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Since 1977
MANAGEMENT SERVICES
MS 3408 – SHORT-TERM DECISIONS
LECTURE NOTES
Five steps in managerial decision-making process:
• Identify the decision problem.
• Determine the decision alternatives.
• Evaluate the costs and benefits of the
alternatives.
• Make the decision.
• Review the results of the decision.
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.
• The relevant costs of making a product or
providing a service internally include all variable
costs plus any incremental fixed costs.
•
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TRINIDAD
MAY 2023
• 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.
STRAIGHT PROBLEMS
PROBLEM NO. 1.
Classic Company sells office furniture in the northern
Luzon area. As part of its service, it delivers furniture
to customers. The costs associated with the
acquisition and annual operation of a delivery truck
are given below:
Insurance P6,400
License 750
Taxes (vehicle) 1,250
Garage rent for parking (per truck) 12,000
Depreciation (P180,000/5 years) *36,000
Gasoline, oil, tires, and repairs (per 2.00
km)
*Based on obsolescence rather than wear and tear.
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 EXCEL PROFESSIONAL SERVICES, INC.
Requirements:
1. At the beginning of the second year, Classic
Company is unsure whether to use the truck or
leave it parked in the garage and have all
hauling done commercially. (The government
requires the payment of vehicle taxes even if the
vehicle is not used.) What costs from the
previous list are relevant to this decision?
2. Assume that the company decides to use the
truck during the second year. Near year-end an
order is received from a customer over 1,000
kilometers away. What costs from the previous
list are relevant in a decision between using the
truck to make the delivery and having the
delivery done commercially?
3. Occasionally, the company uses two trucks at
the same time. For this reason, some thought is
being given to purchasing a second truck. The
total number of kilometers driven would be the
same as if only one truck was owned. What
costs from the previous list are relevant to a
decision over whether to purchase the second
truck?
PROBLEM NO. 2.
Corsage Company is currently manufacturing Part 43,
producing 15,000 units annually. The part is used in the
production of several products made by Corsage. The
cost per unit for Part 43 is as follows:
Direct materials P20.00
Direct labor 10.00
Variable overhead 5.00
Fixed overhead 3.00
Total P38.00
Of the total fixed overhead assigned to Part 43,
P9,000 is direct fixed overhead (the annual lease cost
of machinery used to manufacture Part 43), and the
remainder is common fixed overhead. An outside
supplier has offered to sell the part to Corsage for
P37. There is no alternative use for the facilities
currently used to produce the part. No significant
non-unit based overhead costs incurred.
Requirements:
1. Should Corsage Company make or buy Part 43?
2. What is the maximum amount per unit that
Corsage would be willing to pay to an outside
supplier?
PROBLEM NO. 3.
Leland Manufacturing Company uses 10 units of part
KJ37 each month in the production of radar equipment.
The cost of manufacturing one unit of K37 is the
following:
Direct material P1,000
Material handling (20% of direct material cost) 200
Direct labor 8,000
Manufacturing overhead (150% of direct labor) 12,000
Total manufacturing cost P21,200
Material handling represents the direct variable costs of
the Receiving Department that are applied to direct
materials and purchased components on the basis of
their cost. This is a separate charge in addition
manufacturing overhead. Leland’s annual manufacturing
overhead budget is one-third variable and two-third
fixed. Scott Supply, one of Leland’s reliable vendors,
has offered to supply part number K37 at a unit price of
P15,000.
Requirements:
1. If Leland purchases the K37 units from Scott, the
capacity Leland used to manufacture these parts
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would be idle. Should Leland decide to purchase
the parts from Scott, the unit cost of K37 would
increase or decrease by what amount?
2. Assume Leland Manufacturing is able to rent out all
the idle capacity for P25,000 per month. If Leland
decides to purchase the 10 units from Scott Supply,
Leland’s monthly cost for K37 would increase or
decrease by what amount?
PROBLEM NO. 4.
