Encircle the best answer. For problems, show your solution in good form.

1. In a plant operating at capacity: 

A. every machine and person in the plant is working at the maximum possible rate.
B. only some specific machines or processes are operating at the maximum rate possible.
C. profits are maximized.
D. managers should produce those products with the highest contribution margin in order to deal
with the constrained resource.
 2. United Industries manufactures a number of products at its highly automated factory. The
products are very popular, with demand far exceeding the factory's capacity. To maximize profit,
management should rank products based on their: 
A. gross margin
B. contribution margin
C. selling price
D. contribution margin per unit of the constrained resource
 
3. Consider the following statements:

   
Which of the above statements represent advantages to a company that is vertically integrated? 
A. Only I
B. Only III
C. Only I and II
D. Only II and II

4. JB Lumber Corporation is downsizing operations and has to decide which of its large saws
should be sold. JB currently has four saws but only needs to keep three. All four saws have a
remaining useful life of 3 years and will all have a salvage value of zero at the end of those 3
years. Also, all four saws have equal annual operating costs and output efficiency. Information
related to the four saws is provided below:

   
In order to maximize profits for the next three years, which machine would be most beneficial
for JB to sell? 
A. 1
B. 2
C. 3 salvage value is higher
D. 4

5. Degner Inc. has some material that originally cost P19,500. The material has a scrap value of
P13,300 as is, but if reworked at a cost of P2,100, it could be sold for P14,000. What would be
the incremental effect on the company's overall profit of reworking and selling the material
rather than selling it as is as scrap? 
A. -P20,900
B. P11,900
C. -P7,600
D. -P1,400
 6. Corado Corporation has in stock 77,000 kilograms of material N that it bought five years ago
for P7.15 per kilogram. This raw material was purchased to use in a product line that has been
discontinued. Material N can be sold as is for scrap for P4.50 per kilogram. An alternative would
be to use material N in one of the company's current products, M01Y, which currently requires 2
kilograms of a raw material that is available for P7.15 per kilogram. Material N can be modified
at a cost of P0.94 per kilogram so that it can be used as a substitute for this material in the
production of product M01Y. However, after modification, 4 kilograms of material N is required
for every unit of product M01Y that is produced. Corado Corporation has now received a request
from a company that could use material N in its production process. Assuming that Corado
Corporation could use all of its stock of material N to make product M01Y or the company could
sell all of its stock of the material at the current scrap price of P4.50 per kilogram, what is the
minimum acceptable selling price of material N to the company that could use material N in its
own production process? 4.50

 
7. Mcneilly Inc. is considering using stocks of an old raw material in a special project. The
special project would require all 220 kilograms of the raw material that are in stock and that
originally cost the company P1,804 in total. If the company were to buy new supplies of this raw
material on the open market, it would cost P8.55 per kilogram. However, the company has no
other use for this raw material and would sell it at the discounted price of P7.75 per kilogram if it
were not used in the special project. The sale of the raw material would involve delivery to the
purchaser at a total cost of P97.00 for all 220 kilograms. What is the relevant cost of the 220
kilograms of the raw material when deciding whether to proceed with the special project?
7.75 x 220=1705-97= P1,608
8. Knedler Corporation is preparing a bid for a special order that would require 720 liters of
material C01D. The company already has 200 liters of this raw material in stock that originally
cost P9.90 per liter. Material C01D is used in the company's main product and is replenished on
a periodic basis. The resale value of the existing stock of the material is P9.60 per liter. New
stocks of the material can be readily purchased for P10.10 per liter. What is the relevant cost of
the 720 liters of the raw material when deciding how much to bid on the special order? 
720 liters x 10.10= P7,272
9. Part N19 is used by Malouf Corporation to make one of its products. A total of 7,000 units of
this part are produced and used every year. The company's Accounting Department reports the
following costs of producing the part at this level of activity:

