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Incremental Analysis

MODULE 6

24. One of the behavioral problems with relevant cost analysis is the overemphasis on short-term
goals, which can lead to neglect of:
A. sales promotion
C. quarterly net income results
B. expense control
D. long-term strategic goals

INCREMENTAL ANALYSIS
Basic concepts
Steps in decision making process
5. What is the first step in the decision making process?
A. Specify the criteria by which the decision is to be made.
B. Consider the strategic issues regarding the decision context.
C. Perform an analysis in which the relevant information is developed and analyzed.
D. Compare the alternatives.

Incremental analysis
25. Incremental analysis is the process of identifying the financial data that:
A. do not change under alternative courses of action
B. are mixed under alternative courses of action
C. change under alternative courses of action
D. no correct answer is given

7. A major accounting contribution to the managerial decision-making process in evaluating


possible courses of action is to
A. assign responsibility for the decision.
B. provide relevant revenue and cost data about each course of action.
C. determine the amount of money that should be spent on a project.
D. decide which actions that the management should consider.

48. Incremental analysis is most useful


A. in evaluating the master budget.
B. in choosing between the net present value method and the internal rate of return method.
C. in developing relevant information for management decisions.
D. as a replacement technique for variance analysis.
Relevant information
2. Predicted future cost and revenue data that will differ among alternative courses of action are
known as
A. relevant information
C. marginal costs
B. direct information
D. incremental costs

8. An analysis of relevant costs and relevant revenues


A. Will enable the decision maker to assess a decisions impact on profit
B. Is useful in assessing a variety of alternative decisions
C. Provides sufficient and complete evidence with which to make a decision
D. Answers a. and b. are correct

4. Which of the following is described as data that are pertinent to a decision?


A. qualitative characteristics
C. timely information
B. accurate information
D. relevant information

Pitfalls in decision making


1. When discussing the pitfalls to be avoided in decision-making, four reminders usually emerge.
Which is NOT one of those reminders?
A. Ignore sunk costs.
B. Beware of allocated fixed costs; identify the avoidable costs.
C. Pay special attention to identifying and including opportunity costs.
D. Do not overlook the time value of money in short-run decisions.

6. Which of the following best describes relevant information?


A. Focused on the past and differs between the alternatives under consideration.
B. Focused on the past and not related to the decision under consideration.
C. Focused on the future and differs between the alternatives under consideration.
D. Focused on the future and not related to the decision under consideration.

19. Which one of the following is not a common mistake in a decision-making process?
A. Considering sunk costs as relevant.
B. Considering opportunity cost, an imputed cost, being relevant.
C. Considering fixed costs as avoidable fixed costs.
D. Unitizing fixed costs.

Application of incremental analysis


3. Incremental analysis would not be appropriate for
A. a make or buy decision.
B. an allocation of limited resource decision.
C. elimination of an unprofitable segment.
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Incremental Analysis

D. analysis of manufacturing variances.

Relevant costs
16. Relevant costs are
A. all fixed and variable costs
B. all costs that would be incurred within the relevant range of production
C. past costs that are expected to be different in the future
D. anticipated future costs that will differ among various alternatives

Irrelevant costs
Sunk costs
9. The kind of cost that can be ignored in a short-term decision making is a(an)
A. differential cost
C. sunk cost
B. incremental cost
D. joint cost

14. The Health Care Division of Piedmont Insurance employs three claims processors capable of
processing 5,000 claims each. The division currently processes 12,000 claims. The manager
has recently been approached by two sister divisions. Auto Division would like the Health
Care Division to process approximately 2,000 claims. Property Division would like the Health
Care Division to process approximately 5,000 claims. The Health Care Division would be
compensated by Auto Division or Property Division for processing these claims. Assume that
these are mutually exclusive alternatives. Claims processor salary cost is relevant for
A. Auto Division alternative only
B. Property Division alternative only
C. both Auto Division and Property Division alternatives
D. neither Auto Division nor Property Division alternatives

30. Sunk costs are


A. Costs that increase due to a higher volume of activity or the performance of an additional
activity
B. Costs that a company must incur to perform an activity at a given level, but will not be
incurred if a company reduces or discontinues the activity
C. The profits that a company forgoes by following a particular course of action
D. Costs that were incurred prior to making a decision
33. A sunk cost is:
A. a cost incurred in the past and not relevant to any future course of action.
B. an opportunity cost.
C. useful in analysis of alternative courses of action.
D. relevant to current decision making.

Differential costs
31. The difference in cost between or among various alternative courses of action appropriately
describes a(an):
A. differential cost
C. constraint
B. ad hoc discount
D. scarce resource

13. Which of the following is least likely to be a relevant item in deciding whether to replace an old
machine?
A. acquisition cost of the old machine
B. outlay to be made for the new machine
C. annual savings to be enjoyed on the new machine
D. life of the new machine

Opportunity cost
10. An important concept in decision making is described as the contribution to income that is
forgone by not using a limited resource in its best alternative use. This concept is called
A. Marginal cost
C. Incremental cost
B. Cost outlay
D. Opportunity cost

Unit costs
22. Unit costs can mislead decision makers. Which of the following situations dealing with unit
costs are not expected to result in a faulty analysis?
A. Unit costs used in make-or-buy decisions might include costs such as avoidable fixed
costs.
B. Variable unit cost directly varies with the changes in production units.
C. Total fixed costs increase as more units are produced within the relevant range.
D. Contribution margin on products that can be manufactured in using the freed capacity is
irrelevant in the decision.

11. An
A.
B.
C.
D.

opportunity cost is
the difference in total costs that results from selecting one alternative instead of another
the profit forgone by selecting one alternative instead of another
a cost that may be saved by not adopting an alternative
a cost that may be shifted to the future with little or no effect on current operations

12. The best characterization of an opportunity cost is that it is


A. relevant to decision making but is not usually reflected in accounting records
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Incremental Analysis

B. not relevant to decision making and is not usually reflected in accounting records
C. relevant to decision making and is usually reflected in accounting records
D. not relevant to decision making and is usually reflected in accounting records

B. II

29. Avoidable costs are


A. Costs that increase due to a higher volume of activity or the performance of an additional
activity
B. Costs that a company must incur to perform an activity at a given level, but will not be
incurred if a company reduces or discontinues the activity
C. The profits that a company forgoes by following a particular course of action
D. Costs that were incurred prior to making a decision

18. The potential benefit that may be obtained from following an alternative course of action is
called
A. opportunity benefit
C. relevant cost
B. opportunity cost
D. sunk cost
26. Opportunity cost is the
A. cash outlay required to implement an alternative.
B. difference in total costs between the alternatives.
C. maximum available contribution to profit that is given up when using limited resources for
another purpose.
D. fixed cost avoided when a product, department, or business unit is abandoned.

Out-of-pocket costs
23. Which of the following is a cost that requires a future outlay of cash that is relevant for future
decision-making?
A. Opportunity cost
C. Out-of-pocket cost
B. Relevant benefits
D. Incremental revenue

28. Opportunity costs are


A. Costs that increase due to a higher volume of activity or the performance of an additional
activity
B. Costs that a company must incur to perform an activity at a given level, but will not be
incurred if a company reduces or discontinues the activity
C. The profits that a company forgoes by following a particular course of action
D. Costs that were incurred prior to making a decision

Sensitivity analysis
20. Sensitivity analysis is useful in decision making when:
A. there is a degree of uncertainty about the relevant data.
B. there is an opportunity cost included in the analysis.
C. sunk cost is included in the analysis.
D. the analysis is subject to a review by the management.
21. To determine the possible outcome in a decision analysis if a key prediction or assumption
proves to be wrong, managers will use:
A. sensitivity analysis.
C. incremental analysis.
B. total analysis.
D. regression analysis.

27. Using opportunity cost to analyze the income effects of a given alternative is referred to as
A. engineering analysis
C. account analysis
B. mixed-cost analysis
D. differential analysis
Avoidable
15. A fixed cost is relevant if it is
A. future cost
B. sunk

D. II and III

Make-or-buy decision
Qualitative Considerations
38. Which of the following elements of the value chain should be considered when deciding
whether to make or buy a component needed for production?
A. Marketing
C. Manufacturing
B. Distribution
D. all of these choices

C. avoidable
D. a product cost

17. Which of the following is (are) a true statement(s) about cost behaviors in incremental
analysis?
I. Fixed costs will not change between alternatives.
II. Fixed costs may change between alternatives.
III. Variable costs will always change between alternatives.
A. I
C. III

Make decision
34. Manufacturing parts internally by a company causes:
A. the company to be dependent upon suppliers for timely delivery of parts
B. the quality of the parts to be under the control of the company
13

Incremental Analysis

C. lower parts costs to be assured


D. a company's operations to be more efficient than when the parts are purchased from
suppliers

D. Only conversion costs are relevant.


Opportunity costs
39. In a make-or-buy decision, which of the following is true?
A. Variable costs are the only relevant costs.
B. Allocated fixed costs are relevant.
C. Alternative uses of space and machinery are relevant.
D. Making the product is the correct decision when there is idle capacity.

44. A company should decide to make, rather than buy, a part required for their product, if
A. The companys production facility is at full capacity
B. The relevant cost per-unit of making the part exceeds the per-unit relevant costs of
purchasing the part
C. The supplier of the part can produce a higher-quality part
D. The supplier of the part has questionable reliability

40. The opportunity cost of making a component part in a factory with excess capacity for which
there is no alternative use is
A. the total manufacturing cost of the component.
B. the total variable cost of the component.
C. the fixed manufacturing cost of the component.
D. zero.

Buy decision
35. In any make or buy decision confronting a company, which of the following factors should be
considered?
A. Can the supplier provide a sufficient quantity to meet the company's current and future
needs?
B. Do the supplier's items meet product and quality specifications?
C. Is the supplier reliable?
D. All of the above should be considered.

46. The cost of not receiving rent from a space because you decide to make the part rather than
buying it from an outside supplier is considered a(an)
A. sunk cost
C. opportunity cost
B. future cost
D. fixed cost

41. Which of the following qualitative factors favors the buy choice in a make or buy decision for a
part?
A. maintaining a long-term relationship with suppliers
B. quality control is critical
C. utilization of idle capacity
D. part is critical to product

47. In a make-or-buy decision, an opportunity cost that should be considered is the:


A. income that could be generated from idle production space.
B. total costs to produce the item
C. variable costs to produce the item
D. fixed costs to produce the item

Relevant costs
Fixed costs
36. Within the context of the make or buy decision, when are fixed costs relevant?
A. Fixed costs are always relevant
B. Fixed costs are never relevant
C. Fixed costs are relevant when they differ among alternatives
D. It cannot be determined without closely examining each particular situation

Decision rule
42. Haribon Company is faced with a make-or-buy decision. Haribon should agree to buy the part
from a supplier provided the price is less than Haribons
A. total costs
B. variable production costs plus avoidable fixed production costs
C. total manufacturing costs
D. variable costs

37. In a make or buy decision:


A. Only variable costs are relevant.
B. Fixed costs that can be avoided in the future are relevant.
C. Fixed costs that will continue regardless of the decision are relevant.

84. A company owns equipment that is used to manufacture important parts for its production
process. The company plans to sell the equipment for P10,000 and to select one of the
following alternatives:
(1) acquire new equipment for P80,000
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Incremental Analysis

(2) purchase the important parts from an outside company at P4 per part.
The company should quantitatively analyze the alternatives by comparing the cost of
manufacture the parts
A. Plus P80,000 to the cost of buying the parts less P10,000.
B. to the cost of buying the parts less P10,000.
C. Less P10,000 to the cost of buying the parts.
D. To the cost of buying the parts.

B. Marketing costs

D. All of the above

Opportunity costss
50. An opportunity cost commonly associated with a special order is
A. the contribution margin on lost sales
B. the variable costs of the order
C. additional fixed cost that is related to the increased output
D. any of the above

Special order decision


Process
49. In making a special order decision, management should:
A. compute a reasonable sales price for items not normally produced.
B. consider additional overhead cost.
C. consider normal and relevant costs.
D. All of the above.

53. Operating at or near full capacity will require a firm considering a special order to recognize
the:
A. opportunity cost arising from lost sales
B. value of full employment
C. time value of money
D. need for good management

52. Which of the following factors should be considered in deciding whether to accept a special
order?
A. the sales price of the product or service
B. the production capacity of the company
C. the impact on regular customers
D. all of these choices

Decision rule
82. Production of a special order will increase gross profit when the additional revenue from the
special order is greater than
A. The nonvariable costs incurred in producing the order.
B. The direct material and labor costs in producing the order.
C. The fixed costs incurred in producing the order.
D. The marginal cost of producing the order.

Irrelevant cost
83. In considering a special order that will enable a company to make a use of presently idle
capacity, which of the following costs would be irrelevant.
A. Materials
C. Direct labor
B. Depreciation
D. Variable OH

51. If the firm is operating under capacity, the minimum special order price should be high enough
to cover:
A. all variable costs and incremental fixed costs associated with the special order minus
foregone contribution margin on regular units not produced.
B. variable and incremental fixed costs associated with the special order and a profit margin.
C. limited variable costs associated with the special order.
D. neither variable nor fixed costs associated with the special order.

54. Given the following list of costs, which one should be ignored in a decision to produce
additional units of product for a factory that is operating at less than 100% capacity, and the
additional business will not use up the remainder of the plant capacity?
A. Direct material cost per unit
C. Fixed selling expenses
B. Direct labor cost per hour
D. Variable selling expenses

57. Green Giant Foods has some excess manufacturing capacity that it can leave idle, use to
produce its own boxes for frozen foods, or use to process another companys frozen foods. It
will be more profitable for Green Giant to process the competitors frozen foods as long as the
net cost is
A. greater than both the cost to buy the boxes and the cost to leave the plant idle.
B. less than the cost to leave the plant idle and greater than the cost to buy the boxes.
C. greater than the cost to leave the plant idle and lower than the cost to buy boxes from a

Relevant costs
Long-run decision
58. The sales price of a product, in the long run, must be enough to cover what type of costs?
A. Designing costs
C. Servicing costs
15

Incremental Analysis

supplier.
D. less than both the cost to leave the plant idle and the cost to make or buy the boxes.

desired profit.
62. Which of the following is NOT a cost concept commonly used in applying the cost-plus
approach to product pricing?
A. Total cost concept.
C. Variable cost concept.
B. Product cost concept.
D. Fixed cost concept.

