BM1915

NAME: Salazar, Jaybo DATE: SCORE:

ACTIVITY

1. After several years producing and selling at a capacity of 50,000 units, Milton Company faced a year with
projected sales and production of 38,000 units. A potential customer offered to purchase 7,000 units at a price of
P18 each. The normal sales price is P30 each.
Direct material P9.00
Direct labor 6.50
Variable manufacturing overhead 2.00
Fixed manufacturing overhead 3.75
Total P21.25

Should Milton accept the order? Justify your answer.

2. Fuji Company is currently manufacturing part A123, producing 40,000 units annually. The part is used in the
production of several products made by the company. The cost per unit for A123 is as follows:
Direct material P9.00
Direct labor 3.00
Variable manufacturing overhead 2.50
Fixed manufacturing overhead 4.00
Total P18.50
Of the total fixed overhead assigned to A123, P88,000 is avoidable (the lease of production machinery and
salary of a production line supervisor–neither of which will be needed if the line is dropped). The remaining
fixed overhead is a common fixed overhead. An outside supplier has offered to sell the part to Fuji for P16.
There is no alternative use for the facilities currently used to produce the part.
Should Fuji Company make or buy part A123? Justify your answer.

From the given data for A123, total fixed manufacturing overhead (Unavoidable + Avoidable)
= 4 per unit x 40.000 units annually
= P160.000
It is given that avoidable component is P160,000.
Therefore, the unavoidable component of fixed deposit = Total Fixed cost. - Avoidable component of fixed
deposit = P160 000 - P88.000 = P 72000 When Fui buys from an outside supplier, total cost paid by Full -
Total per-unit price paid by Fuji x 40,000 units - Unavoidable component of fixed deposit = P16 X 40,000 +
72,000
= P 640,000 + P72,000
= P712.000
The total cost incurred by Fuji, when it makes it in house = Total cost per unit x 40,000
= P18.5 X 40,000
= P740,000
As it can be seen: The total cost of buying from outside ( P712,000) - Total cost of making it inhouse
( P740,000) Therefore, Fuji should buy Part A123 and the ANSWER: FUJI SHOULD BUY PART A123

3. The following information is available for Titan Company. Based on this information, the management is
considering eliminating product line C. They assumed that by operating only product lines A and B, they would
have higher profits. It was also determined that if product line C is discontinued, 80% of the fixed overhead can
be avoided and 70% of the fixed selling and administrative expenses can also be avoided.

Product A Product B Product C

Sales P100,000 P300,000 P200,000
Cost of Goods Sold
Direct Materials 25,000 75,000 80,000
 Labor 20,000 40,000 50,000
Variable Overhead 10,000 20,000 15,000
Fixed Overhead 5,000 15,000 35,000
Total 60,000 150,000 180,000
Gross Profit 40,000 150,000 20,000
Selling and Administrative
Variable 12,000 30,000 10,000
Fixed 8,000 40,000 30,000
Total 20,000 70,000 40,000
Net Income (Loss) P20,000 80,000 (20,000)

Based on the above data, should product line C be continued or eliminated? Justify your answer.

It needs to be removed because product line C's contribution margin of P45,000 is less than the total fixed
cost of P49,000, which is P49,000. So, if product line C is discontinued, 80% of the fixed overhead and 70%
of fixed selling and administrative can be avoided. So, Product Line C should be eliminated.

06 Activity 1 *Property of STI

Page 1 of 1