Manila * Cavite * Laguna * Cebu * Cagayan De Oro * Davao
Since 1977
MAS.3208
Short-term Decisions
LECTURE NOTES
Five steps in managerial decision-making process:
• Identify the decision problem.
• Determine the decision alternatives.
Relevant costs and benefits.
When making decisions, managers should focus only on
costs and benefits that are relevant to the decision. To be
relevant, a cost or benefit must meet the following criteria:
• It must occur in the future, not the past. Sunk
costs are never relevant.
• The total amount of the cost or benefit must
change depending on which alternative is selected.
• Relevant costs are sometimes called differential
costs, incremental costs, or avoidable costs.
Costs that will not change regardless of the
alternative selected are irrelevant and should be
ignored.
• Opportunity costs are the forgone (lost) benefits
of choosing one alternative over another.
Opportunity costs occur when resources are limited
or when capacity constraints are reached. They
are always relevant for decision-making.
• All sunk costs (i.e., costs already irrevocably
incurred) are irrelevant since they will be the same
for any alternative. All future costs that do not
differ between alternatives are irrelevant.
SHORT-TERM DECISION
Special-order decision
• A special order is outside the scope of normal
sales. If the incremental revenue exceeds the
incremental costs of filling the special order, it will
increase short-term profitability.
• If a company has excess capacity, only the
variable costs of filling the special order are
relevant.
• Fixed costs do not change in the short run and are
therefore not included in the incremental analysis.
• If a company is operating at full capacity, the
opportunity cost of lost sales is relevant and should
be incorporated into the incremental analysis.
• Other qualitative factors such as the effect on
routine customers and the opportunity to capture
new customers must also be considered.
Make-or-buy decision.
• Make-or-buy decisions involve deciding whether to
perform a particular function in-house versus
buying it from an outside supplier. They are also
called in source versus outsource decisions.
DISCUSSION QUESTIONS
STRAIGHT PROBLEMS
PROBLEM NO. 1.
Case A
Gentle Chemical Co. recently received an order for a product
it does not normally produce. Since the company has excess
production capacity, management is considering accepting
the order. In analyzing the decision, the assistant controller
is compiling the relevant costs of producing the order.
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TRINIDAD/ALENTON/URO
MAY 2022
• Evaluate the costs and benefits of the alternatives.
• Make the decision.
• Review the results of the decision.
• The relevant costs of making a product or
providing a service internally include all variable
costs plus any incremental fixed costs.
• The opportunity costs of making something
internally include alternative uses for the internal
resources.
• Many qualitative considerations including quality,
reliability and environmental concerns are also
important in make-or-buy decisions.
Drop-or-keep decision.
• Managers must often decide whether to eliminate a
business segment that is not performing as well as
expected.
• To decide whether to eliminate a segment,
managers should focus on the segment margin, or
the amount of profit generated by the segment
after variable costs and direct fixed costs have
been deducted.
• Common fixed costs would be incurred even if the
segment is eliminated and are not relevant to the
decision.
• Managers must also consider how elimination of
the segment would affect other segments or
product lines and whether alternative uses for the
resources currently devoted to the business
segment exist.
Sell-or-process further decision.
• A sell-or-process further decision determines
whether to sell a product as is or continue to refine
it.
• The incremental revenue should be compared to
the incremental cost of continuing to enhance the
product or service.
Prioritize products to maximize short-term profit
with constrained resources
• A constrained resource occurs when its capacity is
insufficient to meet the demands placed on it.
• The most constrained resource is also called the
bottleneck, which limits the system’s overall
output.
• To maximize short-term profit, managers should
prioritize products based on the amount of
contribution margin earned per unit of time for the
most constrained (bottleneck) process.
Production of the special order would require 8,000
kilograms of theolite. Gentle does not use theolite for its
regular product, but the firm has 8,000 kilograms of the
chemical on hand from the days when it used theolite
regularly. The theolite could be sold to a chemical
wholesaler for P21,750. The book value of the theolite is P3
per kilogram. Gentle could buy theolite for P3.60 per
kilogram.
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EXCEL PROFESSIONAL SERVICES, INC.
Requirements:
1. What is the relevant cost of theolite for the purpose of
analyzing the special order?
2. Discuss each of the numbers given in the exercise with
regard to its relevance in making the decision.
Case B
Gentle’s special order also requires 1,000 kilograms of
genatope, a solid chemical regularly used in the company’s
products. The current stock of genatope is 8,000 kilograms
