market skimming pricing is used when a new product is introduced at the highest
price possible given the benefits of the product. For market skimming to work,
a. competitors can easily enter the market.
b. no buyer wants the product at a high price.
c. competitors can undercut the price.
d. the cost of producing a small volume cannot be so high that it eliminates the
advantage of charging more.

77. Freight charges affect prices. Different pricing policies considering freight charges
are used by firms. Which of the following statements about such policies is wrong?
a. In uniform delivered pricing, the company charges the same price, inclusive of
shipping costs, to all customers regardless of their location.
b. In freight absorption pricing, the selling company absorbs all or part of the
actual freight charges; customers are not charged actual delivery costs.
c. In zone pricing, differential freight charges are set for customers on the basis
of their location; customers are not charged actual average freight costs.
 d. None of the above.

78. Which of the following is least associated with cost-based pricing?

a. Fixed cost recovery c. Price stability
b. Target pricing d. relevant costs

79. Discounts, allowances, and freight charges are among the adjustments that a firm
considers in setting prices. Which of the following statements about discounts is wrong?
a. Quantity discounts encourage large volume purchases.
b. Cash discounts encourage prompt payment, improve cash flows, and avoid
bad debts.
c. Seasonal discounts are offered to other members of the marketing channel for
performing certain services, such as selling.
d. Seasonal discounts are offered for sales out of season to stabilize production.

80. It is a product-mix pricing strategy wherein the seller is willing to accept any price
that exceeds the storage and delivery costs for the product.
a. Product bundle pricing c. Optional product pricing
b. Captive product pricing d. By-product pricing

81. Tazal Company wants to establish a selling price that will yield a gross margin of
30% on sales of a product whose cost is P21. How much should the selling price be?
a. P30.00 c. P70.00
b. P27.30 d. P21.30

82. Aaron Company wants to establish a selling price that will yield a markup of 30% of
cost. The cost of the product is P20. How much should the selling price of the product
be?
a. P28.57 c. P26.00
b. P66.67 d. P20.30

83. Chan Company desires to earn a 40% return on its P1, 000, 000 investments in
equipment that is used to produce its products. Based on estimated sales of 40, 000
units, the product’s costs per unit are as follows:
Materials P10
Labor 20
Variable Overhead 25
Fixed Overhead 15
Variable selling and administrative costs 18
Fixed selling and administrative costs 12
Total cost per unit P100
How much per unit should the product be priced for sale?
a. P400, 100 c. P140
b. P 110 d. P 83

84. Bonita Caterers quotes a price of P924 per person for a banquet dinner. This price
includes the 12% VAT and 20% service charge, both of which are computed based on
the food’s selling price. At what amount does Bonita Caterers price the food?
a. P637 c. P700
 b. P1, 183 d. P973

85. Ning Caterers quotes a price of P940.80 per person for a banquet dinner. This price
includes the 12% VAT and 20% service charge. The VAT is computed based on the
food’s selling price plus the service charge. The service charge is computed based on
the food’s selling price only. At what amount does Ning Caterers price the food?
a. P710.77 c. P613
b. P700.00 d. P840

86. Anderson Company uses target pricing and costing. For the year just ended,
following are some data about the company’s costs and revenue:
Sales (50,000 units @ P500) P25, 000, 000
Cost of goods sold 15, 000,000
Value-chain operating costs,
Excluding manufacturing costs 5, 000,000

The company plans to increase sales by 20, 000 units. This can be achieved if the
selling price is reduced to P450. If the company desires a unit target operating income of
P80, by how much must it reduce its full cost per unit?
a. P400 c. P30
b. P370 d. P50

87. A. Padilla Company is planning to produce a product that is expected to have a two-
year life cycle. The estimated whole-life cost for a budgeted production of P160, 000
units is as follows:
Life-cycle costs:
Upstream costs (research and development, design) P1, 600,000
Production costs 2, 400,000
Downstream costs (marketing, distribution, customer service) 900, 000
Total life-cycle costs P4, 900,000
After-purchases costs (operating, support, repair, and
disposal) incurred by customers 700, 000
Total whole-life costs P5, 600,000

If the product is to be priced at 130% of the whole-life unit cost, the budgeted unit selling
price is
a. P39.81. c. P43.50.
b. P26.92. d. P35.00.

88. Jemarie Supermarkets, Inc. operates a chain of three retail stores. For the year
ended December 31, 200A, operating results for each store, before taxes and allocation
of corporate overhead, were as follows:

STORE 1 STORE 2 STORE 3 TOTAL

Sales P400, 000 P320, 000 P240, 000 P960, 000
Cost of sales 224, 000 184, 000 152, 000 560, 000
Gross margin P176, 000 P136, 000 P88, 000 P400, 000
Operating expenses:
Variable P52, 800 P58, 400 P24, 800 P136, 000
 Fixed 56, 000 48, 000 40, 000 144, 000
Total P108, 800 P106, 400 P64, 800 P280, 000
Income before corporate
Overhead and taxes P67, 200 P29, 600 P23, 200 P120, 000

