Problem 1

1. Answer: 200 x 5,000 = 1,000,000

2. Answer: (52 + 60 + 20) = 132 x 5,000 = 660,000

Fixed cost is considered irrelevant because the company will continue to incur
the same amount whether it makes or buys the seat cushions.

3. Answer: To Make, 340,000 net advantage

4. Answer: [52 + 60 + 20 + (80 x 40%)] = 164 x 5,000 = 820,000

5. Materials 52 x 120% x (5,000 + 2,000) 436,800

Labor 60 x 120% x (5,000 + 2,000) 504,000
Variable overhead 20 x (5,000 + 2,000) 140,000
Fixed overhead 80 x 5,000 x 40% 160,000
1,240,800
Less: net purchase cost (200 x 7,000) 1,400,000
Savings from alternative use of facilities (200,000) 1,200,000
Net advantage of buying the seat cushions 40,800

Problem 2
1. Answer: (500 x 70%) = 350 x 3,000 = 1,050,000

2. Materials 100
Labor 120
Variable overhead 80
Total unit cost 300
Multiply: No. of Units x 3,000
Cost to Make the Special Order 900,000

Incremental Profit from Accepting the Special Order

(1,050,000 – 900,000) = 150,000

Notes: Grace Company can afford to produce the additional 3,000 units since it has idle capacity of 5,000 units
(25,000 – 20,000). The fixed overhead as well as the selling and administrative costs are irrelevant
since they are expected to remain whether the special order is accepted or not.

Problem 3
Selling price per unit (1,500,000 / 30,000) = 50
Variable cost per unit (600,000 / 30,000) = 20
Contribution margin per unit (900,000 / 30,000) = 30
Variable manufacturing cost per unit (20 x 3/4) = 15
Variable selling and administrative cost per unit (20 x 1/4) = 5

Relevant cost to make the special order

Variable manufacturing cost per unit 15
Additional selling cost - freight charges 4
Total 19

Analysis on the unit capacity:

60,000 units is the current normal capacity
30,000 units is the current production (regular sales)
35,000 units is the special order from a customer
If the company will accept the special order, it will have to sacrifice the 5,000 units from its regular sales
which will lose profit with the amount of (5,000 x CM per unit of 30) 150,000.

Selling price of the special order (35,000 x 25) 875,000

Relevant cost to make the special order (35,000 x 19) 665,000

Profit lost for reducing the regular sales (5,000 x 30) 150,000 815,000

Incremental profit from the special order 60,000

Problem 4
Answer: Continue, since Thinny is contributing 20 per unit to the company (contribution margin). The fixed cost will
remain whether Beth continue or discontinue Thinny. Fixed cost will be absorbed by the 2 remaining products if Beth
decided to discontinue Thinny.

Continue: Profit per unit is 30

Discontinue: Profit per unit is 10

Skinny Bony Thinny Total
Sales price per unit 50 70 120
Variable cost per unit (20) (30) (50)
Contribution margin per unit 30 40 70
Fixed cost per unit (10) (20) (30) (60)
Profit (Loss) per unit 20 20 (30) 10

Problem 5
Answer: Continue, since Makati is contributing 100,000 (400,000 – 160,000 – 140,000).

Continue: Operating Profit is 110,000

Discontinue: Operating Profit is 10,000

Manila Makati Quezon City Total
Sales 300,000 500,000 800,000
Costs and Expenses
Variable 120,000 200,000 320,000
Direct Fixed Costs 50,000 70,000 120,000
Allocated Home Office Costs 90,000 120,000 140,000 350,000
Total Costs and Expenses 260,000 120,000 410,000 790,000
Operating Profit (Loss) 40,000 (120,000) 90,000 10,000

Problem 6
Answer: Continue Operations

Continue Operations Shut Down the Operations

Sales price per unit 15 Rent 3,000
Variable cost per unit 8 Allocated cost of utilities 500
Contribution margin per unit 7 Janitor’s salary 1,000
Multiply: Sales in units x 800 Security agency’s billing 2,500
Contribution margin 5,600 Total Loss during Shut Down (7,000)
Fixed costs (10,000)
Loss on Operations (4,400)

Shut Down Point = 10,000 – 7,000 = 429 units

In Units 7

Shut Down Point = 10,000 – 7,000 = 6,429

In Pesos (7 / 15)

Problem 7
Answer: Process Further to Pritong Balut with Incremental Profit of
(3.50 x 10,000) = 35,000
Balut Pritong Balut
Unit selling price 30.00 37.50
Unit Cost to make
Materials 15.00 15.00
Labor 5.00 5.00
Total 20.00 20.00
Additional costs per unit 4.00
Total cost per unit 20.00 24.00
Profit per unit 10.00 13.50
Problem 8
Answers: Sell at split-off point and not process further, decrease in profit would be 3,000.
Materials (10,000 x 50) 500,000
Conversion Cost 500,000
Total Joint Cost 1,000,000
Chipboard Newsprint Kraft paper
Sales value at split-off 480,000 1,000,000 45,000
Allocated joint cost (170,000) (800,000) (30,000)
Profit at split-off 310,000 200,000 15,000

Chipboard Newsprint Kraft paper

(20,000 x 24) = 480,000 (5,000 x 200) = 1,000,000 (3,000 x 15) = 45,000
(1,000,000 x 17%) = 170,000 (1,000,000 x 80%) = 800,000 (1,000,000 x 3%) = 30,000

At Split-off Process Further

Kraft Paper Sales Value 45,000 60,000 (3,000 x 20)
Allocated Joint Cost (30,000) (30,000)
Cost after Split-off (18,000) (3,000 x 6)
Profit 15,000 12,000

Problem 9
Answer:
The best product combination is the mixture of products that will yield the highest possible profit or
contribution margin considering the given constraints or limitations. (CM per scarce resources)

What is the scarce resource? Answer is the total machine hours available.
Constraint is the sales or market limit.

Labany Singkamy Mistisy

Contribution margin per unit 5 8 12
Divide: Machine hours required to produce one unit 1 hr. 4 hrs. 12 hrs.
Contribution margin per hour 5 2 1

Priority to produce (higher CM/hr.) 1st 2nd 3rd

We need to allocate the 120,000 machine hours.

1. Labany has a market limit of 10,000 units - That is equivalent to 10,000 hours (1 hour x 10,000 units)

2. Singkamy has a market limit of 20,000 units - That is equivalent to 80,000 hours (4 hours x 20,000)

3. Mistisy has no market limit and will be allocated the remaining hours of:
(120,000 – 10,000 – 80,000) = 30,000
That is equivalent to 2,500 units (30,000 / 12 hours)

Labany Singkamy Mistisy

Allocated Units 10,000 20,000 2,500
Allocated Hours 10,000 80,000 30,000

Contribution Margin 50,000 160,000 30,000

(10,000 units x 5) (20,000 units x 8) (2,500 units x 12)
Or (10,000 hours x 5) (80,000 hours x 2) (30,000 x 1)

Problem 10
Answer:
Pesos Per Unit
Sales (10,000 x 150% = 15,000 units) 225,000 15
Variable Costs [15,000 x (8 + 2)] (150,000) 10
Contribution Margin 75,000 5
Fixed Costs (50,000 x 120%) (60,000)
Profit 15,000