at a book value of P12.00 per kilogram. If the special order
is accepted, the firm will be forced to restock genatope
earlier than expected, at a predicted cost of P13.00 per
kilogram. Without the special order, the purchasing
manager predicts that the price will be P12.30 when normal
restocking takes place. Any order of genatope must be in
5,000 kilograms. What is the relevant cost of genatope?
PROBLEM NO. 2.
Raymond Company makes 20,000 units per year of a
part it uses in the products it manufactures. The unit
product cost of this part is computed as follows:
Direct materials P24.70
Direct labor 16.30
Variable OH 2.30
Fixed OH 13.40
Unit product cost P56.70
An outside supplier has offered to sell the company all of
these parts it needs for P51.80 a unit. If the company
accepts this offer, the facilities now being used to make
the part could be used to make more units of a product
that is in high demand. The additional contribution
margin on this other product would be P44,000 per
year.
If the part was purchased from the outside supplier, all
of the direct labor costs of the part would be avoided.
However, P5.10 of the fixed manufacturing overhead
cost being applied to the part would continue even if the
part were purchased from the outside supplier. This
fixed manufacturing overhead cost would be applied to
the company's remaining products.
Requirements:
1. How much of the unit product cost of P56.70 is
relevant in the decision of whether to make or buy
the part?
2. What is the net total peso advantage
(disadvantage) of purchasing the part rather than
making it?
3. What is the maximum amount the company should
be willing to pay an outside supplier per unit for the
part if the supplier commits to supplying all 20,000
units required each year?
PROBLEM NO. 3.
“In my opinion, we ought to stop making our own drums
and accept that outside supplier’s offer,” said Luz Valdez,
managing director of Gold Refining Co. “At a price of P18
per drum, we would be paying P5 less than it costs us to
manufacture the drums in our own plant. Since we use
60,000 drums a year, that would be an annual cost savings
of P300,000.” Gold Refining’s present cost to manufacture
one drum is given below (based on 60,000 drums per year):
Direct material P10.35
Direct labor 6.00
Variable overhead 1.50
Fixed overhead (P2.80 general company
overhead, P1.60 depreciation and,
P0.75 supervision) 5.15
Total cost per drum P23.00
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A decision about whether to make or buy the drums is
especially important at this time since the equipment being
used to make the drums is completely worn out and must
be replaced. The choices facing the company are:
Alternative 1: Purchase new equipment and continue to
make the drums. The equipment would cost P810,000; it
would have a six-year useful life and no salvage value.
The company uses straight-line depreciation.
Alternative 2: Purchase the drums from an outside
supplier at P18 per drum under a six-year contract.
The new equipment would be more efficient than the
equipment that Antilles Refining has been using and,
according to the manufacturer, would reduce direct labor
and variable overhead costs by 30%. The old equipment
has no resale value. Supervision cost (P45,000 per year)
and direct materials cost per drum would not be affected
by the new equipment. The new equipment’s capacity
would be 90,000 drums per year. The company has no
other use for the space being used to produce the drums.
The company’s total general company overhead would be
unaffected by this decision.
Requirements:
1. To assist the managing director in making a decision,
prepare an analysis showing what the total cost and
the cost per drum would be under each of the two
alternatives given above. Assume that 60,000 drums
are needed each year. Which course of action would
you recommend to the managing director?
2. Would your recommendation in (1) above be the same
if the company’s needs were:
a. 75,000 drums per year
b. 90,000 drums per year
3. What other factors would you recommend that the
company consider before making a decision?
PROBLEM NO. 4.
Java Company produces a single product. The cost of
producing and selling a single unit of this product at the
company's normal activity level of 70,000 units per month
is as follows:
Direct materials P29.60
Direct labor 5.80
Variable OH 2.50
Fixed OH 17.20
Var S & A 1.80
Fixed S & A 6.70
The normal selling price of the product is P72.90 per
unit. An order has been received from an overseas
customer for 2,000 units to be delivered this month at a
special discounted price. This order would have no effect
on the company's normal sales and would not change
the total amount of the company's fixed costs. The
variable selling and administrative expense would be
P1.10 less per unit on this order than on normal sales.
Direct labor is a variable cost in this company.
Requirements:
1. Suppose there is ample idle capacity to produce the
units required by the overseas customer and the
special discounted price on the special order is
P66.10 per unit. If the special order is accepted, by
how much is the company's net operating income
for the month going to increase (decrease)?
2. Suppose the company is already operating at
capacity when the special order is received from the
overseas customer. What would be the opportunity
MAS.3208
EXCEL PROFESSIONAL SERVICES, INC.