For the year ended December 31, 200A, corporation overhead was as follows:
Warehouse operations and depreciation P20, 000
Delivery 28, 000
Advertising 6, 400
Central office salaries and other expenses 25, 600
Total corporation overhead P80, 000

Delivery expenses vary with delivery-kilometers which is computed by multiplying the

number of deliveries to the distance (in kilometers) between the stores and the
warehouse. The delivery statistics for the year are as follows:

Distance (km) from No. of Delivery-kilometers

the warehouse deliveries (DK)
Store 1 10 120 1, 200
Store 2 20 40 800
Store 3 5 100 500
2, 500
The company’s management has decided to expand one of the stores in a plan to
increase sales by P100, 000. The contemplated expansion is expected to increase the
store’s fixed operating costs by P10, 000 and to require 20 additional deliveries from the
warehouse. Which store should be selected for the prospective expansion?
a. Store 1 c. Store 3
b. Store 2 d. None

ITEMS 89 to 92 ARE BASED ON THE FOLLOWING INFORMATION:

Schundel Hair Care Company produces shampoo with conditioner. This is the
company’s only product, which it sells under the name “Shamcon.”

The manufacturing cost data for Shamcon are as follows:

Quantity required Current market price
Per 1, 000 ml bottle per ml
Materials:
Chem 1 4 ml P 0.54
Chem 2 3 ml 0.36
Chem 3 2 ml 0.20

Direct Labor: 2 hours per bottle @ P3 per hour

Factory overhead:
Variable overhead – P2.00 per direct labor hour
Fixed overhead – 4.00 per direct labor hour

Clever Company, owner and operator of a chain of hotels, asked Schundel Hair Care
Company to submit a bid for 500 boxes of Shamcon. Each box will contain 24 bottles.
Per Clever’s specifications, its order should be different in chemical composition from the
regular Shamcon. According to Schundel Company’s production manager, Clever’s
specifications can be met if an additional chemical, Chem 4 would be used. Schundel
Company has 60, 000 ml of this chemical. Chem 4 was used by the company in one of
its brands that it decided to eliminate. The remaining inventory of Chem 4 was not sold
or discarded because it does not deteriorate and the company has adequate space for
its storage. Schundel Company can sell Chem 4 at the prevailing market price of P0.40
per ml less P0.10/ml selling and handling costs. Clever’s oreder would require 5 ml of
Chem 4 per bottle.

The company has a stock of Chem 5. This was used by Schundel Hair Care for its
manufacture of another product that is no longer being produced. Chem. 5, which cannot
be used in Shamcon, can be substituted for Chem 1 on a one-for-one basis without
affecting the quality of the Clever order. There is no problem about the supply of Chem
1. At present, the company has 20, 000 ml of Chem 5 in its inventory, which has a
salvage value of P6, 000.

The production of the Clever’s order would require the same direct labor hours per bottle
as in the regular Shamcon. However, at present, the company has only 20, 000 direct
labor hours available. The Clever order can be produced if the workers would work
overtime, although an overtime premium of 30% of the regular rate should be paid.

Schundel Hair Care Company’s policy is to price new products at 130% of full
manufacturing cost.

89. If Schundel Company bids this month for the special one-time order of 500 boxes of
the product, the special order’s total direct material cost will be
a. P74, 944. c. P68, 880.
b. P61, 680. d. P56, 880.

90. If Schundel Hair Care Company bids this month for the special one-time order of 500
boxes of the product, the special order’s total relevant conversion cost will be

a. P123, 600. c. P120, 000.

b. P219, 600. d. P216, 000.

91. If the company’s policy is to price new products at 130% of full manufacturing cost,
what is the bid price per unit for this one-time special order of Clever Company?

a. P19.55 c. P29.95

b. P 6.91 d. P23.80

92. What will be the total variable manufacturing costs for the subsequent, recurring 500
box orders?
 a. P180, 480 c. P287, 280

b. P373, 464 d. P191, 280

ITEMS 93 to 95 ARE BASED ON THE FOLLOWING INFORMATION:

The top management of Jonalyn Fabricators, Inc. has developed a pricing formula
presented below. The formula is based on the operating results achieved during the
most recent year.
Direct materials xx
Direct labor xx
Factory Overhead (50% of direct labor cost) xx
Corporate overhead (10% of direct labor cost) xx
Total cost of excluding sales commission xx
Add 25% for profit and taxes xx
Sales price before sales commission xx
Divide by 90% to include the 10% sales commission ÷90%
Selling price xx

During the most recent year, the company operated at 80% of normal capacity and the
results are as follows:

Sales P150, 000

Less sales commission (10%) 15, 000

Net Sales P135, 000

Less cost of sales: Materials P 36, 000

Labor 45, 000

(30% of labor cost) 13, 500

Fixed factory overhead 9, 000

Total cost of sales P103, 500

Gross Income P 31, 500

Less corporate overhead (10% of labor cost) 4, 500

Income before tax P27, 000

Less income tax (40%) 10, 800

Net Income P16, 200

Jonalyn Fabricators received an invitation from Order Corporation to submit a bid for a
made-to-order item. Jonalyn Fabricators used the pricing formula to compute the bid
price. The company’s cost accountant estimated that Order Corporation’s order would
use half of the idle capacity and that prime costs to be incurred for the order are as
follows:

Materials P1, 500

Labor 10, 000

The capacity utilization and the relationships shown in the operating results last year, as
well as those in the pricing formula are expected to continue during the next period.