Minimum acceptable price


With excess capacity
55. If there is excess capacity, the minimum acceptable price for a special order must cover
A. variable costs associated with the special order.
B. variable and fixed manufacturing costs associated with the special order.
C. variable and incremental fixed costs associated with the special order.
D. variable costs and incremental fixed costs associated with the special order plus the
contribution margin usually earned on regular units.

63. The cost-plus pricing formula that takes into consideration all costs -- fixed, variable, and
manufacturing, as well as selling and administrative costs -- is called the percentage of
A. full costs.
C. total variable costs.
B. variable manufacturing costs.
D. absorption costs.

At full capacity
56. If a firm is at full capacity, the minimum special order price must cover
A. variable costs associated with the special order.
B. variable and fixed manufacturing costs associated with the special order.
C. variable and incremental fixed costs associated with the special order.
D. variable costs and incremental fixed costs associated with the special order plus foregone
contribution margin on regular units not produced.
Product life cycle
45. A product life cycle includes the phases of
A. research and development and design
B. purchasing and production

Target pricing
43. The concept of target pricing is employed when:
A. a company wishes to set price in order to capture a predetermined market share.
B. a price is pre-set by market conditions.
C. a company wishes to meet marketing goals.
D. All of the above.
Target cost approach
61. In contrast to the total product and variable cost concepts used in setting seller's prices, the
target cost approach assumes that:
A. a markup is added to total cost.
C. a markup is added to variable cost.
B. selling price is set by the marketplace.
D. a markup is added to product cost.

C. marketing and distribution


D. all of the above

Product pricing
Variable cost approach
60. Managers who often make special pricing decisions are more likely to use which of the
following cost concepts in their work?
A. Total cost.
C. Variable cost.
B. Product cost.
D. Fixed cost.

Sell-as-is-or-process further
Joint products
67. Two or more manufactured products that have significant sales values and are not uniquely
identifiable as individual products until the split-off point are called
A. common products.
C. co-mingled products.
B. joint products.
D. cooperative products.

Cost-plus approach
59. In using the variable cost concept of applying the cost-plus approach to product pricing, what
is included in the markup?
A. Total costs plus desired profit.
B. Desired profit.
C. Total selling and administrative expenses plus desired profit.
D. Total fixed manufacturing costs, total fixed selling and administrative expenses, and

Relevant costs
Incremental revenue
32. Incremental revenue is:
A. a difference in costs between two decisions.
B. a concession based on competitive influences.
C. additional revenue across decision choices from potential sales.
D. the difference between selling price and variable costs.
16

Incremental Analysis

D. decrease in direct fixed costs.


Cost to process further
65. Which of the following costs is relevant in deciding whether to sell joint products at split-off or
process them further?
A. The unavoidable costs of further processing.
B. The additional costs of further processing.
C. The variable costs of operating the joint process.
D. The cost of materials used to make the joint products.

Irrelevant cost
80. Which of the following should not enter into decision of whether to drop product?
A. Unavoidable costs
B. Avoidable costs
C. Revenue that would be lost
D. Nonfinancial impacts of the decision

68. What are the manufacturing costs incurred beyond the split-off point called?
A. Separable costs.
C. Severance costs.
B. Joint costs.
D. Common costs.

Decision rule
79. As long as its marginal cost is lower than its marginal revenue, a company should
A. suspend additional production and sales activities.
B. perform a cost-benefit balance analysis before producing and selling additional products.
C. engage in additional production and sales activities.
D. examine cost behaviors and develop a cost function to measure the cost of future
production.

Decision rule
64. How does a company determine whether to sell a product as is or process it further?
A. If the costs to process further exceed the costs of current production, the product should
be sold as is.
B. If the costs to process further exceed the costs of current production, the product should
be processed further.
C. If the increase in revenue from selling the product after further processing is greater than
the additional costs incurred in further processing, the company should opt for further
processing.
D. If the revenues generated by processing the product further exceed the revenues from
selling the product as is, the company should process further.

Short-run profit maximization


Factors affecting sales mix
70. Which of the following is an important factor affecting the sales mix of any company?
A. organizational advertising expenditures
B. organizational sales force compensation plan
C. product selling price
D. All of the above

Keep-or-drop decision
Strategic considerations
66. The decision to keep or drop products or services involves strategic consideration of the:
A. potential impact on remaining products or services
B. impact on employee morale
C. growth potential of the firm
D. All of the above answers are correct

To relax a constraint
73. Which of the following will relax a constraint?
A. Outsourcing all or part of the bottleneck operation
B. Working overtime at the bottleneck operation
C. Retraining employees and shifting them from the bottleneck
D. A and B, only
Decision rule
76. A product mix decision involves
A. Influencing the sales volume mix of the products to minimize cost.
B. Influencing the sales volume mix of the products to maximize revenue.
C. Producing the maximum amount of items that provide the highest contribution margin.
D. Producing the maximum amount of items that carry the lowest per-unit cost.

Goal
78. The goal in deciding whether to add or drop products, services, or departments is to obtain the
greatest
A. reduction in total costs.
B. contribution possible to cover unavoidable costs.
C. increase in sales revenues.
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Incremental Analysis

71. A useful device for solving production problems involving multiple products and limited
resources is:
A. gross sales per unit of product
C. net profit per unit of product
B. contribution per unit of scarce resource D. total benefit

A.
B.
C.
D.

72. When there is only one production constraint and excess demand, it is generally best to focus
production and sales on the product with the highest:
A. Contribution per unit of scarce resource C. Contribution margin in pesos
B. Margin of Safety
D. Operating Leverage

its failure to recognize fixed costs.


its failure to recognize depreciation expense.
its inability to control waste.
its inability to recognize financing costs of the production in question.

PROBLEMS:
Incremental (decremental) cost
1
. For the year ended April 30, 2007, Salmo Company incurred direct costs of P800,000 based
on a particular course of action. Had a different course of action been taken, direct costs
would have been P650,000. In addition, Salmos fixed costs during the fiscal year were
P110,000.
The incremental (decremental) cost was:
A. P 40,000
C. P 150,000
B. P( 40,000)
D. P(150,000)

69. When there is one scarce resource, the product that should be produced first is the product
with the highest
A. contribution margin per unit of the scarce resource.
B. sales price per unit of scarce resource.
C. demand.
D. contribution margin per unit.

Opportunity cost
2
. Luzon Fabricators, Inc. estimates that 60,000 special components will be used in the
manufacture of a specialty steel window for the whole next year. Its supplier quoted a price of
P60 per component. Luzon prefers to purchase 5,000 units per month, but its supplier could
not guarantee this delivery schedule. In order to ensure availability of these components,
Luzon is considering the purchase of all the 60,000 units at the beginning of the year.
Assuming Luzon can invest cash at 8%, the companys opportunity cost of purchasing all the
60,000 units at the beginning of the year is
A. P132,000
C. P144,000
B. P150,000
D. P264,000

74. Uranus Company has 2 products that use the same manufacturing facilities and cannot be
subcontracted. Each product has sufficient orders to utilize the entire manufacturing capacity.
For short-run profit maximization, Uranus should manufacture the product with the
A. Lower total manufacturing costs for the manufacturing capacity.
B. Lower total variable manufacturing costs for the manufacturing capacity.
C. Greater gross profit per hour of manufacturing capacity.
D. Greater contribution margin per hour of manufacturing capacity.
75. Profit can be maximized by producing products with the highest
A. selling price
B. contribution margin
C. contribution margin per unit of items that are best sellers
D. contribution per unit of the constraining resource

Defective/obsolete inventory
Incremental net income
3
. Sieney & Company has 24,000 defective units of a product that cost P8 per unit to
manufacture, and can be sold for P4 per unit. These units can be reworked for P2 per unit and
sold at their full price of P12 each. If Sieney reworks the defective units, how much
incremental net income will result?
A. P144,000
C. P 72,000
B. P 96,000
D. P 48,000

77. A company should advertise those products that


A. Require the lowest commitment of resources to produce
B. Have the largest total contribution margin
C. Can be outsourced
D. Have the largest total contribution margin after deducting the cost of the ad campaign

Minimum price
4
. Joji Company manufactures and sell FM radios. Information on last years operations (sales
and production of the 2006 model) follows:
Selling price
P300

Pitfall
81. The major pitfall in the contribution margin approach to pricing is
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Incremental Analysis

Cost per unit:


Direct materials
70
Direct labor
40
Overhead (50% variable)
60
Selling costs (40% variable)
100
Production in units
10,000
Sales in units
9,500
At this time (May 2007), the 2007 model is in production and it renders the 2006 model radio
obsolete. A foreign firm is willing to purchase the obsolete products at a net price of P140
each. If the remaining 500 units of the 2006 model radios are to be sold through regular
channels, what is the minimum price the company would accept for the radios?
A. P300
C. P270
B. P180
D. P 40

The special order requires 1,000 kilograms of powdered Nitrocide, a solid chemical regularly
used in the companys products. The current stock of Nitrocide is 8,000 kilograms at a book
value of P8.10 per kilogram. If the special order is accepted, the firm will be forced to restock
powdered Nitrocide earlier than expected, at a predicted cost of P8.70 per kilogram. Without
the special order, the purchasing manager predicts that the price will be P8.30, when normal
restocking takes place. Any order of the Nitrocide must be in 5,000 kilograms.
What is the relevant cost of powdered Nitrocide to be included in the special order?
A. P 8,700
C. P10,300
B. P 8,300
D. P43,500
Incremental cost
8
. Balagtas & Company expects to incur the following costs at the planned production level of
10,000 units:
Direct materials
P100,000
Direct labor
120,000
Variable overhead
60,000
Fixed overhead
30,000
The selling price is P50 per unit. The company currently operates at full capacity of 10,000
units. Capacity can be increased to 13,000 units by operating overtime. Variable costs
increase by P14 per unit for overtime production. Fixed overhead costs remain unchanged
when overtime operations occur. Balagtas has received a special order from Florante, Inc.
who has offered to buy 2,000 units at P45 each.
What is the incremental cost associated with this special order?
A. P42,000
C. P31,000
B. P84,000
D. P62,000

Special order
Unit relevant cost
5
. Venus Company, a manufacturer of lamps, budgeted sales of 400,000 lamps at P20 per unit
for the year. Variable manufacturing costs were budgeted at P8 per unit, and fixed
manufacturing costs at P 5 per unit. A special order offering to buy 40,000 lamps for P11.50
each was received by Venus in April. Venus has sufficient plant capacity to manufacture the
additional quantity of lamps; however, the production would have to be done by the present
work force on an overtime-basis at an estimated additional cost of P1.50 per lamp. Venus
will not incur any selling expenses as a result of the special order. Venus Company would
have a unit relevant cost of
A. P 8.00
C. P 9.50
B. P13.00
D. P14.50
6

Minimum acceptable price


9
. Brace Co. has considerable excess manufacturing capacity. A special job orders cost sheet
includes the following applied manufacturing overhead costs:
Variable costs
P56,250
Fixed costs
45,000
The fixed costs include a normal P6,800 allocation for in-house design costs, although no inhouse design will be done. Instead, the special job will require the use of external designers
costing P13,750.
What is the minimum acceptable price for the job?
A. P 63,050
C. P101,250
B. P 70,000
D. P108,200

Wawa Enterprises has the capacity to produce 10,000 bearings, but operates at 90% of
capacity. Bearings normally sell for P60 each, and cost an average of P50 to make, including
a share of the monthly fixed costs of P180,000. Ilog Corp has offered to buy 1,000 bearings at
P40 each. What is the relevant cost per unit?
A. P 20
C. P 40
B. P 30
D. P 50

Total relevant cost


7
. Intellectual Co. recently received an order for a product that 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.

10

. The cost to produce 24,000 units at 70% capacity consists of:

19

Incremental Analysis

Direct materials
Direct labor
Factory overhead, all fixed
Selling expense (35% variable, 65% fixed)
What unit price would the company have to charge to make P22,500 on a
additional units that would be shipped out of the normal market area?
A. P 51
C. P 41
B. P 56
D. P 50

13

P360,000
540,000
290,000
240,000
sale of 1,500

. De Silva Co. is a manufacturer of industrial components. One of their products that is used as
a subcomponent in auto manufacturing is KB69. This product has the following financial
structure per unit:
Selling price
P150
Direct materials
P 20
Direct labor
15
Variable manufacturing overhead
12
Fixed manufacturing overhead
30
Variable shipping and handling
3
Fixed selling and administrative
10
Total
P 90
De Silva is operating at full capacity. It has received a special, one-time, order for 1,000 KB69
parts. The next best alternative use of the excess capacity is to produce LB46, resulting in a
contribution margin of P10,000. The minimum price that is acceptable for this one-time special
order is
A. P 60
C. P 70
B. P 87
D. P100

11

. Kaila Companys unit cost of manufacturing and selling a given item at an activity level of
10,000 units per month are:
Manufacturing costs
Direct materials
P39
Direct labor
6
Variable overhead
8
Fixed overhead
9
Selling expenses
Variable
30
Fixed
11
The company desires to seek an order for 5,000 units from a foreign customer. The variable
selling expenses will be reduced by 40%, but the fixed costs for obtaining the order will be
P20,000. Domestic sales will not be affected by the order.
The minimum break-even price per unit to be considered on this special sale is
A. P 71
C. P 69
B. P 75
D. P 84

14

. Sylvania Company. is currently operating at a loss of P15,000. The sales manager has
received a special order for 5,000 units of product, which normally sells for P35 per unit. Costs
associated with the product are: direct material, P6; direct labor, P10; variable overhead, P3;
applied fixed overhead, P4; and variable selling expenses, P2. The special order would allow
the use of a slightly lower grade of direct material, thereby lowering the price per unit by P1.50
and selling expenses would be decreased by P1. If Sylvania wants this special order to
increase the total net income for the firm to P25,000, what sales price must be quoted for each
of the 5,000 units?
A. P18.50
C. P29.00
B. P24.50
D. P26.50

12

. Chrisy Company sells a product for P18 per unit and the standard cost card for the product
shows the following costs:
Direct materials
P 1.00
Direct labor
2.00
Overhead (80% fixed)
7.00
Total
P10.00
Chrisy received a special order for 1,000 units of the product. The only additional cost to
Chrisy would be foreign import taxes of P1 per unit. If Chrisy is able to sell all of the current
production domestically, what would be the minimum sales price that Chrisy would consider for
this special order?
A. P 18
C. P 17
B. P 19
D. P 11

Maximum lost regular sales


15
. Chua Company sells a product for P20 with variable cost of P8 per unit. Chua could accept a
special order for 1,000 units at P14. If Chua accepted the order, how many units could it lose
at the regular price before the decision become unwise?
A. 1,000 units
C.
500 units
B.
200 units
D.
0 units
16

. Filamer 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.