cost of each unit delivered to the overseas Buttons, thread, P2.00

customer? lining
3. Suppose there is not enough idle capacity to Wool yarn 16.00
produce all of the units for the overseas customer Total raw 18.00
and accepting the special order would require materials
cutting back on production of 1,300 units for Direct labor 5.80
regular customers. What would be the minimum Manufacturing 8.70 32.50
acceptable price per unit for the special order? overhead
Manufacturing profit P(2.50)
PROBLEM NO. 5. (loss)
Alvarez Products makes outdoor shirts. Data relating to the • Originally, all of the wool yarn was used to
coming year’s planned operations are as follows. produce sweaters, but in recent years a market has
Sales (230,000 shirts) P4,140,000 developed for the wool yarn itself. The yarn is purchased
Cost of goods sold 2,760,000 by other companies for use in production of wool blankets
Gross profit P1,380,000 and other wool products. Since the development of the
Selling and administrative expenses 805,000 market for the wool yarn, a continuing dispute has existed
Income P 575,000 in the Coldie Company as to whether the yarn should be
The factory has capacity to make 250,000 shirts per year. sold simply as yarn or processed into sweaters. Current
Fixed costs included in cost of goods sold are P690,000. The cost and revenue data on the yarn are given below:
only variable selling, general, and administrative expenses Per Spindle
are a 10% sales commission and a P1.50 per shirt licensing Selling price P 20.00
fee paid to the designer. Cost to manufacture:
A chain store manager has approached the sales manager Raw materials (raw wool) P7.00
of Alvarez Products offering to buy 15,000 shirts at P14 Direct labor 3.60
per shirt. These shirts would be sold in areas where Manufacturing overhead 5.40 16.00
Alvarez’s shirts are not now sold. The sales manager
Manufacturing profit P 4.00
believes that accepting the offer would result in a loss
because the average total cost of a shirt is P15.50 The market for sweaters is temporarily depressed, due to
(2,760,000 + P805,000)/230,000). He feels that even unusually warm weather. This has made it necessary for
though sales commissions would not be paid on the order, the company to discount the selling price of the sweaters to
a loss would still result. P30 from the normal P40 price. Since the market for wool
yarn has remained strong, the dispute has again surfaced
Requirements: over whether the yarn should be sold outright rather than
1. Determine whether the company should accept the processed into sweaters. The sales manager thinks that the
offer. production of sweaters should be discontinued; she is upset
2. Suppose that the order was for 40,000 shirts instead about having to sell sweaters at a P2.50 loss when the yarn
of 15,000, what will be the company’s income if the could be sold for a P4.00 profit. However, the production
special order is accepted? superintendent is equally upset at the suggestion that he
3. What is the lowest price that the company could close down a large portion of the factory. He argues that
accept and still earn P575,000 using the order size the company is in the sweater business, not the yarn
of 15,000 units and 40,000 units? business, and that the company should focus on its core
4. How many units of sales at the regular price could the strength. Due to the nature of the production process,
company loss before it become unprofitable to accept virtually all of the manufacturing overhead costs are fixed
the order in requirement no. 2? and would not be affected even if sweaters were
discontinued. Manufacturing overhead is assigned to
products on the basis of 150% of direct labor cost.
PROBLEM NO. 6.
Biologi Company produces chemicals for the swimming pool
Requirements:
industry. In one joint process, 10,000 gallons of GSX are
1. Would you recommend that the wool yarn be sold
processed in 7,000 gallons of Xenolite and 3,000 gallons of
outright or processed into sweaters?
Banolide. The cost the joint process, including the GSX, is
2. What is the lowest price that the company should
P19,000. The firm allocates P13,300 of the joint cost the
accept for a sweater?
Xenolite and P5,700 of the cost to the Banolide. The 3,000
gallons of Banolide can be sold at the split-off point for
PROBLEM NO. 8.
P2,500, or be processed further into a product called
Maxinne Dental Clinic is considering the purchase of a new
Kitrocide. The sales value of 3,000 gallons of Kitrocide is
lens grinder to replace a machine that was purchased
P10,000, and the additional processing cost is P8,100.
several years ago. Selected information on the two
machines is given below:
Requirement:
Old New
Should the company sell Banolide at split-off point or
Original cost when new P80,000 P85,000
process it further?
Accumulated depreciation to 32,000
date
PROBLEM NO. 7.
Current salvage value 26,000
The Coldie Company produces sweaters. The company buys
Annual operating cost 40,000 30,000
raw wool on the market and processes it into wool yarn from
Remaining useful life 4 years 4 years
which the sweaters are woven. One spindle of wool yarn is
required to produce one sweater. The costs and revenues
Requirement:
associated with the sweaters are given below:
Compute the total advantage or disadvantage of using
Per Sweater
the new machine instead of the old machine over the
Selling price P 30.00
next four years.
Cost to manufacture:
Raw materials:

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EXCEL PROFESSIONAL SERVICES, INC.