93. What was the bid price submitted by Jonalyn Fabricators to Order Corporation?

a. P21, 875 c. P19, 688

b. P24, 062 d. P24, 306

94. Assume that upon receipt of Jonalyn Fabricators’ proposal (the bid price in Question
#93), Order Corporation made a counter-offer that is 10% lower than the bid price.
Should Jonalyn Fabricators accept the order of such lower price?

a. Yes, net income will increase by P2, 625.

b. Yes, net income will increase by P3, 112.50.

c. No, overall net income will decrease by P2, 431.

d. No, net income will decrease by P1, 458.60.

95. What is the lowest price Jonalyn Fabricators can quote on the Order Corporation’s

order without reducing its net income after taxes?

a. P14, 500 c. P24, 167

b. P16, 111 d. P26, 852

ITEMS 96 to 98 ARE BASED ON THE FOLLOWING INFORMATION:

Iking Corporatiom produces “Sticky,” its only product. Annual production capacity is
100, 000 units, although annual demand is only 80, 000 units. Sticky is sold for P20 per
unit. Manufacturing, administrative, and selling costs are as follows:

Variable costs per unit:

Materials P3.00
 Direct labor 5.00

Variable manufacturing overhead 1.50

Variable selling 4.10

Fixed costs (per year):

Factory overhead P200, 000

Selling and administrative 100, 000

One machine hour is required to produce one unit of Sticky.

96. Iking Corporation has 500 units of Sticky that were partially damaged while being
moved into the warehouse. These units can be sold through regular channels at reduced
prices without affecting the regular sales of Sticky. The damaged units will be valueless
unless old at reduced prices. Some customers offered to buy the damaged Sticky at
P4.50 per unit. If this is the highest price being offered, should the company sell the
damaged units at that price?

a. Yes, because the price of P4.50 is greater than the relevant unit cost of P4.10.

b. Yes, because profit will increase by P2, 250 if the damaged units are sold at
P4.50 per unit.

c. No, because the price of P4.50 is very much lower than the relevant unit cost
of P13.60.

d. No, because the price of P4.50 is very much lower than the relevant unit cost
of P9.50.

97. Stickier Company offers to make and ship 30, 000 units of Sticky directly to
IkingCorporation’s customers. If Iking Corporation accepts this offer, it will continue to
produce and sell the remaining 50, 000 units. Iking Corporation’s fixed factory overhead
will decrease by P20, 000. Its fixed selling and administrative costs will remain
unchanged. Variable selling costs will decrease to P1.10 per unit for the 30,000 units
produced and shipped by Sticker Company. What is the maximum amount per unit that
Iking Corporation should pay Stickier Company for producing and shipping the 30, 000
units?

a. P13.17 c. P20.00

b. P13.60 d. P11.27

98. Iking Corporation receives a one-time special order for 10,000 units of Sticky at P13
per unit. Acceptance of this order would not affect the regular sales of 80,000 units.
Variable selling costs for each of these 10,000 units will be P2.00. If the special order is
accepted, Iking Corporation’s income will increase (decrease) by
 a. P14,000 c.P35,000

b.P15,000 d.(P70,000)

ITEMS 99 to 100 ARE BASED ON THE FOLLOWING INFORMATION:

Jane Corporation produces wood glue that is used by furniture manufacturers. The
company normally produces and sells 10,000 gallons of the glue each month. White is
sold for P280 per gallon, variable costs is P168 per gallon, fixed factory overhead cost
totals P460, 000 per month, and the fixed selling cost totals P620,000 per month.

Labor strikes in the furniture manufacturers that buy the bulk of White Glue have caused
the monthly sales of Jane Corporation to temporarily decrease the only 15% of its
normal monthly volume. Jane Corporation’s management expects that the strikes will
last for about 2 months, after which, sales of White Glue should return the normal.
However, due to the dramatic drop in the sales level, Jane Corporation’s management is
considering to close down its plant during the two-month period that the strikes are on.

If Jane Corporation will temporarily shut down its operations, it is expected that the fixed
factory overhead cost can be reduced to P340, 000 per month and that the fixed selling
costs can be reduced by P62, 000 per month. Start-up costs at the end of the shut-down
period would total P56, 000. Jane Corporation uses the JIT System, so no inventories
are on hand.

The shut down point in units is

a.2, 750.00 c.3, 250.00

b.9, 642.00 d.1, 100.00

100. At the sales level of only 30% of the normal volume, should the company continue
operating or shut down temporarily for two months?

a. Continue, because the expected sales is above the shut down point.

b. Shut down, because the expected sales is above the shut down point.

c. Continue, so that the shutdown costs may be avoided.

d. Shut down, because shutdown costs is less than the contribution margin under
continued operations.
.