20

Incremental Analysis

Determine the number of units they could lose before the order become unprofitable.
A. 200 units.
C. 400 units.
B. 160 units.
D. 500 units

production of 30,000 units.


Direct materials
P 4
Direct labor
12
Variable manufacturing overhead
6
Fixed manufacturing overhead
8
The company has the capacity to produce 40,000 units. The product regularly sells for P40. A
wholesaler has offered to pay P32 a unit for 2,000 units.
If the firm accepts the special order the effect on its operating income would be a
A. P20,000 increase
C. P4,000 increase
B. P16,000 decrease
D. P 0 effect

Effect on profit of accepting the order


17
. You have been approached by a foreign customer who wants to place an order for 15,000
units of Product C at P22.50 a unit. You currently sell this item for P39 a unit, and the item
has a cost of P29 a unit. Further analysis reveals that you will not be paying sales commission
of P2.50 a unit on this sales and its packaging requirement will save you an additional P1.50
per unit. However, the additional graphics required on this job will cost you P30,000. Note also
that fixed costs amounting to P400,000 for the production of 50,000 of such products by the
firm will not change. You decide to accept this order, but another customer who buys an
average of 2,000 units for the period wants to pay you P22.50 rather than the regular price of
P39 a unit. Profit will
A. increase profit by P19,500
C. increase profit by P52,500
B. increase profit by P16,500
D. decrease profit by P52,500

21

. Louderhead Company makes bull-repellent scent according to a traditional Western recipe,


which normally sells at P90 per unit. Normal production volume is 10,000 ounces per month.
Average cost is P50 per ounce, of which P20 is direct material and P10 is variable conversion
cost. This product is seasonal. After July, demand for this product drops to 6,000 ounces
monthly. In November, Garrison Co. offers to buy 1,500 ounces for P60,000. If Louderhead
accepts the order, it must design a special label for Garrison at a cost of P5,000. Each label
will cost P2.50 to make and apply. Louderhead should:
A. accept the order, at a gain of P6,250
B. reject the order, at a loss of P18,750
C. reject the order, at a loss of P23,750
D. accept the order, at a gain of P11,250

18

. The Thermo Company has received a special order for 300 units of product X for P6 a unit. It
usually sells for P9.50 a unit with a cost of P7.50 a unit inclusive of 75 cents a unit as sales
commission that will not be paid on this order. The cost also includes P3 in manufacturing
overhead, was two-third of which is for the fair share of depreciation, rent, utilities and
supervisor's salary. The latters (supervisor's salary) accounts for one-half of this amount.
Assuming that excess capacity is available, and this order requires a mold that costs P150,
accepting the order will increase
A. loss by P225
C. gain by P225
B. loss by P375
D. gain by P375

Question Nos. 68 and 69 are based on the following information:


The Disk Division of Systems Specialist Company produces a high quality computer disks. Unit
production costs (based on capacity production of 100,000 units per year) follow:
Direct materials
P50
Direct labor
20
Overhead (20% variable)
10
Other information:
Sales price
100
SG & A costs (40% variable)
15
The Disk Division is operating at a level of 70,000 chips per year.

19

. Alejar Company manufactures a product with a unit variable cost of P50 and a unit sales price
of P88. Fixed manufacturing costs were P240,000 when 10,000 units were produced and sold.
The company has a one-time opportunity to sell an additional 3,000 units at P70 each in a
foreign market. This special sale would not affect its present sales. If the company has
sufficient capacity to produce the additional units, acceptance of the special order would affect
net income as follows:
A. Income would decrease by P 12,000.
B. Income would increase by P 12,000.
C. Income would increase by P210,000.
D. Income would increase by P 60,000.

22

. What is the minimum price that the division would consider on a special order of 1,000 disks
to be distributed through normal channels?
A. P 72
C. P 81
B. P 78
D. P 6

20

. KC Industries manufactures a product with the following costs per unit at the expected
21

Incremental Analysis
23

. Assuming that that the Disk Division is producing and selling at capacity. What is the minimum
selling price that the division would consider on a special order of 1,000 chips on which no
variable period costs would be incurred?
A. P100
C. P 94
B. P 72
D. P 90

capacity costs that will not be affected by any make-or-buy decision represent 60% of the
applied overhead.
The available 30,000 machine hours are to be scheduled so that ELM realizes maximum
potential cost savings. The relevant unit production costs that should be considered in the
decision to schedule machine time are:
A. P54.00 for Beta and P147.00 for Zeta
C. P14.00 for Beta and P127.00 for Zeta
B. P50.00 for Beta and P150.00 for Zeta
D. P30.00 for Beta and P135.00 for Zeta

Make-or-buy decision
Relevant costs
24
. For the past 12 years, the JLO Company has produced the small electric motors that fit into its
main product line of dental drilling equipment. As materials costs have steadily increased, the
controller of the JLO Company is reviewing the decision to continue to make the small motors
and has identified the following facts:
1)
The equipment which is used to manufacture the electric motors has a book
value of P1,500,000.
2)
The space being occupied now by the electric motor manufacturing department
could be used to eliminate the need for storage space which is presently being rented.
3)
Comparable units can be purchased from an outside supplier for P597.50.
4)
Four of the people who work in the electric motor manufacturing department
would be terminated and given eight weeks of separation pay.
5)
A P750,000 unsecured note is still outstanding on the equipment that is being
used in the manufacturing process.
Which of the items above are relevant to the decision that the controller has to make?
A. 1, 2, 4, and 5
C. 1, 3, 4, and 5
B. 1, 3, and 4
D. 2, 3, and 4

Maximum buy price


26
. The following are a companys monthly unit costs to manufacture and market a particular
product.
Manufacturing Costs:
Direct materials
P2.00
Direct labor
2.40
Variable indirect
1.60
Fixed indirect
1.00
Marketing Costs:
Variable
2.50
Fixed
1.50
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 a level of quality that the company prescribes.
Fixed marketing costs would be unaffected, but variable marketing costs would continue at
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

Relevant cost to make


25
. ELM Electronics has the following standard costs and other data:
Part Beta
Part Zeta
Direct materials
P 4.00
P80.00
Direct labor
10.00
47.00
Factory overhead
40.00
20.00
Unit standard cost
P54.00
P147.00
Units needed per year
6,000
8,000
Machine hours per unit
4
2
Unit cost if purchased
P50.00
P150.00
In the past years, ELM has manufactured all of its required components; however, this year
only 30,000 hours of otherwise idle machine time can be devoted to the production of
components. Accordingly, some of the parts must be purchased from outside suppliers. In
producing the parts, factory overhead is applied at P10 per standard machine hour. Fixed

27

. Sinta Company can make 1,000 units of a necessary component with the following costs:
Direct Materials
P64,000
Direct Labor
16,000
Variable Overhead
8,000
Fixed Overhead
?
The company can purchase the 1,000 units externally for P104,000. An analysis shows that at
this external price, the company is indifferent between making or buying the part. Sinta
Company could avoid P6,000 in fixed overhead costs if it acquires the components externally.
If cost minimization is the major consideration and the company would prefer to buy the
components, what is the maximum external price that Sinta Company would accept to acquire

22

Incremental Analysis

the 1,000 units externally?


A. P102,000.
B. P 94,000.

Effect of buy decision


On fixed overhead cost
31
. Sisa's Shop can make 1,000 units of a necessary component with the following costs:
Direct Materials
P64,000
Direct Labor
16,000
Variable Overhead
8,000
Fixed Overhead
?
The company can purchase the 1,000 units externally for P104,000. The unavoidable fixed
costs are P5,000 if the units are purchased externally. An analysis shows that at this external
price, the company is indifferent between making or buying the part. What are the fixed
overhead costs of making the component?
A. P21,000.
C. P11,000.
B. P16,000.
D. Cannot be determined.

C. P 96,000.
D. P 88,000.

28

. Almeda's Shop can make 1,000 units of a necessary component with the following costs:
Direct Materials
P64,000
Direct Labor
16,000
Variable Overhead
8,000
Fixed Overhead
?
The company can purchase the 1,000 units externally for P104,000. None of Almeda
Company's fixed overhead costs can be reduced, but another product could be made that
would increase profit contribution by P16,000 if the components were acquired externally. If
cost minimization is the major consideration and the company would prefer to buy the
components, what is the maximum external price that Almeda Company would be willing to
accept to acquire the 1,000 units externally?
A. P 86,000.
C. P 96,000.
B. P110,000.
D. P104,000.

On income
32
. Sylvan Processing Company is considering whether to make 2,000 units of product Whirl
which costs P16 a unit or buy it from outside for P15 a unit. A further analysis shows that if
product Whirl is outsourced, fixed costs of P8,000 attributable to this product will be reduced
by 25%.
If the product is outsourced, Sylvan will
A. Decrease profit by P2,000
C. Increase profit by P2,000
B. Decrease profit by P4,000
D. Increase profit by P4,000

Effect of make decision


29
. A business is operating at 90% of capacity and is currently purchasing a part which is being
used in its manufacturing operations for P15 per unit. The unit cost for the business to make
the part is P20, including fixed costs, and P12, not including fixed costs. If 30,000 units of the
part are normally purchased during the year but could be manufactured using unused
capacity, what would be the amount of differential cost, increase or decrease, from making the
part rather than purchasing it?
A. P150,000 cost increase
C. P150,000 cost decrease
B. P 90,000 cost decrease
D. P 90,000 cost increase

33

. Sylvan Processing Company is considering whether to make 2,000 units of product Whirl
which costs P16 a unit or buy it from outside for P15 a unit. A further analysis shows that if
product Whirl is outsourced, fixed costs of P8,000 attributable to this product will be reduced
by 25%. If Sylvan Processing Company purchased the product Whirl, the space could be
rented out for P6,000. If the product is outsourced, profit would
A. decrease, P2,000
C. increase, P2,000
B. decrease, P4,000
D. increase, P4,000

30

. Alfaro's Manufacturing Company can make 100 units of a necessary component part with the
following costs:
Direct Materials
P80,000
Direct Labor
13,000
Variable Overhead
40,000
Fixed Overhead
27,000
If Alfaro's Manufacturing Company can purchase the component externally for P145,000 and
only P4,000 of the fixed costs can be avoided, what is the correct make or buy decision?
A. Make and save P8,000
C. Make and save P20,000
B. Buy and save P8,000
D. Buy and save P20,000

34

. It costs P450,000 to make 15,000 units of a part in this plant. This cost includes material of
P90,000, direct labor of P120,000, variable overhead of P15,000, and P225,000 in fixed
overhead inclusive of P45,000 in depreciation and common overhead allocation of P150,000.
The balance is for the section supervisor's salary. The part can be purchased for P20 a unit. If
the part is purchased, the space released can be rented for P65,000. If the part is purchased,
the company will
A. lose P20,000
C. gain P20,000
B. lose P45,000
D. gain P45,000

23

Incremental Analysis

Garland, the unit cost of WS73 would


A. Increase by P4,800
B. Decrease by P3,200

35

. Lane Co. manufactures ballpoint pens. Another manufacturer has offered to supply Lane with
the 5,000 ink cartridges that it needs annually. The cost to buy the cartridges would be P15
each. In producing its own cartridges, Lane has incurred P10 in fixed costs and P8 in variable
costs. If Lane buys the cartridges, its net income will:
A. not change
C. increase by P35,000
B. decrease by P35,000
D. increase by P25,000

C. Decrease by P6,200
D. Increase by P1,800

38

. The Rural Cooperative, Inc. produces 1,000 units of Part M per month. The total
manufacturing costs of the part are as follows:
Direct materials
P10,000
Direct labor
5,000
Variable overhead
5,000
Fixed overhead
30,000
Total manufacturing cost
P50,000
An outside supplier has offered to supply the part at P30 per unit. It is estimated that 20% of
the fixed overhead being assigned to Part M will no longer be incurred if the company
purchases the part from the outside supplier.
If Rural Cooperative purchases 1,000 units of Part M from the outside supplier, its monthly
operating income will
A. decrease by P 4,000
C. increase by P 1,000
B. decrease by P20,000
D. increase by P20,000

36

. The Rainbow Company manufactures Part No. 498 for use in its production cycle. The cost
per unit if 20,000 units of Part No. 498 are manufactured are as follows:
Direct materials
P6
Direct labor
30
Variable overhead
12
Fixed overhead applied
16
Total unit cost
P64
The Reeves Company has offered to sell 20,000 units of part No. 498 to Rainbow for P60 per
unit. Rainbow will make the decision to buy the part from Reeves if there is a savings of
P25,000 for Rainbow. If Rainbow accepts Reevess offer, P9 per unit of the fixed overhead
applied would be totally eliminated. Furthermore, Rainbow has determined that the released
facilities could be used to save relevant costs in the manufacture of part No. 575. 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. 575 would have to be
A. P 80,000
C. P125,000
B. P 85,000
D. P140,000

39

. Migs Corporation currently manufactures all component parts used in the manufacture of
various hand tools. A steel handle is used in three different tools. The budgeted costs per unit
based on 20,000 units are:
Direct material
P6.00
Direct labor
4.00
Variable overhead
1.00
Fixed overhead
2.00
Total unit cost
P13.00
Sans Steel, Inc. has offered to supply 20,000 units of the handle to Migs for P12.50 each
delivered. If Migs currently has idle capacity that cannot be used, accepting the offer will
A. Decrease the handle unit cost by P0.50.
B. Increase the handle unit cost by P1.50.
C. Decrease the handle unit cost by P1.50.
D. Increase the handle unit cost by P0.50.

