Naga College Foundation

MT Villanueva Avenue, Naga City

College of Business and Accountancy
Management Science

Name: _____________________________________________________________

Course: ____________________________________________________________

Test 1: MODIFIED TRUE OR FALSE: if the statement is true write LOCKDOWN, if the
statement is false write CORONA then underline the word/s that made the statement wrong. (1
point each either true or false is the right answer)

________________ 1. The opportunity cost of making a component part in a factory given no

alternative use of the capacity was ZERO.

________________ 2. The outside supplier’s per unit variable cost to make the part is relevant in
a make or buy decision.

________________3. An opportunity cost commonly associated with special order is the

contribution margin on lost sales.

________________4. Avoidable cost is a cost that cannot be eliminated, in whole or in part, by

choosing one alternative over another.

________________5. Opportunity costs are not actual cash outlays and are not recorded in the
formal accounts of an organization.

________________6. When analyzing a special order, the incremental costs and benefits and
fixed manufacturing overhead cost are relevant.

________________7. Differential cost analysis or differential costing is a special technique to

help management in decision making which shows how costs and revenues would be differ under
different alternative courses of action.

________________8. Sunk costs are past cost that are relevant for decision making.

________________9. A company should consider the effect on the future revenue due to
temporary reduction in selling price before taking the accept/reject decision.

________________10. The decision regarding closing down will depend on whether products
making a contribution towards fixed costs or not.

Test 2: COMPUTATION: Circle the correct answer and on a separate sheet/s write a solution
that justify your answer. (2 points per number- 1 for the correct letter and 1 for the correct
solution)

1. Picnic Items, Inc. manufactures coolers of 10,000 units that contain a freezable ice bag.
For an annual volume of 10,000 units, fixed manufacturing costs of P500,000 are
incurred. Variable costs per unit amount are direct materials – P80; direct labor – P15,
and variable factory overhead – P20 Bags Corp. offered to supply the assembled ice bag
for P40 with a minimum order of 5,000 units. If Picnic accepts the offer, it will be able to
reduce variable labor and overhead by 50%. The direct materials for the freezable bag
will cost Picnic P20 if it will produce it. Considering Bags Corp. offer, Picnic should
 a. Buy the freezable ice bag due to P150,000 advantage.
b. Produce the freezable ice bag due to P25,000 advantage.
c. Produce the freezable ice bag due to P50,000 advantage.
d. Buy the freezable bag due to P50,000 advantage.

2. Listed below are a company’s monthly unit costs to manufacture and market a particular
product.
Unit Costs Variable Cost Fixed Costs
Direct materials $2.00
Direct labor 2.40
Indirect Manufacturing 1.60 $1.00
Marketing 2.50 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 the same level of quality that
the company can make it. Fixed marketing costs would be unaffected, but variable
marketing costs would be reduced by 30% if the company were to accept the proposal.
What is the maximum amount per unit that the company can pay the supplier without
decreasing its operating income?
a. $8.50 b. $7.75 c. $6.75 d. $5.25

For question 3 and 4:

Hermo Company has just completed a hydro-electric plant at a cost of $21,000,000. The
plant will provide the company's power needs for the next 20 years. Hermo will use only
60% of the power output annually. At this level of capacity, Hermo's annual operating
costs will amount to $1,800,000, of which 80% are fixed. Quigley Company currently
purchases its power from MP Electric at an annual cost of $1,200,000. Hermo could supply
this power, thus increasing output of the plant to 90% of capacity. This would reduce the
estimated life of the plant to 14 years.

3. If Hermo decides to supply power to Quigley, it wants to be compensated for the

decrease in the life of the plant and the appropriate variable costs. Hermo has decided
that the charge for the decreased life should be based on the original cost of the plant
calculated on a straight-line basis. The minimum annual amount that Hermo would charge
Quigley would be
a. $450,000. b. $630,000. c. $990,000. d. $800,000
35.

4. The maximum amount Quigley would be willing to pay Hermo annually for the power is
a. $600,000. b. $1,050,000. c. $1,200,000. d.
$1,000,000

5. 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 company‟s
opportunity cost of purchasing all the 60,000 units at the beginning of the year is
A. P132,000 B. P144,000 C. P150,000 D. P264,000
6. 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 B. P 72,000 C. P 96,000 D. P 48,000

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

8. Tagaytay Open-Air Flea Market is along the highway leading to Taal Vista Lodge. Arnel
has a stall which specializes in hand-crafted fruit baskets that sell for P60 each. Daily
fixed costs are P15,000 and variable costs are P30 per basket. An average of 750 baskets
are sold each day. Arnel has a capacity of 800 baskets per day. By closing time,
yesterday, a bus load of teachers who attended a seminar at the Development Academy
of the Philippines stopped by Arnel’s stall. Collectively, they offered Arnel P1,500 for 40
baskets. Arnel should have
a. Rejected the offer since he could have lost P500.
b. Rejected the offer since he could have lost P900.
c. Accepted the offer since he could have P300 contribution margin.
d. Accepted the offer since he could have P700 contribution margin.

9. Part BX is a component that Motors and Engines Co. uses in the assembly of motors. The
cost to produce one BX is presented below:
Direct materials P4,000
Materials handling (20% of direct materials) 800
Direct labor 32,000
Overhead (150% of direct labor) 48,000
_
Total manufacturing costs P84,800
Materials handling which is not included in manufacturing overhead, represents the direct
variable costs of the receiving department that are applied to direct materials and
purchased components on the basis of their cost. The company’s annual overhead budget
is one-third variable and two-thirds fixed. Pre-casts Co., offers to supply BX at a unit
price of P60,000. Should the company buy or manufacture?
a. Buy, due to advantage of P24,800 per product.
b. Manufacture, due to advantage of P7,200 per unit.
c. Buy, due to advantage of P12,800 per unit.
d. Manufacture, due to advantage of P19,200 per unit.

10._
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
B. Increase profit by P2,000
C. Decrease profit by P4,000
D. Increase profit by P4,000
Test 3: ESSAY: Write a brief explanation, no less than 3 sentences and not more than 5
sentences.

1. As a future CPA (CERTIFIED PUBLIC ACCOUNTANT) why understanding RELEVANT

COSTING is important.

2. State your stand: YES or NO to MASS PROMOTION (Mass Promotion definition according
to Encyclopedia 2017, is the policy of promoting students to the NEXT GRADE LEVEL
despite of having poor achievement at their current grade level).