PROBLEM NO. 9. Requirements:

Sheryl Company manufactures tents and sleeping bags. 1. Which orders would you recommend that the
Tents are priced at P80, have variable cost of P55, and direct company work on next week – the orders for
fixed costs of P120,000. Sleeping bags are priced at P60, product Alpha, product Beta, or product Charlie?
have variable cost of P35, and direct fixed costs of P66,000. 2. A foreign supplier could furnish Garter with
Common fixed costs equal P200,000. Last year, the division additional stocks of the raw material at a
sold 5,000 tents and 10,000 sleeping bags. substantial premium over the usual price. If there
is unfilled demand for all three products, what is
Requirements: the highest price that Garter should be willing to
1. What was the segment margin for tents last year? pay for an additional pound of materials?
2. What was the segment margin for sleeping bags last
year? PROBLEM NO. 12.
3. What was Sheryl's operating income last year? Andretti Company has a single product called AFAR. The
4. If Sheryl stopped making tents, what would operating company normally produces and sells 72,000 AFAR each
income be? year at a selling price of P35 per unit. The company’s unit
costs at this level of activity are given below:
PROBLEM NO. 10. Per Unit Total
Del Mundo Company expects the following results for the Direct materials P12.00
year (in thousand pesos). Fixed costs, all unavoidable, are Direct labor 4.50
allocated based on relative peso sales. Variable OH 2.50
Fixed OH 5.00 P360,000
Variable selling expenses 1.50
Fixed selling expenses 3.50 P252,000
Total cost per unit P29.00
Prod A Prod B Total
Sales P450 P400 P850 Requirements:
Variable Costs 200 100 300 A number of questions relating to the production and sale
Contribution margin P250 P300 P550 of AFAR follow. Each question is independent.
Fixed costs 110 180 290 1. Assume that Andretti Company has sufficient
Profit P140 P120 P260 capacity to produce 90,000 AFAR each year without
any increase in fixed manufacturing overhead costs.
Requirements: The company could increase its sales by 20% above
Answer each of the following questions independently, the present 72,000 units each year if it were willing
unless otherwise instructed. to increase the fixed selling expenses by P120,000.
1. The managers are considering increasing advertising Would the increased fixed expenses be justified?
for product A by P30,000. They expect to achieve a 2. Assume again that Andretti Company has sufficient
40% increase in volume for product A with no change capacity to produce 90,000 AFAR each year. A
in selling price, but some of that increase will be at customer in a foreign market wants to purchase
the expense of product B. Sales of B are expected to 20,000 AFAR. Import duties on the AFAR would be
decline by 15%. What will be the increase in total P1.90 per unit, and costs for permits and licenses
profit if the managers approve the proposed action? would be P18,000. The only selling costs that would
2. What is the maximum percentage decline in volume be associated with the order would be P3.50 per unit
of product B that would leave the action in shipping cost. You have been asked by the president
requirement 1 just barely desirable? to compute the per unit break-even price on this
3. The managers are considering dropping product A and order.
replacing it with product C. Introducing product C 3. The company has 5,000 AFAR on hand that have
would increase total fixed costs by P75,000. C’s some irregularities and are therefore considered to
contribution margin percentage is 40%. What peso be “seconds.” Due to the irregularities, it will be
sales of product C are needed to maintain the original impossible to sell these units at the normal price
profit of P260,000? through regular distribution channels. What unit
cost figure is relevant for setting a minimum selling
PROBLEM NO. 11. price?
Garter Company manufactures three products: Alpha, Beta, 4. Due to a strike in its supplier’s plant, Andretti
and Charlie. The selling price, variable costs, and Company is unable to purchase more material for the
contribution margin for one unit of each product follow: production of AFAR. The strike is expected to last for
Alpha Beta Charlie two months. Andretti Company has enough material
Selling price P180 P270 P240 on hand to continue to operate at 20% of normal
Less: Variable expenses levels for the two-month period. As an alternative,
Direct materials 24 72 32 Andretti could close its plant down entirely for the
Others 102 90 148 two months. If the plant were closed, fixed
Total variable overhead costs would continue at 60% of their
Expenses 126 162 180 normal level during the two-month period; the fixed
Contribution margin P54 P108 P60 selling costs would be reduced by 30% while the
CMR 30% 40% 25% plant was closed. What would the peso advantage or
The same raw material is used in all three products. disadvantage of closing the plant for the two-month
Garter Company has only 5,000 pounds of material on period?
hand and will not be able to obtain any more material 5. An outside manufacturer has offered to produce
for several weeks due to a strike in its supplier’s plant. AFAR for Andretti Company and to ship them directly
Management is trying to decide which product(s) to to Andretti’s customers. If Andretti company accepts
concentrate on next week in filling its backlog of orders. this offer, the facilities that it uses to produce AFAR
The material costs P8 per pound. would be idle; however, fixed overhead costs would
be reduced by 80% of their present level. Since the

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EXCEL PROFESSIONAL SERVICES, INC.