37

. Leis Manufacturing Co. uses 10 units of Part Number WS73 each month in the production of
computer printer. The unit cost to manufacture one unit of WS73 is presented below.
Direct materials
P 1,000
Materials 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 to manufacturing overhead. Leis annual manufacturing overhead
budget is one-third variable and two-thirds fixed. Garland Company, one of Leis reliable
vendors, has offered to supply part WS73 at a unit price of P15,000.
If Leis purchases the WS73 units from Garland, the capacity being used by Leis to
manufacture these parts would be idle. Should Leis decide to purchase the parts from

40

. The Minolta, Inc. produces 1,000 units of Part M per month. The total manufacturing costs of
the part are as follows:
Direct materials
P10,000
Direct labor
5,000
Variable overhead
5,000

24

Incremental Analysis

Fixed overhead
30,000
Total manufacturing cost
P50,000
An outside supplier has offered to supply the part at P30 per unit. It is estimated that 20% of
the fixed overhead assigned to Part M will no longer be incurred if the company purchases the
part from the outside supplier.
If Minolta purchases 1,000 units of Part M from the outside supplier per month, then its
monthly operating income will
A. decrease by P 4,000
C. increase by P 1,000
B. decrease by P20,000
D. increase by P20,000

Blade Division cannot sell any additional products to outside customers.


Should Dana allow its Lawn Products Division to purchase the blades from the outside
supplier, and why?
A. Yes, because buying the blades would save Dana Company P500.
B. No, because making the blades would save Dana Company P1,500.
C. Yes, because buying the blades would save Dana Company P2,500.
D. No, because making the blades would save Dana Company P2,500
43

. The Connell Company uses 5,000 units of Part 501 each year. The cost of manufacturing one
unit Part 501 at this volume is as follows:
Direct materials
P2.50
Direct labor
3.50
Variable overhead
1.50
Fixed overhead
1.00
Total
P8.50
An outside supplier has offered to sell Connell unlimited quantities of Part 501 at a unit cost of
P7.75. If Connell accepts this offer, it can eliminate 50 percent of the fixed costs assigned to
part 501. Furthermore, the space devoted to the manufacture of Part 501 would be rented to
another company for P6,000 per year. If Connell accepts the offer of the outside supplier,
annual profits will
A. Increase by P13,500
C. Increase by P 7,250
B. Increase by P11,000
D. Increase by P 1,250

41

. Bulacan Company manufactures part G for use in the production of its principal product. The
costs per unit for 10,000 units of part G are as follows:
Direct materials
P 3
Direct labor
15
Variable overhead
6
Fixed overhead
8
Total
P32
Pampanga Company has offered to sell Bulacan 10,000 units of part G for P30 per unit. If
Bulacan accepts Pampangas offer, the released facilities could be used to save P45,000 in
relevant costs in the manufacture of part H. In addition, P5 per unit of the fixed overhead
applied to part G would continue.
What alternative is more desirable and by what amount?
A.
B.
C.
D.
Alternative
Manufacture
Manufacture
Buy
Buy
Amount
P10,000
P15,000
P15,000
P10,000

Point of indifference - Units


44
. Mars Industries is a multi-product company that currently manufactures 30,000 units of Part
QS42 each month for use in the production of its main product. The facilities now being used
to produce Part QS42 have fixed monthly cost of P150,000 and a capacity to produce 84,000
units per month. If Mars were to buy Part QS42 from an outside supplier, the facilities would
be idle, but 60 percent of its fixed costs would not continue. The variable production costs of
Part QS42 are P11 per unit.
If Mars Industries is able to obtain Part QS42 from an outside supplier at a unit purchase price
of P12.875, the monthly usage at which it will be indifferent between purchasing and making
Part QS42 is
A. 30,000 units
C. 80,000 units
B. 32,000 units
D. 48,000 units

. Blade Division of Dana Company produces hardened steel blades. One-third of the Blades
Divisions output is sold to the Lawn Products Division of Dana; the remainder is sold to
outside customers. The Blade Divisions estimated sales and standard costs data for the fiscal
year ending June 30 are as follows:
Lawn Products
Outsiders
Sales
P15,000
P40,000
Variable costs
(10,000)
(20,000)
Fixed costs
(3,000)
(6,000)
Gross margin
P 2,000
14,000
Unit sales
10,000
20,000
The Lawn Products Division has an opportunity to purchase 10,000 identical quality blades
from an outside supplier at a cost of P1.25 per unit on a continuing basis. Assume that the

42

Point of indifference - price


45
. Calero Manufacturing Company can make 100 units of a necessary component part with the
following costs:
25

Incremental Analysis

Direct Materials
P80,000
Direct Labor
13,000
Variable Overhead
40,000
Fixed Overhead
27,000
If Calero Manufacturing Company purchases the component externally, P20,000 of the fixed
costs can be avoided. At what external price for the 100 units is the company indifferent
between making or buying?
A. P160,000.
C. P153,000.
B. P113,000.
D. P133,000.

determined as follows:
Product X
Product Y
Revenue
P130
P80
Variable costs
70
P38
Contribution margin
P 60
P42
Total demand for X is 16,000 units and for Y is 8,000 units. Machine hour is a scarce
resource. 42,000 machine hours are available during the year. Product X requires 6 machine
hours per unit while product Y requires 3 machine hours per unit.
How many units of X and Y should Hingis Corporation produce?
A.
B.
C.
D.
Product X
16,000
8,000
7,000
3,000
Product Y
zero
4,000
zero
8,000

Profit maximization
Point of indifference
46
. Dipsum Soft Drinks makes three products: iced tea, soda, and lemonade. The following data
are available:
Iced Tea
Soda
Lemonade
Sales price per unit
P9.00
P6.00
P5.00
Variable cost per unit
3.00
1.50
1.00
Contribution margin per unit
P6.00
P4.50
P4.00
Dipsum is experiencing a bottleneck in one of its processes that affects each product as
follows:
Iced Tea
Soda
Lemonade
Bottleneck process hours per unit
3
3
4
What price for lemonade would equate its profitability to that of soda?
A. P8.00.
C. P6.00.
B. P7.00.
D. P5.50.

49

. Mary Manufacturing has assembled the following data pertaining to two popular products.
Blender
Electric mixer
Direct materials
P 6
P11
Direct labor
4
9
Factory overhead @ P16 per hour
16
32
Cost if purchased from an outside supplier
20
38
Annual demand (units)
20,000
28,000
Past experience has shown that the fixed manufacturing overhead component included in the
cost per machine hour averages P10. Mary has a policy of filling all sales orders, even if it
means purchasing units from outside suppliers.
If 50,000 machine hours are available, and Mary Manufacturing desires to follow an optimal
strategy, it should
A. produce 25,000 electric mixers, and purchase all other units as needed
B. produce 20,000 blenders and 15,000 electric mixers, and purchase all other units as
needed
C. produce 20,000 blenders and purchase all other units as needed
D. produce 28,000 electric mixers and purchase all other units as needed

Optimal mix
47
. Product A sells for P12 per unit and its variable cost per unit is P10. Product B sells for P15
per unit and its variable cost per unit is P12. The plant capacity is 350,000 machine hours and
both products require one machine hour to manufacturer. Which of the following will provide
the best sales mix of Product A and Product B assuming the market limitation of Product A is
200,000 units and the market limitation of Product B is 250,000 units?
A. 250,000 units of Product A, 100,000 units of Product B
B. 50,000 units of Product A, 300,000 units of Product B
C. 100,000 units of Product A, 250,000 units of Product B
D. 150,000 units of Product A, 200,000 units of Product B

Decision
50
. 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 more if Product A is made.
C. P3,000 less if Product A is made.
B. P3,000 less if Product B is made.
D. the same if either product is made.

48

. The Hingis Corporation manufactures two products: X and Y. Contribution margin per unit is
26

Incremental Analysis

C. 6,000 units of Plastic and manufacturing the remaining bearings.


D. 5,000 units of Metal and manufacturing the remaining bearings.

51

. The Baco Company produces three products with the following costs and
selling prices:

53

. HILO Company manufactures electric carpentry tools. The production department had met all
production requirements for the current month and has an opportunity to produce additional
units of product with its excess capacity. Unit selling prices and unit costs for three different
drill models are as follows:
Home Model
Deluxe Model
Pro Model
Selling price
P58
P65
P80
Direct material
16
20
19
Direct labor (P10 per hour)
10
15
20
Variable overhead
8
12
16
Fixed overhead
16
5
15
Variable overhead is applied on the basis of direct-labor pesos, while fixed overhead is applied
on the basis of machine hours. There is sufficient demand for the additional production of any
model in the product line. If it has excess machine capacity but a limited amount of labor time,
to which product or products should HILO Company devote its excess production?
A. Home model
C. Deluxe model
B. Pro Model
D. Equally

A
B
C
Selling price per unit
P16
P21
P21
Variable cost per unit
7
11
13
Contribution margin per unit
P 9
P10
P 8
Direct labor hours per unit
1.0
1.5
2.0
Machine hours per unit
4.5
2.0
2.5
In what order should the three products be produced if either the direct labor-hours or the
machine hours are the companys production constraint?
A.
B.
C.
D.
Direct labor hours
A, B, C
B, C, A
B, C, A
A, B, C
Machine hours
B, C, A
B. C. A
A, C, B
A, C, B
. Scarce Company has been producing two types of bearings, Plastic and Metal, for its own use
in the production of main products. The data regarding these two bearings follow:
Plastic
Metal
Machine hours required per unit
3.0
4.5
Standard cost per unit
Prime costs
P 8.00
P 9.00
Variable overhead*
3.00
4.00
Fixed overhead**
4.50
6.75
Total
P15.50
P19.75

52

. Product A sells for P12 per unit and its variable cost per unit is P10. Product B sells for P15
per unit and its variable cost per unit is P12. The plant capacity is 350,000 machine hours and
Product A requires 48 minutes to complete while Product B requires 75 minutes. Which of the
following will provide the best sales mix of Product A and Product B assuming the market
limitation of Product A is 200,000 units and the market limitation of Product B is 250,000 units?
A. 46,875 units of Product A, 250,000 units of Product B
B. 200,000 units of Product A, 152,000 units of Product B
C. 152,000 units of Product A, 200,000 units of Product B
D. 100,000 units of Product A, 250,000 units of Product B

54

*Variable manufacturing overhead is applied on the basis of direct labor hours.


**Fixed manufacturing overhead is applied on the basis of machine hours.
Scarces annual requirements for these bearings is 7,000 units of Plastic and 11,000 units of
Metal. Recently, Scarces management decided to devote additional machine hours to other
product lines resulting to only 48,000 machine hours per year that can be dedicated to the
production of the bearings. An outside company has offered to sell Scarce the annual supply
of the bearings at prices of P15.50 for Plastic and P17.50 for Metal. Scarce wants to schedule
the otherwise idle 48,000 machine hours to produce bearings so that the company can
minimize its costs (maximize its net benefits).
Scarce Company will maximize its net benefits by purchasisng
A. 7,000 units of Plastic and manufacturing the remaining bearings.
B. 11,000 units of Metal and manufacturing 7,000 units of Plastic.

. Dimasalang Company has only 25,000 hours of machine time each month to manufacture its
two products. Product X has a contribution margin of P50 and Product Y has a contribution
margin of P64. Product X requires 5 machine hours and Product Y, 8 hours. If Dimasalang
wants to dedicate 80% of its machine time to the product that will provide the most income, it
will have a total contribution margin of
A. P250,000
C. P210,000
B. P240,000
D. P200,000

55

Sell-as-is-or-process-further
27

Incremental Analysis

Minimum sales
56
. Snow Clean Corporation produces cleaning compounds and solutions for industrial and
household use. While most of its products are processed independently, a few are related.
Grit 337, a coarse cleaning powder with many industrial uses, costs P16 a pound to make and
sells for P20 a pound. A small portion of the annual production of this product is retained for
further processing in the Mixing Department, where it is combined with several other
ingredients to form a paste, which is marketed as a silver polish selling for P40 per jar. This
further processing requires pound of Grit 337 per jar. Costs of other ingredients, labor, and
variable overhead associated with this further processing amount to P25 per jar. Variable
selling costs are P3 per jar. If the decision were made to cease production of the silver polish,
P56,000 of Mixing Department fixed costs could be avoided. Snow Clean has limited
production capacity for Grit 337, but unlimited demand for the cleaning powder.
What is the minimum number of jars of silver polish that would have to be sold to justify further
processing of Grit 337.
A. 8,000
C. 7,000
B. 5,600
D. 4,667

P350,000.
Which of the following answers is correct?
A. Sell now
B. Finish the product because profits will increase by P25,000
C. Finish the product because profits will increase by P12,500
D. Finish the product because profits will increase by P10,000
Effect of decision
60
. Ottawa Corporation produces two products from a joint process. Information about the two
joint products follows:
Product X
Product Y
Anticipated production
2,000 lbs
4,000 lbs
Selling price per pound at split-off
P30
P16
Additional processing costs/pound after split-off
P15
P30
(all variable)
Selling price/pound after further processing
P40
P50
The joint cost is P85,000. Ottawa currently sells both products at the split-off point. If Ottawa
makes decision which maximizes profit, its profit will increase by
A. P16,000
C. P 4,000
B. P50,000
D. P10,000

Decision
57
. Beal Company is starting business and is unsure of whether to sell its product assembled or
unassembled. The unit cost of the unassembled product is P40 and Beal Company would sell
it for P90. The cost to assemble the product is estimated at P18 per unit and Beal Company
believes the market would support a price of P116 on the assembled unit.
What is the correct decision using the sell or process further decision rule?
A. Sell before assembly, the company will be better off by P18 per unit.
B. Sell before assembly, the company will be better off by P26 per unit.
C. Process further, the company will be better off by P26 per unit.
D. Process further, the company will be better off by P8 per unit.