Rippey Corporation manufactures a single product with
the following unit costs for 5,000 units:
Direct materials P60
Direct labor 30
Factory overhead (40% variable) 90
Selling expenses (60% variable) 30
Administrative expenses (20% variable) 15
Total per unit P225
Recently, a company approached Rippey Corporation
about buying 1,000 units for P225. Currently, the models
are sold to dealers for P412.50. Rippey's capacity is
sufficient to produce the extra 1,000 units. No additional
selling expenses would be incurred on the special order.
Requirements:
1. What is the profit earned by Rippey Corporation on
the original 5,000 units?
2. Should Rippey accept the special order if its goal is
to maximize short-run profits? How much will
income be affected?
3. Determine the minimum price Rippey would want to
receive in order to increase profits by P7,500 on the
special order.
PROBLEM NO. 5.
Potsdam Company manufactures and sells a single
product called a Ret. Operating at capacity, the company
can produce and sell 20,000 Rets per year. Costs
associated with this level of production and sales are
given below:
Unit Total
Direct materials P12.00 P240,000
Direct labor 6.00 120,000
Variable manufacturing overhead 4.00 80,000
Fixed manufacturing overhead 7.00 140,000
Variable selling expense 3.00 60,000
Fixed selling expense 4.00 80,000
Total cost P36.00 P720,000
The Rets normally sell for P42.00 each. Fixed
manufacturing overhead is constant at P140,000 per
year within the range of 15,000 through 20,000 Rets per
year.
Requirements:
1. Assume that due to a recession, Potsdam Company
expects to sell only 15,000 Rets through regular
channels next year. A large retail chain has offered
to purchase 5,000 Rets if Potsdam Company is
willing to accept a 15% discount off the regular
price. There would be no sales commissions on this
order; thus, variable selling expenses would be
slashed by 80%. However, Potsdam Company
would have to purchase a special machine to
engrave the retail chain’s name on the 5,000 units.
This machine would cost P5,000. Potsdam Company
has no assurance that the retail chain will purchase
additional units in the future. Determine the impact
on profit next year if this special order is accepted.
2. Refer to the original data. Assume again that
Potsdam Company expects to sell only 15,000 Rets
through regular channels next year. A government
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EXCEL PROFESSIONAL SERVICES, INC.

unit would like to make a one-time-only purchase of Fix Roach Total

5,000 Rets. The special customer would pay a fixed Division Division
fee of P7.00 per Ret, and it would reimburse Sales revenue P60,000 P 40,000 P100,000
Potsdam Company for all costs of production Variable expenses 20,000 15,000 35,000
(variable and fixed) associated with the units. Contribution margin P40,000 P 25,000 P 65,000
Since the buyer would pick up the Rets with its own Direct fixed
trucks, there would be no variable selling expenses expenses 12,500 30,000 42,500
associated with this order. If Potsdam Company Segment margin P27,500 P (5,000) P 22,500
accepts the order, how much will profit increase or Allocated common
decrease for the year? costs 10,000 7,500 17,500
3. Assume the same situation as that described in (2) Total relevant
above, except that the company expects to sell benefit (loss) P17,500 P(12,500) P 5,000
20,000 Rets through regular channels next year.
Thus, accepting the special customer’s order would Requirements:
require giving up regular sales of 5,000 Rets. If the 1. Determine operating income for Grant Corporation
customer’s order is accepted, how much will profit as a whole if the Roach Division is dropped.
increase or decrease from what they would be if the 2. Should the Roach Division be eliminated?
5,000 Rets were sold through regular channels?
PROBLEM NO. 9.