   
An outside supplier has offered to make the part and sell it to the company for P24.50 each. If
this offer is accepted, the supervisor's salary and all of the variable costs, including the direct
labor, can be avoided. The special equipment used to make the part was purchased many years
ago and has no salvage value or other use. The allocated general overhead represents fixed costs
of the entire company, none of which would be avoided if the part were purchased instead of
produced internally. In addition, the space used to make part N19 could be used to make more of
one of the company's other products, generating an additional segment margin of P25,000 per
year for that product. What would be the impact on the company's overall net operating income
of buying part N19 from the outside supplier? 
A. Net operating income would decline by P21,900 per year.
B. Net operating income would decline by P60,700 per year.
C. Net operating income would decline by P10,700 per year.
D. Net operating income would increase by P25,000 per year.
 10. Lounsberry Inc. regularly uses material O55P and currently has in stock 360 liters of the
material for which it paid P2,484 several weeks ago. If this were to be sold as is on the open
market as surplus material, it would fetch P6.35 per liter. New stocks of the material can be
purchased on the open market for P6.90 per liter, but it must be purchased in lots of 1,000 liters.
You have been asked to determine the relevant cost of 800 liters of the material to be used in a
job for a customer. The relevant cost of the 800 liters of material O55P is: 
800 liters x 6.90= P5,520
  11. Govoni Corporation is a specialty component manufacturer with idle capacity. Management
would like to use its extra capacity to generate additional profits. A potential customer has
offered to buy 9,500 units of component AIG. Each unit of AIG requires 6 units of material M51
and 4 units of material M93. Data concerning these two materials follow:

   

Material M51 is in use in many of the company's products and is routinely replenished. Material
M93 is no longer used by the company in any of its normal products and existing stocks would
not be replenished once they are used up.
What would be the relevant cost of the materials, in total, for purposes of determining a
minimum acceptable price for the order for product AIG? ___________

 
 
12. Nowak Corporation is a specialty component manufacturer with idle capacity. Management
would like to use its extra capacity to generate additional profits. A potential customer has
offered to buy 1,600 units of component FHB. Each unit of FHB requires 8 units of material N95
and 1 unit of material K78. Data concerning these two materials follow:

   
Material N95 is in use in many of the company's products and is routinely replenished. Material
K78 is no longer used by the company in any of its normal products and existing stocks would
not be replenished once they are used up.
What would be the relevant cost of the materials, in total, for purposes of determining a
minimum acceptable price for the order for product FHB? ___________

13. A study has been conducted to determine if one of the departments in Parry Company should
be discontinued. The contribution margin in the department is P50,000 per year. Fixed expenses
charged to the department are P65,000 per year. It is estimated that P40,000 of these fixed
expenses could be eliminated if the department is discontinued. These data indicate that if the
department is discontinued, the company's overall net operating income would: 
A. decrease by P25,000 per year
B. increase by P25,000 per year
C. decrease by P10,000 per year
D. increase by P10,000 per year
14. Vanikoro Corporation currently has two divisions which had the following operating results
for last year:

   
was dropped at the beginning of last year, how much higher or lower would Vanikoro's total net
operating income have been for the year? 
A. P10,000 higher
B. P40,000 lower
C. P50,000 higher
D. P100,000 lower
 15. The management of Austin Corporation is considering dropping product R97C. Data from
the company's accounting system appear below:

   
In the company's accounting system all fixed expenses of the company are fully allocated to
products. Further investigation has revealed that P34,000 of the fixed manufacturing expenses
and P20,000 of the fixed selling and administrative expenses are avoidable if product R97C is
discontinued. What would be the effect on the company's overall net operating income if product
R97C were dropped? 
A. Overall net operating income would increase by P20,000.
B. Overall net operating income would increase by P10,000.
C. Overall net operating income would decrease by P20,000.
D. Overall net operating income would decrease by P10,000.

 
 
16. Product L28N has been considered a drag on profits at Beets Corporation for some time and
management is considering discontinuing the product altogether. Data from the company's
accounting system appear below:

   
In the company's accounting system all fixed expenses of the company are fully allocated to
products. Further investigation has revealed that P41,000 of the fixed manufacturing expenses
and P25,000 of the fixed selling and administrative expenses are avoidable if product L28N is
discontinued. What would be the effect on the company's overall net operating income if product
L28N were dropped? 
A. Overall net operating income would decrease by P73,000.
B. Overall net operating income would increase by P10,000.
C. Overall net operating income would decrease by P10,000.
D. Overall net operating income would increase by P73,000.
 17. Green Company produces 1,000 parts per year, which are used in the assembly of one of its
products. The unit product cost of these parts is:

   
The part can be purchased from an outside supplier at P20 per unit. If the part is purchased from
the outside supplier, two thirds of the fixed manufacturing costs can be eliminated. The annual
impact on the company's net operating income as a result of buying the part from the outside
supplier would be: 
A. P1,000 increase
B. P1,000 decrease
C. P5,000 increase
D. P2,000 decrease
 
 
18. A year ago, Crunchy Cola Corporation bought a stamping machine to make the cans for its
cola. The cost of the machine was P60,000. The machine has a useful life of 5 years and a
salvage value of zero at the end of those five years. Annual depreciation on the machine is
P12,000. One year of depreciation has been recorded. The variable manufacturing cost of
producing the cans is P0.05 per can. The only fixed manufacturing cost is the annual
depreciation of P12,000 on the stamping machine. Crunchy needs 200,000 cans annually.
Dagmar Stamping Company recently gave Crunchy an offer to supply all of its can needs for the
next four years at P0.07 per can. If Crunchy buys from Dagmar, the stamping machine would not
be needed and would be sold for P35,000. If Crunchy buys from Dagmar, what will be the total
dollar increase or decrease in income for the next four years? 
A. P16,000 decrease
B. P19,000 increase
C. P29,000 decrease
D. P32,000 increase

 19. CurlyInc. is considering whether to continue to make a component or to buy it from an

outside supplier. The company uses 16,000 of the components each year. The unit product cost
of the component according to the company's cost accounting system is given as follows:

   
Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 30% is
avoidable if the component were bought from the outside supplier. In addition, making the
component uses 1 minutes on the machine that is the company's current constraint. If the
component were bought, this machine time would be freed up for use on another product that
requires 2 minutes on the constraining machine and that has a contribution margin of P8.10 per
unit.
When deciding whether to make or buy the component, what cost of making the component
should be compared to the price of buying the component? ____________

20. Supreme Celery Corporation manufactures four celery based products. Floods and fire on the
west coast are going to cause a shortage of celery for Supreme next month. Information related
to the four celery products that it produces are shown below. The numbers relate to the cost per
case and the amount of celery per case of product:

   
To maximize profit next month, in what order would it be best for Supreme to schedule
production (first to last)? 
A. Jelly, Cracker Spread, Soup, Snack Bars
B. Jelly, Snack Bars, Cracker Spread, Soup
C. Cracker Spread, Snack Bars, Jelly, Soup
D. Snack Bars, Jelly, Soup, Cracker Spread

 
Problem 1

Walker, Inc. makes and sells a single product, widgets. Three pounds of wackel are needed to make one
widget. Budgeted production of widgets for the next few months follows:
September 29,000 units
October 31,000 units
The company wants to maintain monthly ending inventories of wackel equal to 20% of the following
month's production needs. On August 31, 9,000 pounds of wackel were on hand.

How much wackel should be purchased in September? _______________

Problem 2
 KelsoCompany manufactures two products, (1) Regular and (2) Deluxe. The budgeted units to be
produced are as follows:
Units of Product
2008 Regular Deluxe Total
July 10,000 15,000 25,000
August 6,000 10,000 16,000
September 9,000 14,000 23,000
October 8,000 12,000 20,000

It takes 3 pounds of direct materials to produce the Regular product and 5 pounds of direct materials to
produce the Deluxe product. It is the company's policy to maintain an inventory of direct materials on
hand at the end of each month equal to 30% of the next month's production needs for the Regular product
and 20% of the next month's production needs for the Deluxe product. Direct materials inventory on hand
at June 30 were 9,000 pounds for the Regular product and 15,000 pounds for the Deluxe product. The
cost per pound of materials is $5 Regular and $7 Deluxe.

Instructions
1. How much is the total direct materials purchases for the quarter (July to September) for Product
Regular. _____________
2. How much is the total direct materials purchases for the quarter (July to September) for Product
Deluxe. ________________

Cerner Company has budgeted the following unit sales:

2008 2009
Quarter Units Quarter Units
1 70,000 1 60,000
2 40,000
3 50,000
4 80,000

The finished goods inventory on hand on December 31, 2007 was 14,000 units. It is the company's policy
to maintain a finished goods inventory at the end of each quarter equal to 20% of the next quarter's
anticipated sales.

Requirement
Compute for the total required production in units for 2008.