. The cost to manufacture an unfinished unit is P40 (P30 variable and P10 fixed). The selling
price per unit is P50. The company has unused production capacity and has determined that
units could be finished and sold for P65 with an increase in variable costs of 40%. What is the
additional net income per unit to be gained by finishing the unit?
A. P 3
C. P10
B. P15
D. P12

61

58

. Sales of 25,000 units at P7.20 per unit are made monthly. The unit cost is P5.90. Incremental
costs of P1.35 per unit to further process the units will result in the 25,000 units being sold for
P8.75 each. Which course of action should the company take?
A. Commit its resources to a different product
B. Sell the units at the current stage of completion
C. Do further processing and sell the units at P8.75
D. Do further processing on only one-half of the units

Total processing cost


62

. Matador Manufacturing schedules a weekly production of 15,000 units of


Product M and 30,000 units of N for which P800,000 common variable costs
are incurred. These two products can be sold as is or processed further.
Further processing of either product does not delay the production of
subsequent batches of the joint products. Below are some of the information:
Unit selling price without further processing
Unit selling price with further processing
Total separate weekly variable costs of further processing

59

. Aaron Company produces a product that can be sold for P250,000 at an intermediate stage. If
Aaron finishes the product, they will incur P75,000 of additional material costs and another
P15,000 in labor and overhead costs. When finished, Aaron will be able to sell the product for
28

M
N
P25
P19
P31
P23
P100,000 P110,000

Incremental Analysis

To maximize Matadors manufacturing contribution margin, the total separate variable costs of
further processing that should be incurred each week are
A. P105,000
C. P110,000
B. P100,000
D. P210,000

Shutdown point
67
. Bulusan Company normally produces and sells 30,000 units of E14 each month. E14 is a
small electrical relay used in the automotive industry as a component part in various products.
The selling price is P22 per unit, variable costs are P14 per unit, fixed manufacturing overhead
costs total P150,000 per month, and fixed selling costs total P30,000 per month.

Keep-or-drop decision
Analysis
63
. A company is deciding whether or not to eliminate a segment of its business. The segment
generates total sales of P104,000, its direct expenses are P22,000, and its indirect expenses
are P26,000. Its cost of goods sold is P64,000. Six thousand pesos of the direct expenses
and P8,000 of its indirect expenses are avoidable expenses. Which of the following is not
true?
A. This segment has a net loss of P8,000.
B. This segment's revenue is greater than its avoidable costs.
C. This segment is a good candidate for elimination.
D. This segment's avoidable costs are greater than unavoidable costs.

Employment-contract strikes in the companies that purchase the bulk of the E14 have caused
Bulusan Companys sales to temporarily drop to only 9,000 units per month. Bulusan
Company estimates that the strikes will last for about two months, after which time sales of
E14 should return to normal. Due to the current low level of sales, however, Bulusan
Company is thinking about closing down its own plant during the two months that the strikes
are on. If Bulusan Company does close down its plant, it is estimated that fixed manufacturing
overhead costs can be reduced to P105,000 per month and that fixed selling costs can be
reduced by 10%. Start-up costs at the end of the shutdown period would total P8,000. Since
Bulusan Company uses just-in-time production method, no inventories are on hand.
At what level of unit sales for the two-month period should Bulusan Company be indifferent
between temporarily closing the plant or keeping it open?
A. 11,000
C. 10,000
B. 24,125
D. 8,000

Effect of drop decision


64
. Banahaw Company plans to discontinue a department that has a contribution margin of
P240,000 and P480,000 in fixed costs. Of the fixed costs, P210,000 can be avoided. The
effect of this discontinuance on Banahaws overall net operating income would be a(an)
A. decrease of P30,000
C. increase of P30,000
B. decrease of P10,000
D. increase of P10,000

Equipment replacement
68
. MNL Company has an opportunity to acquire a new machine to replace one of its present
machines. The new machine would cost P90,000, have a 5-year life and no estimated
salvage value. Variable operating costs would be P100,000 per year. The present machine
has a book value of P50,000 and a remaining life of 5 years. Its disposal value now is P5,000,
but it would be zero after 5 years. Variable operating costs would be P125,000 per year.
Ignore income taxes. Considering the 5 years in total, what would be the difference in profit
before income taxes by acquiring the new machine as opposed to retaining the present one?
A. P10,000 decrease
C. P35,000 increase
B. P15,000 decrease
D. P40,000 increase

65

. Mina Co. mines three products. Gold Ore sells for P1,000,000 per ton, variable costs are
P600,000 per ton, and fixed mining costs are P6,000,000. The segment margin for 2007 was
P1,200,000. The management of Mina Co. was considering dropping the mining of Gold Ore.
Only one-half of the fixed expenses are direct and would be eliminated if the segment was
dropped. If Gold Ore were dropped, net income for Mina Co. would
A. Increase by P2,000,000
C. Decrease by P2,000,000
B. Increase by P1,200,000
D. Decrease by P1,200,000

66

. Agimat Company plans to discontinue a segment with a P32,000 segment margin. Common
expenses allocated to the segment amounted to P45,000, of which P20,000 cannot be
eliminated if the segment were closed. The effect of closing down the segment on Agimat
Companys before tax profit would be
A. P12,000 decrease
C. P12,000 increase
B. P 7,000 decrease
D. P 7,000 increase

Lease
69
. Darren Co. is considering disposing an equipment that costs P50,000 and has P40,000 of
accumulated depreciation to date. Darren Co. can sell the equipment through a broker for
P25,000 less 5% commission. Alternatively, Minton Co. has offered to lease the equipment for
five years for a total of P48,750. Darren will incur repair, insurance, and property tax expenses
estimated at P10,000. At lease-end, the equipment is expected to have no residual value. The
net differential income from the lease alternative is:
29

Incremental Analysis

A. P15,000.
B. P 5,000.

73

C. P25,000.
D. P12,500.

. Due to a strike in its suppliers plant, Adrenal Company is unable to purchase more material for
the production of CADS. The strike is expected to last for two months. Adrenal Company has
enough material on hand to continue to operate at 30% of normal levels for the two months. If
the plant were 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. How much is the advantage or disadvantage of closing the plant for the two-month
period?
A. Disadvantage, P144,000
C. Disadvantage, P15,000
B. Advantage, P144,000
D. Advantage, P15,000

Comprehensive
Questions 70 through 74 are based on the following information:
Adrenal Company has a single product called a CAD. The company normally produces and sells
60,000 CADS each year at a selling price of P32 per unit. The companys unit costs at this level of
activity are given below:
Direct materials
P10.00
Direct labor
4.50
Variable manufacturing overhead
2.30
Fixed manufacturing overhead
5.00
Variable selling expenses
1.20
Fixed selling expenses
3.50
Total cost per unit
P26.50

74

. An outside manufacturer has offered to produce CADS for Adrenal Company and to ship them
directly to Adrenals customers. If Adrenal Company accepts this offer, the facilities that it
uses to produce CADS 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. What is
the unit cost figure that is relevant for comparison to whatever quoted price is received from
the outside manufacturer?
A. P20.95
C. P20.55
B. P21.35
D. P16.80

70

. Assume that Adrenal Company has sufficient capacity to produce 90,000 CADS 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. The increase in income if the production is increased by 25% is
A. P130,000
C. P 25,000
B. P108,333
D. P 20,800

Question Numbers 75 though 77 are based on the following:


Henderson Equipment Company has produced a pilot run of 50 units of a recently developed
cylinder used in its finished products. The company expects to produce and sell 800 units. The
pilot run required 14.25 direct-labor hours for the 50 cylinders, averaging 0.285 direct-labor hours
per cylinder. Henderson has experienced a significant learning curve on the direct-labor hours
needed to produce new cylinders. As cumulative output doubles, say from 25 to 50 units for
example, the average labor time per unit declines by 20 percent. Past experience indicates that
learning tends to cease by the time 800 parts are produced. Hendersons manufacturing costs for
cylinders are as follows:
Direct labor
P120.00 per hour
Variable overhead
100.00 per direct labor hour
Fixed overhead
166.00 per direct labor hour
Direct material
40.50 per unit

71

. Assume again that Adrenal Company has sufficient capacity to produce 90,000 CADS each
year. A customer in a foreign market wants to purchase 20,000 CADS. Import duties on the
CADS 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.
What is the break-even price on this order?
A. P23.35
C. P22.15
B. P28.65
D. P21.70

72

. The company has 1,000 CADS on hand that have some deformities and are therefore
considered to be seconds. Due to the deformities, 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?
A. P16.80
C. P 4.70
B. P18.00
D. P 1.20

Henderson has received a quote of P75 per unit from the Leyte Machine Company for the
additional 750 cylinders needed. Henderson frequently subcontracts this type of work and has
always been satisfied with the quality of the units produced by Leyte. Recently, Henderson
Equipment Company has been operating at considerably less than full capacity.
30

Incremental Analysis

75

. How many direct-labor hours are expected to be used for the production of 800 cylinders
(including the pilot run)?
A. 93.4 hours
C. 79.1 hours
B. 74.7 hours
D. 67.6 hours

A second alternative available to CLASP is to convert the special machinery to the standard model,
which sells for P62,500. The additional identifiable costs for this conversion are as follows:
Direct materials
Direct labor
Total

76

. The production of 800 cylinders, including the pilot run, requires total incremental costs of:
A. P48,834
C. P68,452
B. P49,802
D. P52,948

A third alternative for CLASP is to sell the machine as is for a price of P52,000. However, the
potential buyer of the unmodified machine does not want it for 60 days. This buyer has offered a
P7,000 down payment, with the remainder due upon delivery.

77

. The effect on profit of producing 750 units instead of buying them from Leyte Machine
Company a(an)?
A. Increase of P 8,470.
C. Increase of P12,676.
B. Increase of P 7,052.
D. Decrease of P22,560.

The following additional information is available regarding CLASPs operations:


1. The sales commission rate on sales of standard models is 2 percent, while the rate on special
orders is 3 percent.

Questions 78 through 81 are based on the following:


CLASP Industries received an order for a piece of special machinery from Tigok Company. Just as
CLASP completed the machine, Tigok declared backruptcy, defaulted on the order, and forfeited
the 10 percent deposit paid on the selling price of P72,500.

2. Normal credit terms for sales of standard models are 2/10, net/30. This means that a
customer receives a 2 percent discount if payment is made within 10 days, and payment is
due no later than 30 days after billing. Most customers take the 2 percent discount. Credit
terms for a special order are negotiated with the customer.

CLASPs manufacturing manager identified the costs already incurred in the production of the
special machinery for Tigok as follows:
Direct material
Direct labor
Manufacturing overhead:
Variable
Fixed
Fixed selling and administrative costs
Total

3. The allocation rates for manufacturing overhead and fixed selling and administrative costs are
as follows:
Manufacturing costs:
Variable
50% of direct-labor costs
Fixed
25% of direct-labor costs
Fixed selling and administrative costs 10% of the total manufacturing costs

P16,600
21,400
P10,700
5,350

16,050
5,405
P59,455

4. Normal time required for rework is one month.


78

Another company, Kay Corporation, will buy the special machinery if it is reworked to Kays
specifications. CLASP offered to sell the reworked machinery to Kay as a special order for
P68,400. Kay agreed to pay the price when it takes delivery in two months. The additional
identifiable costs to rework the machinery to Kays specifications are as follows:
Direct materials
Direct labor
Total

P2,850
3,300
P6,150

. How much peso contribution would the sale to Kay Corporation add to CLASP before-tax
profit?
A. P53,848
C. P55,900
B. P55,948
D. P 9,300

79

P 6,200
4,200
P10,400

. How much peso contribution would the alternative of converting the special machinery to
standard model add to CLASPs before-tax profit?
A. P52,200
C. P52,825

31

Incremental Analysis

B. P54,475

D. P 7,650

403

80

. If Kay makes CLASP a counteroffer, what is the lowest price CLASP should accept for the
reworked machinery from Kay?
A. P10,400
C. P10,722
B. P12,500
D. P12,887

405

. How much would the alternative of selling unmodified machinery to the potential buyer
contribute to CLASPs before-tax profit?
A. P50,440
C. P49,920
B. P 1,740
D. P49,400

Product
401
403
405

Question Nos. 82 and 85 are based on the following:


Constraint Company manufactures and sells three products, which are manufactured in a factory
with four departments. Both labor and machine time are applied to the products as they pass
through each department. The machines and labor skills required in each department are so
specialized that neither machines nor labor can be switched from one department to another.

Labor and Machine Specifications per


Unit of Product
Product
Labor and Machine Time
401
Direct labor hours
Machine hours

( 500)
3,000
3,700

( 400)
3,100
4,500

4
3,500

( 300)
2,700
2,750

( 200)
3,300
2,600

Unit costs:
Direct material
Direct labor
Department 1
Department 2
Department 3
Department 4
Variable overhead
Fixed overhead
Variable selling expenses
Unit selling price

P 13

P 17

12
21
24
9
27
15
3
P196

6
14
-18
20
10
2
P123

12
14
16
9
25
32
4
P167

. Which department has capacity constraint in labor hours?