PROBLEM NO. 6. Nickolai Company expects the following results for the
Prime Company manufactures three products from a year (in thousand pesos). Fixed costs, all unavoidable,
common input in a joint processing operation. Joint are allocated based on relative peso sales.
processing costs up to the split-off point total P700,000
per quarter. The company allocates these costs to the Prod A Prod B Total
joint products on the basis of their total sales value at Sales P450 P400 P850
the split-off point. Unit selling prices and total output at Variable Costs 200 100 300
the split-off point are as follows: Contribution margin P250 P300 P550
Product Selling Price Quarterly Output Fixed costs 110 180 290
Economy P16 per pound 15,000 pounds Profit P140 P120 P260
Deluxe 9 per pound 20,000 pounds
Supreme 25 per gallon 4,000 gallons Requirements:
Each product can be processed further after the split- Answer each of the following questions independently,
off point. Additional processing costs (per quarter) unless otherwise instructed.
and unit selling prices after further processing are 1. The managers are considering increasing
given below: advertising for product A by P40,000. They expect
Product Addt’l Processing Costs Selling Price to achieve a 30% increase in volume for product
Economy P55,000 P20 per pound A with no change in selling price, but some of
Deluxe 75,000 P12 per pound that increase will be at the expense of product B.
Supreme 26,000 P32 per gallon Sales of B are expected to decline by 5%. What
will total profit be if the managers approve the
Requirement: proposed action?
Which product(s) should Prime Company sell at the 2. What is the maximum percentage decline in
split-off point and which product(s) should it continue volume of product B that would leave the action
processing? in requirement 1 just barely desirable?
3. The managers are considering dropping product A
PROBLEM NO. 7. and replacing it with product C. Introducing
Khrishan Optometry is considering the purchase of a product C would increase total fixed costs by
new lens grinder to replace a machine that was P75,000. C’s contribution margin percentage is
purchased several years ago. Selected information on 40%. What peso sales of product C are needed to
the two machines is given below: maintain the original profit of P260,000?
Old New
Original cost when new P80,000 P85,000 PROBLEM NO. 10.
Accumulated depreciation to 32,000 Constraint Company makes three products in a single
date facility. These products have the following unit product
Current salvage value 26,000 costs:
Annual operating cost 24,000 11,500 Products
Remaining useful life 4 years 4 years A B C
Direct materials P10.90 P15.80 P8.00
Requirement: Direct labor 12.50 12.60 9.90
Compute the total advantage or disadvantage of using Variable OH 2.40 1.20 1.40
the new machine instead of the old machine over the Fixed OH 11.60 7.20 7.80
next four years. Unit product cost P37.40 P36.80 P27.10
Additional data concerning these products are listed
PROBLEM NO. 8. below.
The operations of Grant Corporation are divided into the Products
Fix Division and the Roach Division. Projections for the A B C
next year are as follows: Mixing minutes /unit 2.00 1.00 0.50
Unit selling price P55.80 P54.60 P43.10
Variable selling cost P2.10 P1.40 P1.90
Monthly demand 2,000 1,000 3,000

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EXCEL PROFESSIONAL SERVICES, INC.
The mixing machines are potentially the constraint in
the production facility. A total of 5,900 minutes are
available per month on these machines. Direct labor is
a variable cost in this company.
Requirements:
1. How many minutes of mixing machine time would
be required to satisfy demand for all three
products?
2. How many of each product should be produced to
maximize net operating income?
3. Up to how much should the company be willing to
pay for one additional hour of mixing machine
time if the company has made the best use of the
existing mixing machine capacity?
PROBLEM NO. 11.
Radial Company has a single product called Daks. The
company normally produces and sells 60,000 Daks
each year at a selling price of P32 per unit. The
company’s unit costs at this level of activity are given
below:
Per Unit Total
Direct materials P10.00
Direct labor 4.50
Variable OH 2.30
Fixed OH 5.00 P300,000
Variable selling expenses 1.20
Fixed selling expenses 3.50 P210,000
Total cost per unit P26.50
Requirements:
A number of questions relating to the production and
sale of Daks follow. Each question is independent.
1. Assume that Radial Company has sufficient
capacity to produce 90,000 Daks each year
without any increase in fixed manufacturing
overhead costs. The company could increase its
sales by 25% above the present 60,000 units each
year if it were willing to increase the fixed selling
expenses by P80,000. Would the increased fixed
expenses be justified?
2. Assume again that Radial Company has sufficient
capacity to produce 90,000 Daks each year. A
customer in a foreign market wants to purchase
20,000 Daks. Import duties on the Daks would be
P1.70 per unit, and costs for permits and licenses
would be P9,000. The only selling costs that
would be associated with the order would be P3.20
per unit shipping cost. You have been asked by
the president to compute the per unit break-even
price on this order.