outside manufacturer would pay for all the costs of e. none of the above
shipping, the variable selling costs would be only
two-thirds of their present amount. Compute the 9. Pearce Sign Company manufactures signs from
unit cost figure that is relevant for comparison to direct materials to the finished product. This is
whatever quoted price is received from the outside considered:
manufacturer. a. insourcing
b. outsourcing
MULTIPLE CHOICE QUESTIONS c. relevant costing
d. sunk costing
1. A computer system installed last year is an example
of a(n): 10. In a make-or-buy decision, which of the following is
a. sunk cost true?
b. relevant cost a. Variable costs are the only relevant costs.
c. differential cost b. Allocated fixed costs are relevant.
d. avoidable cost c. Alternative uses of space and machinery are
relevant.
2. Which of the following costs always differ among d. Making is the correct decision when there is idle
future alternatives? capacity.
a. fixed costs e. None of the above statements is true.
b. historical costs
c. relevant costs 11. In a make or buy decision, the opportunity cost of
d. variable costs capacity could be considered to
a. decrease the price of units purchased from
3. Quantitative factors: suppliers
a. include financial information, but not b. decrease the cost of units manufactured by the
nonfinancial information company
b. can be expressed in monetary terms c. increase the price of units purchased from
c. are always relevant when making decisions suppliers
d. include employee morale d. not be considered since opportunity costs are
not part of the accounting records
4. What is always the question to ask to determine if
revenues or costs are relevant? 12. The opportunity cost of making a component part in
a. What is the time frame for achieving results? a factory with excess capacity for which there is no
b. What difference will an action make? alternative use is
c. Who will be responsible? a. the total manufacturing cost of the component
d. How much will it cost?
b. the fixed manufacturing cost of the component
c. the total variable cost of the component
5. Which of following are risks of outsourcing the
d. zero
production of a part?
a. unpredictable quality
b. unreliable delivery 13. When deciding whether to discontinue a segment of
c. unscheduled price increases a business, managers should focus on:
d. All of these answers are correct. a. equipment used by that segment that could
become idle
b. reallocation of corporate costs
6. Which of the following minimize the risks of
c. how total costs differ among alternatives
outsourcing?
d. operating income per unit of the discontinued
a. the use of short-term contracts that specify price
segment
b. the responsibility for on-time delivery is now the
responsibility of the supplier
c. building close relationships with the supplier 14. In the decision on whether or not to drop an
d. All of these answers are correct. unprofitable product line, the product line will most
likely be dropped if:
a. all of the product line's fixed costs are
7. Factors used to decide whether to outsource a part
unavoidable.
include:
b. the product line's total fixed costs are less than
a. the supplier’s cost of direct materials
the contribution margin lost from dropping the
b. if the supplier is reliable
product line.
c. the original cost of equipment currently used for
c. the contribution margin lost from dropping the
production of that part
product line is less than the fixed costs avoided
d. past design costs used to develop the current
from dropping the product line.
composition of the part
d. the contribution margin lost from dropping the
e. none of the above.
product line is more than the fixed costs avoided
from dropping the product line.
8. Relevant costs of a make-or-buy decision include all
of the following except: 15. When there is excess capacity, it makes sense to
a. fixed salaries that will not be incurred if the part is accept a one-time-only special order for less than
outsourced the current selling price when:
b. current direct material costs of the part a. incremental revenues exceed incremental costs
c. special machinery for the part that has no resale b. additional fixed costs must be incurred to
value accommodate the order
d. material-handling costs that can be eliminated

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EXCEL PROFESSIONAL SERVICES, INC.