A. Department 1
C. Department 3
B. Department 2
D. Department 4
. The total Machine Hours required by estimated monthly unit sales are:
A. 10,600
C. 11,600
B. 12,100
D. 13,500

3
1

3
2

1
2
32

405

P 7

82

83

2
1

2
1

2
2
1
1

Monthly Unit Sales


500
400
1,000

P R O D U C T S
401
403

Management has assembled the following information regarding available machine and labor time
by department and the machine hours and direct-labors required per unit of product. These data
should be valid for the next six months.

3
3,000

2
1
2
2

Inventory levels are satisfactory and need not be increased or decreased during the next six
months. Unit price and cost data that will be valid for the next six months are as follows:

Constraint Companys management is planning its production schedule for the next few months.
The planning is complicated, because there are labor shortages in the community and some
machines will be down several months for repairs.

DEPARTMENT
1
2
3,500
3,500

1
1
2
2

The sales department believes that the monthly demand for the next six months will be as follows:

81

Monthly Capacity Available


Norman machine capacity in MH
Capacity of machines being repaired
in machine hours
Available machine capacity in MH
Available direct labor hours (DLH)

Direct labor hours


Machine hours
Direct labor hours
Machine hours

Incremental Analysis
84

. The total number of labor hours as constraint for a month is:


A. 50
C. 300
B. 750
D. No constraint

P40 per unit and the labor will be P72 per unit. Mr. Syjuco will have to spend P40,000 for a special
device which will be discarded when the job is done.
86

. What is the incremental cost of the special order of 5,000 units?


A. P600,000
C. P779,000
B. P421,000
D. P371,000

85

. In order to maximize its monthly profit, Constraint Company should produce:


A.
B.
C.
401
250
250
500
403
0
400
400
405
1,000
1,000
625

D.
500
0
625

87

. What is the full cost of the special order?


A. P779,000
B. P492,400

Question Nos. 86 through 89 are based on the following;


Arnold Syjuco operates a small machine shops. He manufactures one standard product available
from many other similar businesses and he also manufactures products to customer order. Hi
accountant prepared the annual income statement shown below:

Sales
Material
Labor
Depreciation
Power
Rent
Heat and light
Other
Total
Income

Custom Sales
P1,000,000
P 200,000
400,000
126,000
14,000
120,000
12,000
8,000
P 880,000
P 120,000

Standard Sales
P500,000
P160,000
180,000
72,000
8,000
20,000
2,000
18,000
P460,000
P 40,000

C. P421,000
D. P651,000

88

. The amount of opportunity cost of taking the special order is:


A. P183,000
C. P250,000
B. P 71,000
D. P124,600

89

. What is the effect on the overall profit if the special order is accepted?
A. P450,000
C. P( 25,000)
B. P( 85,000)
D. P 29,000

Total
P1,500,000
P 360,000
580,000
198,000
22,000
140,000
14,000
26,000
P1,340,000
P 160,000

Question Nos. 90 through 94 are based on the following:


The Verbatim Corporation, which produces and sells to wholesalers a highly successful line of
summer lotions and insect repellents, has decided to diversify in order to stabilize sales over the
year. A natural area for the company to consider is the production of special lotion and cream to
prevent dry and chapped skin.
After considerable research, a special product line has been developed. However, because of the
conservatism of the company management, Verbatims president has decided to introduce only
one of the new products for this coming rainy season. If the product is a success, further
expansion will be initiated in future years.

The depreciation charges are for machines used in the respective product lines. The power charge
is apportioned on the estimate of power consumed. The rent is for the building space which has
been leased for 10 years at P140,000 per year. The rent and heat and light are apportioned to the
product lines based on amount of floor space occupied. All other costs are current expenses
identified with the product line incurring them.

The product selected (called Chaps) is a lip balm that will be sold in a lipstick-type tube. The
product will be sold to wholesalers in boxes of 24 tubes for P800 per box. Because of available
capacity, no additional fixed charges will be incurred to produce the product. However, a
P10,000,000 fixed charge will be absorbed by the new product to allocate a fair share of the
companys present fixed costs to it.

A valued custom parts customer has asked Mr. Syjuco to manufacture 5,000 special units for him.
Mr. Syjuco is working at capacity and would have to give up some other business to take this
business. He cannot renege on custom orders already agreed to but he could reduce the output of
his standard product by about one-half for one year while producing the specially requested
custom part. The customer is willing to pay P140 for each part. The material cost will be about

Using the estimated sales and production of 100,000 boxes of Chaps as the standard volume, the
accounting department has developed the following costs:
33

Incremental Analysis

Direct labor
Direct materials
Total overhead
Total

P200 per box


300 per box
150 per box
P650 per box

Unit manufacturing costs:


Direct materials
Direct labor
Variable overhead
Fixed overhead
Unit marketing costs:
Variable
Fixed
Total unit costs

Verbatim has approached a cosmetics manufacturer to discuss the possibility of purchasing the
tubes for Chaps. The purchase price of the empty tubes from the cosmetics manufacturer would
be P90 per 24 tubes. If the Verbatim Corporation accepts the purchase proposal, it is estimated
that direct labor and variable overhead costs would be reduced by 10% and direct material costs
would be reduced by 20%.

P1,000
1,500
500
1,200
500
1,400

P4,200
1,900
P6,100

Unless otherwise stated, assume there is no connection between the situations described in the
questions; each is to be treated independently. Unless otherwise stated, a regular selling price of
P7,400 per unit should be assumed. Ignore income taxes and other costs that are not mentioned
in the cost schedule or in a question itself.

90

. What is the variable overhead rate per box of Chaps?


A. P100
C. P 50
B. P150
D. P200

95

. What is the monthly breakeven units for Medical Supply Company?


A. 2,000
C. 1,950
B. 2,689
D. 2,614

91

. What is the material cost per box of Chaps saved by purchasing them?
A. P300
C. P 60
B. P240
D. P 30

96

. Market research estimates that volume could be increased to 3,500 units, which is well within
hoist production capacity limitations, if the price were ct from P7,400 to P6,500 per unit.
Assuming the cost behavior patterns implied by the data in the cost schedule is correct, would
you recommend this action be taken?
A. Yes, because the profit will increase by P1,500,000.
B. Yes, because the profit will increase by P 200,000.
C. No, because the profit will decrease by P1,200,000.
D. No, because the profit will decrease by P2,400,000.

92

. How much would it cost Verbatim to produce the tubes per box?
A. P 60
C. P 90
B. P 85
D. P120

93

. How much would Verbatim incur by making 125,000 boxes, assuming that additional
equipment, at an annual rental of P1,000,000, must be acquired to produce this volume?
A. P10,625,000
C. P11,250,000
B. P11,625,000
D. P12,500,000

97

. On March 1, a contract offer is made to Medical Supply Company by the Veterans Hospital to
supply 500 units for delivery by March 31. Because of an unusually large number of rush
orders form their regular customers. Medical Supply plans to produce 4,000 units during
March, which will use all available capacity. If the Veterans Hospitals order is accepted, 500
units normally sold to regular customers would be lost to a competitor. The contract given by
the hospital would reimburse the Veterans Hospitals share of March manufacturing costs,
plus pay a fixed fee (profit) of P500,000. (There would be no variable marketing costs incurred
on the hospitals unit.) What impact would accepting the Veterans Hospital contract have on
March income?
A. P 1,100,000
C. P(1,350,000)
B. P( 850,000)
D. P 500,000

94

. Referring to Question No. 93, what is the impact on its profit if Verbatim were to buy 125,000
boxes?
A. Additional profit of P1,000,000.
C. Additional profit of P375,000.
B. Additional profit of P1,250,000.
D. Decrease in profit of P625,000.

Question Nos. 95 through 101 are based on the following:


Medical Supply Company produced hydraulic hoists that were used by hospitals to move
bedridden patients. The costs of manufacturing and marketing hydraulic hoists at the companys
normal volume of 3,000 units per month are show below:
34

Incremental Analysis

98

. Medical Supply Company has an opportunity to enter a foreign market in which price
competition is keen. An attraction of the foreign market is that demand there is greatest when
demand in the domestic market is quite low; thus idle production facilities could be used
without affecting domestic business.
An order for 1,000 units is being sought at a below-normal price in order to enter this market.
Shipping costs for this order will amount to P750 per unit, while total costs of obtaining the
contract (marketing costs) will be P40,000. No other variable marketing costs would be
required on this order. Domestic business would be unaffected by this order. What is the
minimum unit price should Medical Supply Company consider for this order of 1,000 units?
A. P3,750
C. P3,790
B. P3,000
D. P4,290

Question Nos. 102 and 103 are based on the following:


Marcus Fibers, Inc., specializes in the manufacturing of synthetic fibers that the company uses in
many products such as blankets, coats, and uniforms for police and firefighters. Marcus has been
in business since 1975 and has been profitable every year since 1983. The company uses a
standard cost system and applies overhead on the basis of direct labor hours.
Marcus has recently received a request to bid on the manufacture of 800,000 blankets scheduled
for delivery to several military bases. The bid must be started at full cost per unit plus a return on
full cost of no more than 9 percent after income taxes. Full cost has been defined as including all
variable costs of manufacturing the product, a reasonable amount of fixed overhead, and
reasonable incremental administrative costs associated with the manufacture and sale of the
product. The contractor has indicated that bids in excess of P25 per blankets are not likely to be
considered.

99

. An inventory of 230 units of an obsolete model of the hoist remains in the stockroom. These
must be sold through regular channels at reduced prices, or the inventory will soon be
valueless. What is the minimum price that would be acceptable in selling these units?
A. P3,500
C. P3,000
B. P4,200
D. P 500

In order to prepare the bid for the 800,000 blankets, Andrea Lighter, cost accountant, has gathered
the following information about the cost associated with the production of the blankets.
Direct material
Direct labor
Direct machine costs*
Variable overhead
Fixed overhead
Incremental administrative costs
Special fee**
Material usage
Production rate
Effective tax rate

100

. A proposal is received from an outside contractor who will make and ship 1,000 hydraulic hoist
units per month directly to Medical Supplys customers as orders are received from Medical
Supplys sales staff. Medical Supplys fixed marketing costs would be unaffected, but its
variable marketing costs would be cut by 20 percent for these 1,000 units produced by the
contractor. Medical Supplys plant would operate at two thirds of its normal level, and total
allocated fixed manufacturing costs for these 1,000 units would be cut by 30 percent. What inhouse unit cost should be used to compare with the quotation received from the supplier?
A. P 3,760
C. P 4,240
B. P 3,000
D. P 3,460

101

P 1.50 per pound of fibers


P 7.00 per hour
P10,00 per blanket
P 3.00 per direct labor hour
P 8.00 per direct labor hour
P2,500 per 1,000 blankets
P 0.50 per blanket
6 pounds per blanket
4 blankets per DLH
40%

102

. Assume the same facts as in requirement No. 101 except that the idle facilities would be used
to produce 800 modified hydraulic hoists per month for us in hospital operating rooms. These
modified hoists could be sold for P9,000 each, while the costs of production would be P5,500
per unit variable manufacturing expense. Variable marketing costs would be P1,000 per unit.
Fixed marketing and manufacturing costs would be unchanged whether the original 3,000
regular units hoists were manufactured or the mix of 2,000 regular hoists plus 800 modified
hoists were produced. What is the maximum purchase price per unit that Medical Supply
should be willing to pay the outside contractor?
A. P 5,100
C. P 5,500
B. P 3,100
D. P 5,600

. The minimum price per blanket that Marcus Fibers, Inc., could bid without reducing the
companys net income is
A. P24.00
C. P50.25
B. P21.50
D. P40.25

103

. Using the full-cost criteria and the maximum allowable return specified, Marcus Fibers bid
price per blanket would be:
A. P24.00
C. P26.00
B. P29.90
D. P27.90

35

Incremental Analysis

ANSWER EXPLANATIONS

36

Answer: C
Cost of alternative selected
Cost of alternative rejected
Incremental cost

P800,000
650,000
P150,000

. Answer: A
The company needs to purchase 55,000 units earlier than their scheduled 5,000-unit monthly purchase. Hence, the
average investment for the inventory is (55,000 x P60 2) or P1,650,000. The opportunity cost is P132,000 or
(P1,650,000 x 0.08).