3. The company has 1,000 Daks on hand that have
some irregularities and are therefore considered to
be “seconds.” Due to the irregularities, it will be
impossible to sell these units at the normal price
through regular distribution channels. What unit
cost figure is relevant for setting a minimum
selling price?
4. Due to a strike in its supplier’s plant, Radial
Company is unable to purchase more material for
the production of Daks. The strike is expected to
last for two months. Radial Company has enough
material on hand to continue to operate at 30% of
normal levels for the two-month period. As an
alternative, Radial could close its plant down
entirely for the two months. If the plant was
closed, fixed overhead costs would continue at
60% of their normal level during the two-month
period; the fixed selling costs would be reduced by
20% while the plant was closed. What would the
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peso advantage or disadvantage of closing the
plant for the two-month period?
5. An outside manufacturer has offered to produce
Daks for Radial Company and to ship them directly
to Radial’s customers. If Radial company accepts
this offer, the facilities that it uses to produce
Daks would be idle; however, fixed overhead costs
would be reduced by 75% of their present level.
Since the outside manufacturer would pay for all
the costs of shipping, the variable selling costs
would be only two-thirds of their present amount.
Compute the unit cost figure that is relevant for
comparison to whatever quoted price is received
from the outside manufacturer.
MULTIPLE CHOICE QUESTIONS
1. A computer system installed last year is an
example of a(n):
a. sunk cost
b. relevant cost
c. differential cost
d. avoidable cost
2. The relevance of a particular cost to a decision is
determined by
a. Riskiness of the decision.
b. Amount of the cost.
c. Number of decision variables.
d. Potential effect on the decision.
3. Which of following are risks of outsourcing the
production of a part?
a. unpredictable quality
b. unreliable delivery
c. unscheduled price increases
d. All of these answers are correct.
4. When evaluating a make-or-buy decision, which
of the following does NOT need to be considered?
a. alternative uses of the production capacity
b. the original cost of the production equipment
c. the quality of the supplier's product
d. the reliability of the supplier's delivery
schedule
5. Pearce Sign Company manufactures signs from
direct materials to the finished product. This is
considered:
a. insourcing
b. outsourcing
c. relevant costing
d. sunk costing
6. In the decision on whether or not to drop an
unprofitable product line, the product line will
most likely be dropped if:
a. all of the product line's fixed costs are
unavoidable.
b. the product line's total fixed costs are less
than the contribution margin lost from
dropping the product line.
c. the contribution margin lost from dropping the
product line is less than the fixed costs
avoided from dropping the product line.
d. the contribution margin lost from dropping the
product line is more than the fixed costs
avoided from dropping the product line.
7. Which of the following is not a correct use of the
term “opportunity cost”?
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EXCEL PROFESSIONAL SERVICES, INC.

a. Opportunity costs are considered period costs use of 4,200 pounds of Hydrol. Which of the
rather than inventoriable costs for accounting following is (are) relevant in deciding whether to
purposes. accept the special order?
b. Opportunity costs must be considered by a. The 300-pound remaining inventory of Hydrol
managers when making decisions b. The P4.05 market price
c. Opportunity cost plus the incremental future c. The P3.40 purchase price
revenues and costs equal the relevant d. 4,500 pounds of Hydrol
revenues and costs of any alternative when
capacity is constrained. 14. For the past 12 years, the Blue Company has
d. The opportunity cost of holding inventory is produced the small electric motors that fit into its
the income forgone by tying up money in main product line
inventory and not investing it elsewhere. of dental drilling equipment. As material costs
have steadily increased, the controller of the Blue
8. Which of the following statements is true when Company is reviewing the decision to continue to
making a decision between two alternatives? make the small motors and has identified the
a. Variable costs may not be relevant when the following facts:
decision alternatives have the same activity 1. The equipment used to manufacture the
levels. electric motors has a book value of
b. Variable costs are not relevant when the P150,000.
decision alternatives have different activity 2. The space now occupied by the electric
levels. motor manufacturing department could be
c. Sunk costs are always relevant. used to eliminate the need for storage
d. Fixed costs are never relevant. space now being rented.