c. the company placing the order is in the same use of the facilities. What would be the impact on
market segment as your current customers operating income if Regular is discontinued?
d. it never makes sense a. P0
b. P10,400 increase
16. When deciding to accept a one-time-only special c. P20,000 increase
order from a wholesaler, management should do all d. P39,600 decrease
of the following, except
a. to analyze product costs 22. Smith Company has 27,000 direct labor hours
b. to consider the special order’s impact on future available for producing X and Y. Consider the
prices of their products following information:
c. to determine whether excess capacity is Product Product
available X Y
d. to verify past design costs for the product Required DLH 2 3
Maximum demand (units) 6,000 8,000
17. Which of the following is not a correct use of the Contribution margin per P5.00 P6.00
term “opportunity cost”? unit
a. Opportunity costs are considered period costs If Smith follows proper managerial accounting
rather than inventoriable costs for accounting practices, which of the following production
purposes. schedules should the company set?
b. Opportunity costs must be considered by Product X Product Y
managers when making decisions a. None 8,000
c. Opportunity cost plus the incremental future b. 1,500 8,000
revenues and costs equal the relevant revenues c. 6,000 None
and costs of any alternative when capacity is d. 6,000 5,000
constrained.
d. The opportunity cost of holding inventory is the 23. Darren Industries operates a cafeteria for its
income forgone by tying up money in inventory employees. The operation of the cafeteria requires
and not investing it elsewhere. fixed costs of P4,700 per month and variable costs
of 40 percent of sales. Cafeteria sales are currently
18. When a scarce resource, such as space, exists in an averaging P12,000 per month. Darren has an
organization, the criterion that should be used to opportunity to replace the cafeteria with vending
determine production is machines. Gross customer spending at the vending
a. contribution margin per unit machines is estimated to be 40 percent greater
b. selling price per unit than the current sales because the machines are
c. contribution margin per unit of scarce resource available at all hours. By replacing the cafeteria
with vending machines, Darren would receive 16
d. total variable costs of production percent of the gross customer spending and avoid
all cafeteria costs. A decision by Darren Industries
19. In a joint manufacturing process, joint costs to replace the cafeteria with vending machines will
incurred prior to a decision as to whether to result in a monthly increase (decrease) in operating
process the products after the split-off point should income of
be viewed as: a. P(580) c. P2,588
a. relevant costs. c. sunk costs. b. P1,820 d. P188
b. standard costs. d. differential
costs. 24. Wallace Company produces 15,000 pounds of
Product A and 30,000 pounds of Product B every
20. In equipment-replacement decisions, which one of week by incurring a common variable cost of
the following does not affect the decision-making P400,000. These two products can be sold as is or
process? processed further. Further processing of either
A. Current disposal price of the old equipment. product does not delay the production of
B. Operating costs of the old equipment. subsequent batches of the joint product. Data
C. Original fair market value of the old equipment. regarding these two products are as follows:
D. Cost of the new equipment.
21. Techno Resource manufactures two products: Product A Product B
Regular and Super. The results of operations for the Selling price per pound without further processing
year follow.
Regular Super P12.00
Total P9.00
Units 10,000 3,700 13,700
Selling price per pound with further processing
Sales P240,000 P740,000 P980,000
Cost of goods sold 180,000 481,000 661,000
15.00 11.00
Gross margin 60,000 259,000 319,000
Total separate weekly variable costs of further
Selling expenses 60,000 134,000 194,000
processing
Operating income P 0 P125,000 P125,000
Fixed manufacturing costs included in cost of goods 50,000 45,000
sold amount to P3 per unit for Regular and P20 per To maximize Wallace Company’s manufacturing
unit for Super. Variable selling expenses are P4 per contribution margin, the total separate variable costs
unit for Regular and P20 per unit for Super; of further processing that should be incurred each week
remaining selling amounts are fixed. Techno wants are
to drop the Regular product line. If the line is a. P45,000 c. P95,000
dropped, company-wide fixed manufacturing costs b. P50,000 d. P0
would fall by 10% because there is no alternative

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EXCEL PROFESSIONAL SERVICES, INC.
25. Peluso Company, a manufacturer of snowmobiles, is
operating at 70 percent of plant capacity. Peluso’s
plant manager is considering making the headlights
now being purchased for P1,100 each, a price that
is not expected to change in the near future. The
Peluso plant has the equipment and labor force
required to manufacture the headlights. The design
engineer estimates that each headlight requires
P400 of direct materials and P300 of direct labor.
Peluso’s plant overhead rate is 200 percent of
direct labor costs, and 40 percent of the overhead
is fixed cost. A decision by Peluso Company to
manufacture the headlights will result in a gain
(loss) for each headlight of
a. P(200) c. P40
b. P160 d. P280
26. The following are a company’s monthly unit costs to
manufacture and market a particular product:
Direct materials, P2.00; Direct labor, P2.40;
Variable indirect manufacturing costs, P1.60; Fixed
indirect manufacturing costs, P1.00; Variable
marketing costs, P2.50; Fixed marketing costs,
P1.50. The company must decide to continue
making the product or buy it from an outside
supplier. The supplier has offered to make the
product at the same level of quality that the
company can make it. Fixed marketing costs would
be unaffected, but variable marketing costs would
be reduced by 30% if the company were to accept
the proposal. What is the maximum amount per
unit that the company can pay the supplier without
decreasing its operating income?
a. P8.50 c. P7.75
b. P6.75 d. P5.25
27. A manufacturing company's primary goals include
product quality and customer satisfaction. The
company sells a product, for which the market
demand is strong, for P50 per unit. Due to the
capacity constraints in the Production Department,
only 300,000 units can be produced per year. The
current defective rate is 12% (i.e., of the 300,000
units produced, only 264,000 units are sold and
36,000 units are scrapped). There is no revenue
recovery when defective units are scrapped. The
full manufacturing cost of a unit is P29.50,
including
Direct materials P17.50
Direct labor 4.00
Fixed manufacturing overhead 8.00
The company's designers have estimated that the
defective rate can be reduced to 2% by using a
different direct material. However, this will increase the
direct materials cost by P2.50 per unit to P20 per unit.
The net benefit of using the new material to
manufacture the product will be
A. P(120,000) C. P750,000
B. P120,000 D. P1,425,000
28. A company can sell all the units it can produce of
either Product A or Product B but not both. Product
A has a unit contribution margin of P36 and takes
two machine hours to make and Product B has a
unit contribution margin of P45 and takes three
machine hours to make. If there are 1,000 machine
hours available to manufacture a product, income
will be
a. P3,000 less if Product B is made.
b. P3,000 less if Product A is made.
c. P3,000 more if Product A is made.
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d. the same if either product is made.
29. The Calvary Company manufactures Part No. XXX
for use in its production cycle. The cost per unit for
20,000 units of part No. XXX are as follows:
Direct materials P6
Direct labor 30
Variable overhead 12
Fixed overhead applied 16
P64
The Cross Company has offered to sell 20,000 units of
part No. XXX to Calvary for P60 per unit. Calvary will
make the decision to buy the part from Cross if there
is a savings of P25,000 for Calvary. If Calvary accepts
Cross’s offer, P9 per unit of the fixed overhead applied
would be totally eliminated. Furthermore, Calvary has
determined that the released facilities could be used to
save relevant costs in the manufacture of part No. YYY.
In order to have a savings of P25,000, the amount of
the relevant costs that would be saved by using the
released facilities in the manufacture of part No. YYY
would have to be
a. P80,000
b. P85,000
c. P125,000
d. P140,000
e. P35,000
30. Roxas Company currently sells 1,000 units of
product M for P2 each. Variable costs are P1.50. A
discount store has offered P1.70 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 become
unprofitable.
a. 200 units.
b. 160 units.
c. 400 units.
d. 500 units
31. One hundred pounds of raw material W is processed
into 60 pounds of X and 40 pounds of Y. Joint costs
are P135. X is sold for P2.50 per pound and Y can
be sold for P3.00 per pound or processed further
into 30 pounds of Z (10 pounds are lost in the
second process) at an additional cost of P60. Each
pound of Z can then be sold for P6. What is the
effect on profits of processing product Y further into
product Z?
a. P60 increase c. No change
b. P30 increase d. P60 decrease
32. Clay Co. has considerable excess manufacturing
capacity. A special job order's cost sheet includes
the following applied manufacturing overhead
costs:
Fixed costs P21,000
Variable costs P33,000
The fixed costs include a normal P3,700 allocation
for in-house design costs, although no in-house
design will be done. Instead the job will require the
use of external designers costing P7,750. What is
the total amount to be included in the calculation to
determine the minimum acceptable price for the
job?
a. P36,700 c. P54,000
b. P40,750 d. P58,050
33. Nicholas, Inc., has provided the following unit data
for review:
MAS.3208
EXCEL PROFESSIONAL SERVICES, INC.