Answer: A
Additional revenue after rework (24,000(12 4)
Less Additional cost (24,000 x 2)
Additional profit

P192,000
48,000
P144,000

. Answer: B
The only relevant out-of pocket cost is the variable selling expense which is P40. The sale thru the regular channels
involves an opportunity cost of P140.
Variable selling expense (40% x 100)
40
Opportunity cost
140
Total
180

10

Answer: C
Regular variable cost
Overtime premium
Relevant cost per unit
Answer: B
Full cost
Fixed overhead
Relevant unit cost

P8.00
1.50
P9.50

(180,000/9,000)

50.00
20.00
30.00

Answer: C
Cost of 1,000 kg at latest price (1,000 x 8.70)
Add excess price include on the remaining 4,000 kg. 4,000 x (8.70 8.30)
Relevant cost

8,700
1,600
10,300

Answer: B
Direct materials (2,000 @ 10)
Direct labor (2,000 @ 12)
Variable overhead (2,000 @ 6)
Increase in variable cost due to overtime (2,000 @ 14)
Incremental cost

20,000
24,000
12,000
28,000
84,000

Answer: B
Variable costs
Additional fixed costs
Minimum bid price
Answer: B
Direct material
Direct labor
Variable selling expenses

P56,250
13,750
P70,000
(360,000 24,000)
(540,000 24,000)
(84,000 24,000)

P15.00
22.50
3.50

Total
Add Profit per unit
Selling price
11

(22,500 1,500)

Answer: B
Relevant cost to make and sell:
Direct materials
Direct labor
Variable OH
Reduced selling expenses (30 x 0.06)
Addl fixed cost (20,000 5,000)
Minimum selling price

P41.00
15.00
P56.00

39
6
8
18
4
75

12

. Answer: B
The company has no existing capacity. The minimum selling price for this special sales should equal the regular selling
price plus additional expenses.
Regular selling price
P18
Additional expenses
1
Minimum selling price
P19

13

14

15

Answer: A
Direct materials
20.00
Direct labor
15.00
Variable overhead
12.00
Variable shipping and handling
3.00
Lost contribution margin LB46 (10,000 1,000)
10.00
Minimum price
60.00
The lost contribution margin on regular sale is relevant because the company is operating at capacity. In a special sale
wherein the company has to give up some of its regular units, the relevant costs consist of incremental costs plus any
opportunity costs.
Answer: D
Direct materials
Direct labor
Variable overhead
Variable selling expense
Additional profit (40,000/5,000)
Required selling price

. Answer: C
The maximum number of units in regular sales that Benjing could afford to lose equals the quantity that provides regular
contribution margin that matches the contribution margin provided by special sale.
Contribution margin from special sale 1,000 (14 8)
6,000
Divided by regularCM
(20 8)
12
Maximum Number of units
500
To illustrate the solution:
Contribution margin from special sale
Less Decrease in regular sales contribution margin (500 x 12)
Effect on profit

16

4.50
10.00
3.00
1.00
8.00
26.50

6,000
6,000
NIL

Answer: B
The maximum decrease in regular sale = Contribution margin from special sale/Unit contribution margin on regular

sale
(400 x 0.20) (2.00 -1.50) = 160
17

18

Answer: A
Total contribution margin from special sale(15,000 x P5.50)
P82,500
Less Additional fixed costs
30,000
Profit from special sale
P52,500
Less Decrease in contribution margin on regular
Sale
2,000(P39 P22.50)
33,000
Additional profit
P19,500
Please refer to Solution for Number regarding details of contribution margin per unit.
Answer: C
Selling price
Relevant cost per unit:
Regular cost per unit
Less: Commission
Fixed overhead (P3 x 2/3)
Net amount
Incremental fixed cost (P150 /300)
Advantage per unit, Buy
Number of units
Increase in profit

P6.00
P7.50
P0.75
2.00

19

. Answer: D
Additional profit: 3,000 x (70 50) = 60,000

20

21

Answer: A
Special price
Relevant cost:
Direct materials
Direct labor
Variable overhead
Unit contribution margin
Units ordered
Additional profit
Answer: A
Sales
Less: Variable production cost
Additional Fixed cost
Labeling cost
Profit

(2.75)
P4.75
0.50

5.25
P0.75
300
P 225

32
4
12
6

22
10
2,000
20,000
60,000

(1,500 x 30)
(1,500 x 2.50)

45,000
5,000
3,750

53,750
6.250

22

. Answer: B
The minimum selling price should equal the relevant cost to produce and sell a unit of product.
Direct materials
P50
Direct labor
20
Variable overhead (P10 x 0.2)
2
Selling expense (P15 x 0.4)
6
Minimum selling price
P78

23

Answer: C

The company has no excess capacity to be devoted to the production of additional units for special sale. In a special
sale decision where there is no excess capacity, the minimum selling price must be equal to the market price less any
avoidable expenses.
Selling price
P100
Less Avoidable selling expense (P15 x 0.4)
6
Minimum selling price
P 94
24

. Answer: D
The book value of the old equipment is a sunk cost and therefore not a relevant one. Also, the related cost on
outstanding note are irrelevant. They are not affected by a decision.

25

26

27

28

29

30

31

Answer: D
Relevant Costs
BetaZetaDirect materials 4.00 80.00Direct labor10.00 47.00Factory overhead 40% 16.00 8.00Relevant Unit
costP30.00135.00
. Answer: C
Direct material
2.00
Direct labor
2.40
Variable overhead
1.60
Avoidable marketing cost (0.7 x 2.50)
1.75
Relevant cost Make
7.75
The maximum purchase price, if ever the company has to decide buying the product, is P6.75. Any amount higher than
P6.75 will necessarily increase the unit cost of the product.
.

Answer: B
Direct materials
Direct labor
Variable overhead
Avoidable fixed overhead
Total relevant cost to make

64,000
16,000
8,000
6,000
94,000

Answer: D
Direct materials
Direct labor
Variable overhead
Additional contribution margin
Total relevant cost to make

64,000
16,000
8,000
16,000
104,000

Answer: B
Variable cost to make parts
Cost buy
Cost savings Make decision
Answer: A
Direct materials
Direct labor
Variable overhead
Avoidable fixed overhead
Relevant cost make
Purchase price
Advantage Make
Answer: A

(30,000 x 12)
(30,000 x 15)

360,000
450,000
90,000
80,000
13,000
40,000
4,000
137,000
145,000
8,000

Direct materials
Direct labor
Variable overhead
Total variable cost
Less Purchase cost
Avoidable fixed cost
Add unavoidable FC
Total fixed overhead
32

64,000
16,000
8,000
88,000
104,000
16,000
5,000
21,000

Answer: B
Purchase cost (2,000 x P15)
Relevant cost to make:
Variable cost (2,000 x P16) 8,000
Avoidable fixed cost (8,000 x 0.25)
Additional cost Buy (Decrease in profit)

P30,000
P24,000
2,000

Alternative computation for relevant cost to make:


Total cost (2,000 x P16)
Less unavoidable fixed cost (8,000 x 0.75)
Relevant cost to make
33

34

35

36

Answer: C
Cost of purchase (2,000 x P15)
Relevant cost make:
Variable cost (2,000 x P16) P8,000
Avoidable fixed cost (P8,000 x 0.25)
Opportunity cost rent
Cost savings Buy (increase in profit)

P32,000
6,000
P26,000
P30,000
P24,000
2,000
6,000

Answer: C
Relevant costs to make
Direct materials
Direct labor
Variable overhead
Supervisors salary
Opportunity costs, rent
Total
Relevant cost to buy
(15,000 x P20)
Advantage - Buy
If the company would purchase the units, it would save P20,000.
Answer: B
Cost of ink cartridges
(5,000 x P15)
Less: Relevant cost to produce
(5,000 x P8)
Additional cost if ink cartridges are purchased
Answer: B
Direct material
Direct labor
Variable overhead
Avoidable fixed cost
Total relevant costs - Make

(20,000 @ 6)
(20,000 @30)
(20,000 @ 120
(20,000 @ 9)

26,000
P 4,000

32,000
P( 2,000)

P 90,000
120,000
15,000
30,000
65,000
320,000
300.000
P 20,000

P75,000
40,000
P35,000
120,000
600,000
240,000
180,000
1,140,000

Purchase cost
Add net savings
Total
Less: Cost to make
Opportunity cost
37

(20,000 @ 60)

Answer: A
Purchase price
Handling cost (20% x P15,000)
Total
Cost to make (21,200 8,000)*
Increase in unit cost if goods are purchased

1,200,000
25,000
1,225,000
1,140,000
85,000
15,000
3,000
18,000
13,200
4,800

*Fixed OH (12,000 x 2 3) = 8,000


38

39

40

41

Answer: A
Cost to make:
Direct materials
Direct labor
Variable overhead
Avoidable fixed OH
Relevant cost
Purchase costs
Decrease in profit in profit

(20% x 30,000)
(1,000 @ 30)

Answer: B
Relevant costs to make per unit:
Direct materials
Direct labor
Variable overhead
Relevant cost to make
Purchase price per unit
Increase in per unit cost if purchased
Answer: A
Direct materials
Direct labor
Variable overhead
Avoidable fixed overhead (30,000 x 0.2)
Total relevant cost
Purchase cost
Additional cost if purchased
Answer: C
Direct materials
Direct labor
Variable overhead
Avoidable fixed cost
Total per unit
Number of unit
Total
Add savings from the manufacture of other product
Total relevant cost make

P10,000
5,000
5,000
6,000
P26,000
30,000
P 4,000

6.00
4.00
1.00
11.00
12.50
1.50
10,000
5,000
5,000
6,000
26,000
30,000
4,000
3.00
15.00
6.00
3.00
27.00
x10,000
270,000
45,000
315,000

Total purchase cost (10,000 x 30)


Advantage Buy

300,000
15,000

42

. Answer: D
Though the problem deals with transfer of goods from one division to another division, the solution focuses on make on
buy decision approach.
Purchase price, outside supplier
1.25
Variable cost to make
(10,000 10,000)
1.00
Additional unit cost to the company
0.25
Units to be purchased
10,000
Decrease in Danas profit if goods are purchased
2,500

43

Answer: C
Total purchase cost (5,000 x 7.75)
Less Relevant cost to make
Direct materials @ 2.5
Direct labor @ 3.5
Variable overhead @ 1.5
Avoidable fixed cost @ 0.5
Opportunity cost
Net saving purchase

38,750
12,500
17,500
7,500
2,500
6,000

44

. Answer: D
The solution is made in equation form, using y = a + bx for 2 alternatives:
Let x = indifference point in units
Make:
y = 150,000 + 11x
Buy:
y = 60,000 + 12.875x
150,000 + 11x = 60,000 + 12.875x
1.875x = 60,000
x = 48,000

45

46

Answer: C
Direct materials
Direct labor
Variable overhead
Avoidable fixed overhead
Total relevant cost

46,000
(7,250)

80,000
13,000
40,000
20,000
153,000

Answer: B

SodaLemomadeSelling

price6.005.00Variable
cost
1.501.00Contribution
margin4.504.00Processing
hours34CM/Hr1.501.00For the Lemonade to be as profitable as Soda, its contribution margin per hour should be P1.50.
Therefore the required selling price for Lemonade is P7, calculated as:
Contribution margin per unit (4 hours x P1.50)
Variable cost per unit
Selling price

P6.00
1.00
P7.00

47

. Answer: C
Product B has a greater contribution margin per unit (P15 - P12 = P3) than Product A (P12 - P10 = P2). The company
should produce the maximum units it can sell of Product B (250,000) and use the rest of the machine hour capacity to
produce 100,000 units of Product A.

48

Answer: D

Production order: Y, X
Product X:
Product Y:
Total capacity MH
Machine hours devoted to Product Y (8,000 x 3)
Hours available to X
Production of X: 18,000 6 = 3,000
49

60 6 = 10
42 3 = 14
42,000
24,000
18,000

Answer: B
Production order:
BlenderElectric MixerPurchase price 20 38Variable cost to make: Direct materials 6 11 Direct materials 4 9 Overhead
*(16 10) @ 6 12 Total( 16) (32)Additional cost if purchased 4 6Additional cost per hour (Blender, 1 hr; Mixer 2 hours)
4
3
Since it will cost Mary P4 per hour to buy Blender and only P3 if Electric Mixer is purchased, it will produce all of
Blenders requirement and just purchase units of electric mixer that cannot be accommodated by the remaining capacity.
Product:
Blender
Electric Mixer [50,000 (20,000 @ 1)] 2
Purchase:
Electric Mixer (28,000 15,000)
50

51

Answer: A
CM Product A
CM Product B
Difference in contribution margin

36/2 x 1,000
45/3 x 1,000

20,000
15,000
13,000
18,000
15,000
3,000

Answer: A
Based on DLH

52

53

54

ProductsUCMDLH/unitCM/DLHPriorityA91.09.01STB101.56.672ndC82.04.003rd
Based on MH
ProductsUCMMH/unitCM/MHPriorityA94.52.03rdB1025.01stC82.53.22nd
. Answer: D
PlasticMetalRC make 11.00 13.00RC Buy 15.50 17.50Additional Cost-Buy 4.50 4.50Hours required/unit 3
4.5Additional cost /hr. 1.50
1.0Priority 1st
2ndCapacity (machine hours) 48,000MH used - Plastic (7,000 x 3)
21,000Available MH to Metal27,000MH used - Metal (6,000 x 4.50) (27,000)Purchase of Metal (11,000 6,000) 5,000
. Answer: A
HomeDeluxeProSelling price586580Direct materials(16)(20)(19)Direct labor(10)(15)(20)Variable overhead( 8)(12)
(16)CM/unit241825Processing hour(s) 1 1.5
2CM/DLH2412 12.50Profitability rank1st3rd2nd
. Answer: B
Unit contribution margin:
Product A
P12 P10
P2
Product B
P15 P12
P3
Contribution margin per hour:
Product A
Product B

P2 0.8
P3 1.25

Total capacity in hours


Less hours used by Product A 200,000 x 0.8
Available hours for production of Product B

P2.50
P2.40
350,000
(160,000)
190,000

Less hours by Product B 152,000 x 1.25


Number of units to be produced:
Product A
Product B

(190.000)
200,000
152,000

Product A has higher contribution margin per hour. The company should produce the maximum units it can sell of
Product A and use the rest of the machine hour capacity to produce units of Product A in order to maximize its profit.
55

56

Answer: B
CM per hour:
Product X: 50/5
Product Y: 64/8
The 20,000 hours (0.8 x 25,000) will be devoted to the production of X.
Total contribution margin:
(20,000 x 10) + (5,000 x 8)
Answer: A
Selling price per unit silver polish
Less variable costs:
Grit 337
(P20 4)
Ingredients, direct labor and variable OH
Variable selling costs
Contribution margin per unit

10
8
240,000
P40

P 5
25
3

Minimum number of jars of silver polish to be produced:


Avoidable fixed costs Contribution margin per jar P56,000 P7

33
P 7
8,000

The solution used the selling price of P20 as cost of Grit337 because there was unlimited demand for the cleaning
powder. If, however, the demand for the cleaning powder is limited, the recommended solution would use P16 as the
cost of Grit 337.
57

58

59

60

Answer: D
Increase in selling price
Additional processing cost
Addition profit per unit

116 90

26
18
8

Answer: C
Selling price after further processing
P8.75
Selling price if not processed further
7.20
Additional sales per unit
1.55
Number of units
25,000
Additional total sales
P38,750
Less additional processing costs
33,750
Increase in profit if the product is processed
P 5,000
Because further processing will provide more profit per unit, the company should process further.

Answer: D
Additional sales
Additional costs
Additional profit

(350,000 250,000)
(75,000 + 15,000)

P100,000
90,000
P 10,000

Answer: A
XYAdditional sales value1034Additional processing costs1530Incremental (decremental) profit per unit(5) 4If Product Y
is processed further, profit will increase by P16,000 (4,000 x 4).