3. Comparable units can be purchased from
9. In equipment-replacement decisions, which one an outside supplier for P59.75.
of the following does not affect the decision- 4. Four of the persons who work in the
making process? electric motor manufacturing department
A. Current disposal price of the old equipment. would be terminated and given eight
B. Operating costs of the old equipment. weeks’ severance pay.
C. Original fair market value of the old equipment. 5. A P10,000 unsecured note is still
D. Cost of the new equipment. outstanding on the equipment used in the
manufacturing process.
10. The minimum selling price that should be
acceptable in a special order situation is equal to Which of the items above are relevant to the
total decision that the controller has to make?
a. production cost. a. 1, 3, and 4 c. 2, 3, 4, and 5
b. variable production cost. b. 2, 3, and 4 d. 1, 2, 4, and 5
c. variable costs and avoidable fixed costs.
d. production cost plus a normal profit margin. 15. Smith Company has 27,000 direct labor hours
available for producing X and Y. Consider the
11. In a joint manufacturing process, joint costs following information:
incurred prior to a decision as to whether to Product Product
process the products after the split-off point X Y
should be viewed as: Required DLH 2 3
a. relevant costs. c. sunk costs. Maximum demand (units) 6,000 8,000
b. standard costs. d. differential costs. Contribution margin per P5.00 P6.00
unit
12. Copeland Inc. produces X-547 in a joint If Smith follows proper managerial accounting
manufacturing process. The company is studying practices, which of the following production
whether to sell X-547 at the split-off point or schedules should the company set?
upgrade the product to become Xylene. The Product X Product Y
following information has been gathered: a. None 8,000
I. Selling price per pound of X-547 b. 1,500 8,000
II. Variable manufacturing costs of upgrade c. 6,000 None
process d. 6,000 5,000
III. Avoidable fixed costs of upgrade process
IV. Selling price per pound of Xylene 16. Paulson Company has only 25,000 hours of
V. Joint manufacturing costs to produce X-547 machine time each month to manufacture its two
Which items should be reviewed when making the products. Product X has a contribution margin of
upgrade decision? P50, and Product Y has a contribution margin of
A. I, II, and IV. P64. Product X requires 5 hours of machine time,
B. I, II, III, and IV. and Product Y requires 8 hours of machine time.
C. All items. If Paulson Company wants to dedicate 80 percent
D. I, II, IV, and V. of its machine time to the product that will
provide the most income, the company will have
13. Two months ago, Rico Palikero purchased 4,500 a total contribution margin of
pounds of Hydrol, paying P15,300. The demand a. P250,000 c. P210,000
for this product has been very strong since the b. P240,000 d. P200,000
acquisition, with the market price jumping to
P4.05 per pound. (Rico can buy or sell Hydrol at 17. Chow Foods operates a cafeteria for its
this price.) The company recently received a employees. The operations of the cafeteria
special-order inquiry, one that would require the requires fixed costs of P470,000 per month and

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EXCEL PROFESSIONAL SERVICES, INC.

variable costs of 40% of sales. Cafeteria sales 21. Fila Company currently sells 2,000 units of
are currently averaging P1,200,000 per month. product ZEE for P8 each; variable cost is P5 each.
The company has the opportunity to replace the A foreign customer has offered P6.50 per unit for
cafeteria with vending machines. Gross customer 500 units of product ZEE. The manager believes
spending at the vending machines is estimated to that if they accept the special order, they will lose
be 40% greater than the current sale because the some sales at the regular price. Determine the
vending machines are available at all hours. By number of units they could lose before the order
replacing the cafeteria with vending machines, become unprofitable.
the company would receive 16% of the gross a. 250 units. c. 1,000 units.
customer spending and avoid cafeteria costs. A b. 750 units. d. 500 units
decision to replace the cafeteria with vending
machines will result in a monthly increase 22. Pillar Company expects to incur the following
(decrease) in operating income of costs at the planned production level of 10,000
a. P182,000 units:
b. P258,800 Direct materials P100,000
c. (P588,000) Direct labor 120,000
d. P18,800 Variable overhead 60,000
Fixed overhead 30,000
18. Kirklin Co. is a manufacturer operating at 95% of The selling price is P50 per unit. The company
capacity. Kirklin has been offered a new order at currently operates at full capacity of 10,000 units.