Simple Product Advanced Product 37. Kirklin Co. is a manufacturer operating at 95% of
Selling price P22.75 P55.00 capacity. Kirklin has been offered a new order at
Variable cost 10.00 34.50 P7.25 per unit requiring 15% of capacity. No other
Pounds of scarce use of the 5% current idle capacity can be found.
raw material However, if the order were accepted, the
per unit 3 5 subcontracting for the required 10% additional
capacity would cost P7.50 per unit. The variable
Which product, Simple or Advanced, is most profitable cost of production for Kirklin on a per-unit basis
for Nicholas, Inc., to manufacture? follows:
a. Both in ratio of 3 : 5 Materials P3.50
b. Both in ratio of 5 : 8 Labor 1.50
c. Simple Variable overhead 1.50
d. Advanced P6.50
In applying the contribution margin approach to
34. Plainfield Company manufactures part G for use in evaluating whether to accept the new order,
its production cycle. The costs per unit for 10,000 assuming subcontracting, what is the average
units of part G are as follows: variable cost per unit?
Direct materials P3 a. P6.83 c. P7.17
Direct labor 15 b. P7.00 d. P7.25
Variable overhead 6
Fixed overhead 8 38. Ysabelle Industries, Inc. has an opportunity to
P32 acquire a new equipment to replace one of its
Verona Company has offered to sell Plainfield 10,000 existing equipment. The new equipment would cost
units of part G for P30 per unit. If Plainfield accepts P900,000 and has a five-year useful life, with a
Verona’s offer, the released facilities could be used to zero terminal disposal price. Variable operating
save P45,000 in relevant costs in the manufacture of costs would be P1 million per year. The present
part H. In addition, P5 per unit of the fixed overhead equipment has a book value of P500,000 and a
applied to part G would be totally eliminated. remaining life of five years. Its disposal price now
is P50,000 but would be zero after five years.
What alternatives is more desirable and by what Variable operating costs would be P1,250,000 per
amount? year. Considering the five years in total but
Alternative Amount ignoring the time value of money and income taxes.
a. Manufacture P10,000 Ysabelle should
b. Manufacture P15,000 a. Replace due to P400,000 advantage.
c. Buy P35,000 b. Not replace due to P150,000 disadvantage.
d. Buy P65,000 c. Replace due to P350,000 advantage.
d. Not replace due to P100,000 disadvantage.
35. The Twilight Company has 1,000 obsolete twinkling Use the following information for the next two questions.
lights that are carried in stock at a manufacturing Elly Industries is a multi-product company that currently
cost of P200,000. If the twinkling lights are manufactures 30,000 units of Part MR24 each month for use
redesigned for P50,000, they could be sold for in production. The facilities now being used to produce Part
P90,000. If the twinkling lights are scrapped, they MR24 have a monthly fixed cost of P150,000 and a capacity
could be sold for P10,000. What alternative is to produce 84,000 units per month. If Elly would buy Part
more desirable and what are the total relevant MR24 from an outsize supplier, the facilities would be idle,
costs for that alternative? but its fixed costs would continue at 40 percent of their
a. Redesign and P50,000. present amount. The variable production costs of Part MR24
b. Redesign and P150,000. amount to P11 per unit.
c. Redesign and P250,000.
d. Scrap and P200,000. 39. If Elly Industries is able to obtain Part MR24 each
e. Neither, as there is an overall loss under either month, it would realize a net benefit by purchasing
alternative. Part MR24 from an outside supplier only if the
supplier’s unit price is less than
36. Tagaytay Open-Air Flea Market is along the highway a. P14.00 c. P16.00
leading to Taal Vista Lodge. Arnel has a stall which b. P11.00 d. P13.00
specializes in hand-crafted fruit baskets that sell for
P60 each. Daily fixed costs are P15,000 and 40. If Elly Industries is able to obtain Part MR24 from
variable costs are P30 per basket. An average of an outside supplier at a unit purchase price of
750 baskets are sold each day. Arnel has a P12.875, the monthly usage at which it will be
capacity of 800 baskets per day. By closing time, indifferent between purchasing and making Part
yesterday, a bus load of teachers who attended a MR24 is
seminar at the Development Academy of the a. 30,000 units c. 80,000 units
Philippines stopped by Arnel’s stall. Collectively, b. 32,000 units d. 48,000 units
they offered Arnel P1,500 for 40 baskets. Arnel
should have Use the following information for the next two questions.
a. Rejected the offer since he could have lost P500. Hermo Company has just completed a hydro-electric plant
b. Rejected the offer since he could have lost P900. at a cost of P21,000,000. The plant will provide the
c. Accepted the offer since he could have P300 company’s power needs for the next 20 years. Hermo will
contribution margin. use only 60% of the power output annually. At this level of
d. Accepted the offer since he could have P700 capacity, Hermo’s annual operating costs will amount to
contribution margin. P1,800,000, of which 80 percent are fixed.