61

62

63

64

Answer: A
Additional Sales Price
Additional Cost
Additional profit

(65 50)
(30 x 40%)

15.00
12.00
3.00

. Answer: C
Product to be processed further:Prod MProd NFinal selling price3123Selling price at split-off point2519Increase in selling
price64Units15,00030,000Total increase in sales90,000120,000Additional processing costs100,000110,000Increase
(decrease) in profit(10,000)10,000
. Answer: C
Revenues
P104,000
Avoidable costs:
Cost of goods sold
P 64,000
Avoidable expenses (P6,000 + P8,000)
14,000
78,000
Segment margin
P 26,000
A segment is a potential candidate for elimination if its revenues are less than its avoidable costs. This is not the case
for this segment. The company will lose P26,000 of income if this segment is eliminated.
.

Answer: A
Avoidable fixed cost (benefit)
Lost contribution margin
Decrease in profit

210,000
240,000
30,000

65

. Answer: D
The question did not require any computation. If Mina Co. drops the Gold Ore, it will lose the segment margin of
P1,200,000, a decrease in Mina Co.s income. The amount of direct fixed expenses that would be eliminated were
previously deducted from contribution margin, and therefore, not considered in the determination of the effect on
income.

66

67

68

69

Answer: B
Avoidable common expenses (45,000 20,000)
Segment margin lost
Decrease in profit

P 25,000
32,000
P (7,000)

Answer: A
Avoidable fixed expenses:
Manufacturing
(150,000 105,000) 2
90,000
Selling
(30,000 x 0.10 x 2)
6,000
Start up cost (additional fixed expense
( 8,000)
Net avoidable costs
88,000
Indifference point
88,000 (22-14)
11,000 units
At 11,000 unit level (2 months), the contribution margin equals the avoidable costs.

Answer: D
Total Savings 5 year (125,000 100,000 ) 5
Less:
Additional depreciation
(90,000 50,000)
Loss on sale of old machine
(5,000 50,000)
Increase in profit
Answer: A
Lease arrangement:

125,000
(40,000)
(45,000)
40,000

70

Rental income (5 years)


Cost of repairs, insurance and property taxes
Net income

48,000
10,000
38,750

Sale arrangement:
Net proceeds (25,000 x 0.95)
Differential income lease

23,750
15,000

Answer: A
Additional contribution (60,000 x 0.25 x 14)
Additional fixed selling costs
Additional profit
Selling price
Variable expenses:
Materials
Direct labor
Variable overhead
Variable selling costs
Unit contribution margin

71

210,000
80,000
130,000
32.00
10.00
4.50
2.30
1.20

Answer: C
Direct materials
Direct labor
Variable OH
Variable selling cost
Import duties
Permits and licenses (9,000 20,000)
Minimum selling price

18.00
14.00
10.00
4.50
2.30
3.20
1.70
0.45
22.15

Import duties are assumed to be paid by Adrenal Company because of the nature of the sale.
72

. Answer: D
The relevant cost in selling the units on hand (inferior quality) is P1.20, the variable selling costs the production costs,
though variable, are considered irrelevant because they are historical (sunk) costs.

73

Answer: C
Avoidable fixed costs:
Manufacturing (0.40 x 50,000)
Selling (35,000 x 0.20)
Total
Contribution margin if the company has to operate (60,000 6 x 0.30 x 14)
Disadvantage, closing the plant

74

Answer: A
Direct materials
Direct labor
Variable overhead
Avoidable fixed overhead (0.75 x 5)
Avoidable variable expense (1.20 x 1 3)
Relevant cost Make

20,000
7,000
27,000
42,000
(15,000)
10.00
4.50
2.30
3.75
0.40
20.95

75

Answer: A
Batch (each 50 units)Cum Ave. Hrs114.25211.4049.1287.296165.8368
Total Hours required: 16 x 5.8368 = 93.4

76

77

78

79

80

81

Answer: D
Materials (800 x 40.50)
Direct labor (93.40 x 120)
Variable OH (93.40 x 100)
Total

32,400
11,208
9,340
52,948

Answer: A
Production cost 750 units:
Materials (750 x 40.00)
Direct labor (93.40 14.25) 120
VOH (93.40 14.25) 100
Total
Purchase cost (750 x 75)
Advantage make
Answer: A
Sales price to Kay Corp.
Rework costs:
Direct materials
Direct labor
Variable OH (4200 x 50%)
Commission (68,400 x 0.03)
Before tax peso contribution
Answer: A
Regular price
Deduct:
2% commission (62,500 x 0.02)
Sales discount (62,500 x 0.02)
Net price
Less additional conversion costs:
Direct materials
Direct labor
Variable OH - 50%
Net before tax contribution

30,375
9,498
7,915
47,780
56,250
8,470
68,400
6,200
4,200
2,100

(12,500)
( 2,052)
53.848
62,500

1,250
1,250
2,850
3,300
1,650

2,500
60,000

7,800
52,200

Answer: D
Cost of rework
Direct labor
Variable OH (4,200 x 0.50)
Total
Commission [0.03 (12,500 0.97)]
Total

6,200
4,200
2,100
12,500
387
12,887

Answer: A
Sales price
Less: Commission (52,200 x 0.03)
Net contribution

52,000
1,560
50,440

82

. Answer: C
Department 3 has constraint in labor hours of 750.
Dept. 1Dept. 2Dept. 3Dept. 4Available DLH3,7004,5002,7502,600DLH required4011,0001,5001,500 500402 400 800 -8004032,0002,0002,0001,000 Total3,4004,3003,5002,300Excess (Constraint) 300 200( 750) 300
83
. Answer: A
The available machine hours are sufficient to produce the estimated monthly sales. The schedule for monthly
production should consider maximizing the use of available direct labor hours in Department 3 because it is the only one
with constraint.
Dept. 1Dept. 2Dept. 3Dept. 4Available MH3,0003,1002,7003,300MH required401 500 5001,0001,000402 400 400 -8004032,0002,000 1,0001,000 Total2,9002,9002,0002,800Excess (Constraint) 100 200 700 500
Total machine hours required by monthly unit sales: (2,900 + 2,900 + 2,000 + 2,800) 10,600
84

. Answer: B
The table showing the comparison of available hours and required hours to produce all the required units in number 82
indicated that Department 3 is short by 750 hours. Any excess direct labor hours in the other departments cannot be
switched to Department 3.

85

. Answer: B
The production plan that will maximize monthly profit should be based on the profitability of the three products in terms
of the use of direct labor hours in Department 3.
P R O D U C T S401403405Selling price per unitP196P123P167Variable unit costsDirect material71317Direct
labor663851Variable overhead272025Selling expenses324 Total variable cost1037397Unit contribution marginP 93P
50P 70No. of DLH required Dept 33-2Contribution margin per DLHP 31-P 35Based on the above schedule, Product
405 is more profitable per hour than Product 401s and, therefore, all of the units required for Product 405 should be
produced. Product 403 would not use any direct labor hours in Department 3 and so all of the required units for Product
403 can be produced.
Available direct labor hours Department 3

2,750

Hours used by Product 405


Available hours for Product 401

1,000 x 2

2,000
750

Production units Product 401

250 x 3

750

Production:
Product 401
Product 403
Product 405

250
400
1,000

Alternative Solution:
Since Product 401 is the less profitable per DLH, Product 403 and 405 will be produced in full and Product 401 will be
partially produced.
Total required units, Product 401
Equivalent units based on constraint 750 3
Production of Product 401

500
250
250

Alternative question: What is the maximum monthly contribution margin that Constraint Company can earn?
Product 401
250 @ P93
P 23,250
Product 403
400 @ P50
20,000
Product 405
1,000 @ P70
70,000

Total contribution margin


86

P113,250

Answer: B
Costs incurred to make the order:
Material (5,000 x 40)
Labor (5,000 x 72)
Incremental fixed cost (special device)
Costs to be incurred

P200,000
360,000
40,000
P600,000

Decrease in costs for standard products:


Material (0.5 x 160,000)
Labor (0.5 x P180,000)
Other (0.5 x P18,000
Decrease in costs
Net incremental costs

P 80,000
90,000
9,000
P179,000
P421,000

The amounts for depreciation, rent, and heat and light are assumed to be not affected by the special order. There is no
information provided as to how power cost was exactly incurred.
87

Answer: D
Costs to be incurred for special order
P600,000
Fixed costs:
Depreciation
(0.5 x 72,000)
P36,000
Power
(0.5 x 8,000)
4,000
Rent
(0.5 x 20,000)
10,000
Heat and Light
(0.5 x 2,000)
1,000
51,000
Total cost
P651,000
The amount of fixed costs allocated to special order would be the costs that should have been assigned to the
standard sales that would be cancelled.

88

Answer: B
Decrease in sales of standard products0.50 x 500,000
Less variable costs:
Material (160,000 x 0.5)
Labor (180,000 x 0.5)
Other (18,000 x 0.5)
Opportunity costs

89

90

91

P250,000
P80,000
90,000
9,000

Answer: D
Special sales (5,000 x 140)
Variable costs
Contribution margin from special sale
Less opportunity costs
Increase in profit
Answer: C
Total overhead rate per box
Less fixed overhead allocated per boxP10,000,000 100,000 boxes
Variable overhead rate per box

179,000
P 71,000
P700,000
600,000
100,000
71,000
P 29,000
P150
100
P 50

. Answer: C
The cost of materials saved by a decision of purchasing the tubes: is P300 x 0.20 = P 60

92

. Answer: B
The relevant cost to make the tubes by Verbatim should equal the amount of cost savings as follows:
Savings on materials
0.2 x P300
P 60
Labor
0.1 x P200
20
Overhead
0.1 x P 50
5
Total savings (relevant cost)
P 85
The maximum amount that Verbatim is willing to pay per box of 24 tubes must be P85.

93

94

95

Answer: B
Cost of making 125,000 boxes:
Variable costs 125,000 x 85
Additional fixed costs
Total

10,625,000
1,000,000
11,625,000

Answer: C
Total purchase cost 125,000 x 900
Total cost to make 125,000 x 85
Savings if purchased

11,250,000
11,625,000
375,000

Answer: A
Fixed costs:
Manufacturing
Marketing
Total

3,000 x 1,200
3,000 x 1,400

Selling Price
Less Variable costs:
Direct materials
Direct labor
Variable overhead
Marketing costs
Total
Unit contribution margin
Breakeven units
96

P3,600,000
4,200,000
P7,800,000
P 7,400
P1,000
1,500
500
500
3,500
P 3,900

7,800,000 3,900

2,000 units

. Answer: C
In as much that there would be no change in the amount of fixed costs, the recommended solution was made by just
comparing the amounts of contribution margin based on the revised data and the original information:
Contribution margin based on new estimates 3,500 x (6,500 3,500)
Contribution margin based on current estimates
Decrease 3,000 x (7,400 3,500)
Decrease in profit

10,500,000
11,700,000
( 1,200,000)

Alternative Solution:
Total contribution margin 3,000 x (7,400 3,500)
Less Fixed costs
Current profit

11,700,000
7,800,000
3,900,000

Total contribution margin at reduced price 3,500 x (6,500 3,500)


Less Fixed costs
Revised profit

10,500,000
7,800,000
2,700,000

Current profit
Decrease in profit
97

98

. Answer: C
Direct materials
Direct labor
Variable overhead
Shipping cost
Cost of obtaining the order 40,000 1,000
Minimum selling price

3,900,000
( 1,200,000)

Answer: B
Fixed fee
P 500,000
Fixed overhead reimbursement 500 x 1,200
600,000
Total
1,100,000
Less lost contribution margin on regular customers (500 x 3,900)
1.950,000
Decrease in profit
P( 850,000)
The reimbursement for fixed overhead is an income for Medical Hospital Company because the special order does not
entail additional fixed overhead.
1,000
1,500
500
750
40
3,790

99

. Answer: D
All the production costs, both variable and fixed, are no longer relevant because they are sunk costs. To be relevant to
a decision, the cost must be both valid and relevant. Therefore, the only relevant cost is the variable marketing cost,
because if the units will be sold through regular channel, P500 will be incurred.

100

. Answer: D
The maximum price at which the price charged by the contractor would indifferent to the cost to make the hoist is the
total differential cost or avoidable cost.
Direct materials
1,000
Direct labor
1,500
Variable overhead
500
Avoidable fixed overhead
1,200 x 0.30
360
Avoidable variable marketing cost 500 x 0.2
100
Maximum purchase price
3,460

101

Answer: A
Direct materials
Direct labor
Variable overhead
Avoidable marketing costs
Opportunity cost [800 x (9,000 5,500 1,000)] 1,000
Maximum purchase price

1,000
1,500
500
100
2,000
5,100

A better understanding of the solution can be made by drawing a schedule to compute income for this alternative and
compare it with the income shown in solution for Question No. 97 as follows:
ModifiedRegularSales7,200,00022,200,000Variable production costs: In house production
(2,000 x 3,000) 6,000,000
(800 x 5,500)4,400,000 Contractors cost 1,000 x 5,100 5,100,000Variable marketing costs Regular (2,000 x 500) +
(1,000 x 400) 1,400,000 Modified (800 x 1,000) 800,000Fixed costs.
. 7,800,000Profit2,000,0001,900,000
Total profit
(2,000,000 + 1,900,000)
3,900,000
102

Answer: A

Direct material (6 lbs. P1.50)


Direct labor (0.25 hr. P7)
Direct machine cost (P10/blanket)
Variable overhead (0.25 hr. P3)
Administrative costs (P2,500/1,000)
Minimum bid price
103

P9.00
1.75
10.00
0.75
2.50
P24.00

. Answer: B
Using the full-cost criteria and the maximum allowable return specified, Marcus Fibers bid price per blanket would be:
Relevant costs (from Requirement 1)
P24.00
Fixed overhead (0.25 hr. P8)
2.00
Subtotal
P26.00
Allowable return (0.15* P26)
3.90
Bid price
P29.90
*0.09/(1 0.40) = 0.15