P7.25 per unit requiring 15% of capacity. No Capacity can be increased to 13,000 units by
other use of the 5% current idle capacity can be operating overtime. Variable costs increase by
found. However, if the order were accepted, the P14 per unit for overtime production. Fixed
subcontracting for the required 10% additional overhead costs remain unchanged when overtime
capacity would cost P7.50 per unit. The variable operations occur. Pillar Company has received a
cost of production for Kirklin on a per-unit basis special order from a wholesaler who has offered
follows: to buy 1,000 units at P45 each. What is the
Materials P3.50 impact on Pillar's operating income if this special
Labor 1.50 order is accepted?
Variable overhead 1.50 a. P17,000 increase c. no change
P6.50 b. P3,000 increase d. P5,000 decrease
In applying the contribution margin approach to
evaluating whether to accept the new order, Use the following information for the next two questions.
assuming subcontracting, what is the average Elly Industries is a multi-product company that currently
variable cost per unit? manufactures 30,000 units of Part MR24 each month for
a. P6.83 c. P7.17 use in production. The facilities now being used to
b. P7.00 d. P7.25 produce Part MR24 have a monthly fixed cost of
P150,000 and a capacity to produce 84,000 units per
19. Bolsa Co. estimates that 60,000 special zipper month. If Elly would buy Part MR24 from an outsize
will be used in the manufacture of industrial bags supplier, the facilities would be idle, but its fixed costs
during the next year. Sure Zipper Co. has quoted would continue at 40 percent of their present amount.
a price of P6 per zipper. Bolsa would prefer to The variable production costs of Part MR24 amount to
purchase 5,000 units per month but Sure is P11 per unit.
unable to guarantee this delivery schedule. In
order to ensure the availability of these zippers, 23. If Elly Industries is able to obtain Part MR24 each
Bolsa is considering the purchase of all 60,000 month, it would realize a net benefit by
units at the beginning of the year. Assuming that purchasing Part MR24 from an outside supplier
Bolsa can invest cash at 12%, the company’s only if the supplier’s unit price is less than
opportunity cost of purchasing the 60,000 units a. P14.00 c. P16.00
are the beginning of the year is b. P11.00 d. P13.00
a. P21,600 c. P19,800
b. P43,200 d. P39,600 24. If Elly Industries is able to obtain Part MR24 from
an outside supplier at a unit purchase price of
20. Sandow Co. is currently operating at a loss of P12.875, the monthly usage at which it will be
P15,000. The sales manager has received a indifferent between purchasing and making Part
special order for 5,000 units of product, which MR24 is
normally sells for P35 per unit. Costs associated a. 30,000 units c. 80,000 units
with the product are: direct material, P6; direct b. 32,000 units d. 48,000 units
labor, P10; variable overhead, P3; applied fixed
overhead, P4; and variable selling expenses, P2. Use the following information for the next three
The special order would allow the use of a slightly questions.
lower grade of direct material, thereby lowering PM Specialists, a chain of retail stores, sells books and
the price per unit by P1.50 and selling expenses music CDs. The condensed monthly income data are
would be decreased by P1. If Sandow wants this presented in the following table for November of this
special order to increase the total net income for year.
the firm to P10,000, what sales price must be Downtown Mall Total
quoted for each of the 5,000 units? Sales P240,000 P360,000 P600,000
a. P23.50 Less Variable expenses 96,000 252,000 348,000
b. P24.50 Contribution margin 144,000 108,000 252,000
c. P27.50 Less Fixed expenses 60,000 120,000 180,000
d. P34.00 Operating income P 84,000 P(12,000) P 72,000

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EXCEL PROFESSIONAL SERVICES, INC.