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EXCEL PROFESSIONAL SERVICES, INC.

Quigley Company currently purchases its power from MP Additional information:

Electric at an annual cost of P1,200,000. Hermo could Management estimates that closing the mall store would
supply this power thus increasing output of the plant to 90 result in a 10% percent decrease in downtown store
percent of capacity. This would reduce the estimated life of sales, while closing the downtown store would not affect
the plant to 14 years. mall store sales. One-fourth of each store’s fixed
41. If Hermo decides to supply power to Quigley, it expenses would continue through December 31 of the
wants to be compensated for the decrease in the next year if either store was closed. The operating results
life of the plant and the appropriate variable costs. for November are representative of all months.
Hermo has decided that the charge for the 43. The increase or decrease in PM Specialists’ monthly
decreased life should be based on the original cost operating income if the mall store is closed is
of the plant calculated on a straight-line basis. The a. P32,400 decrease c. P18,000 decrease
minimum annual amount that Hermo would charge b. P75,600 increase d. P122,400 decrease
Quigley would be
a. P450,000 c. P990,000 44. The management of PM Specialists is considering a
b. P630,000 d. P1,050,000 promotional campaign at the mall store that would
not affect the downtown store. Annual promotional
42. The maximum amount Quigley would be willing to expenses at the mall store would be increased by
pay Hermo annually for the power is P180,000 in order to increase mall store sales by
a. P600,000 c. P1,200,000 10 percent. What would be the effect of this
b. P1,050,000 d. P450,000 promotional campaign on the company’s monthly
operating income?
Use the following information for the next three a. P10,800 increase c. P129,600 increase
questions. b. P4,200 decrease d. P169,200 decrease
PM Specialists, a chain of retail stores, sells books and
music CDs. The condensed monthly income data are 45. One-half of the mall store’s peso sales are from
presented in the following table for November of this items sold at their variable cost to attract
year. customers to the store. PM Specialists’
Downtown Mall Total management is considering the deletion of these
Sales P240,000 P360,000 P600,000 items, a move that would reduce the mall store’s
Less Variable 96,000 252,000 348,000 direct fixed expenses by 15 percent and result in
expenses the loss of 20 percent of the remaining mall store’s
Contribution 144,000 108,000 252,000 sales volume. This change would not affect the
margin downtown store. What would be the effect on PM
Less Fixed 60,000 120,000 180,000 Specialists’ monthly operating income if the items
expenses sold at their variable cost are eliminated?
Operating P 84,000 P(12,000) P 72,000 a. P3,600 increase c. P18,000 increase
income b. P3,600 decrease d. P57,600 decrease

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