Additional information:
Management estimates that closing the mall store
would result in a 10% percent decrease in downtown
store sales, while closing the downtown store would
not affect mall store sales. One-fourth of each store’s
fixed expenses would continue through December 31
of the next year if either store was closed. The
operating results for November are representative of
all months.
25. The increase or decrease in PM Specialists’
monthly operating income if the mall store is
closed is
a. P32,400 decrease c. P18,000 decrease
b. P75,600 increase d. P122,400 decrease
26. The management of PM Specialists is considering
a promotional campaign at the mall store that
would not affect the downtown store. Annual
promotional expenses at the mall store would be
increased by P180,000 in order to increase mall
store sales by 10 percent. What would be the
effect of this promotional campaign on the
company’s monthly operating income?
a. P10,800 increase c. P129,600 increase
b. P4,200 decrease d. P169,200 decrease
27. One-half of the mall store’s peso sales are from
items sold at their variable cost to attract
customers to the store. PM Specialists’
management is considering the deletion of these
items, a move that would reduce the mall store’s
direct fixed expenses by 15 percent and result in
the loss of 20 percent of the remaining mall
store’s sales volume. This change would not
affect the downtown store. What would be the
effect on PM Specialists’ monthly operating
income if the items sold at their variable cost are
eliminated?
a. P3,600 increase c. P18,000 increase
b. P3,600 decrease d. P57,600 decrease
for the wool yarn itself. The yarn is purchased by
other companies for use in production of wool blankets
and other wool products. Since the development of the
market for the wool yarn, a continuing dispute has
existed in the Ibaan Sweater Company as to whether
the yarn should be sold simply as yarn or processed
into sweaters. Current cost and revenue data on the
yarn are given below:
Per Spindle
of Yarn
Selling price P200.00
Cost to manufacture:
Raw materials (raw P70.00
wool)
Direct labor 36.00
Manufacturing overhead 54.00 160.00
Manufacturing profit P 40.00
The market for sweaters is temporarily depressed, due
to unusually warm weather in the western countries
where the sweaters are sold. This has made it
necessary for the company to discount the selling
price of the sweaters to P300 from the normal P400
price. Since the market for wool yarn has remained
strong, the dispute has again surfaced over whether
the yarn should be sold outright rather than processed
into sweaters. The sales manager thinks that the
production of sweaters should be discontinued. She is
upset about having to sell sweaters at a P25.00 loss
when the yarn could be sold for a P40 profit. However,
the production superintendent is equally upset at the
suggestion that he close down a large portion of the
factory. He argues that the company is in the sweater
business, not the yarn business, and that the company
should focus on its core strength.
Due to the nature of the production process, virtually
all of the manufacturing overhead costs are fixed 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.

Use the following information for the next three 28. Would you recommend that the wool yarn be sold
questions. outright or processed into sweaters?
The Ibaan Sweater Company produces sweaters under a. No, profit to decrease by P25.
the “Alaeh” label. The company buys raw wool on the b. Yes, profit to increase by P22.
market and processes it into wool yarn from which the c. Yes, profit to increase by P29.
sweaters are woven. One spindle of wool yarn is d. No, profit to decrease by P15.
required to produce one sweater. The costs and
revenues associated with the sweaters are given 29. What is the lowest price that the company should
below: accept for a unit of sweaters?
Per Sweater a. P325 c. P271
Selling price P300.00 b. P278 d. P315
Cost to manufacture:
Raw materials: 30. What is the amount of incremental cost per unit if
Buttons, thread, lining P 20.00 the company produces sweaters?
Wool yarn 160.00 a. P238 c. P148
Total raw materials 180.00 b. P184 d. P78
Direct labor 58.00
Manufacturing overhead 87.00 325.00
Manufacturing profit (loss) P(25.00)
Originally, all of the wool yarn were used to produce
sweaters, but in recent years a market has developed

“A lot of us would like to move mountains, but few of us are willing to practice on small hills.” Anonymous

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