Leo Corporation is a company that produces laptop bags. A customer offers to buy 1000 laptop bags for P2500. The regular price of a laptop bag is P3800. The costs of fulfilling the order is as follows: Direct materials Direct labors Variable manufacturing overhead Fixed manufacturing overhead Total costs P1100 350 420 800 P2670 1. What is the total incremental cost? 2. What is the total incremental revenue? 3. Should the company accept the order? Sam Company normally produces and sells 800 units of its product for P350. Variable manufacturing cost per unit is P180. Total fixed manufacturing costs (up to the maximum capacity of 1,000 units) are P8,000. Variable operating cost is P50 per unit and fixed operating costs total P300. A customer placed a special order for 150 units for P300 each. The customer is willing to shoulder the delivery costs; hence the business will not incur additional variable operating costs. 4. 5. 6. 7. 8. What would be the contribution margin if the company accepted the offer? What is the total incremental cost? What is the incremental revenue? Should the company accept or reject the special order? What will be the economic advantage of accepting the order? Josephine Co. is selling joint product of product A and product B. After both products split, the company can sell both products at P800 and P1000 respectively. However, we will be able to increase the price of B to P1200 per unit if we process further, and it will cost P100,000 to get them complete. The quantity of A and B is 1,000 units and 1,500 units. 9. 10. 11. 12. If the company sells both products without any additional work, the sale would be? If the company decides to process further, the sale would be? Should the company sell the products as is or process it further? By how much would the income be increased/decreased if the company decides to process the product further? Kristine Co., has two divisions: X Division and Y Division. Consider the following data: Sales Variable Costs Fixed Costs X Division P500,000 P230,000 P420,000 Y Division 850,000 120,000 360,000 Included in the total fixed costs are P240,000 evenly allocated common costs. The company is thinking of dropping the X Division. 13. 14. 15. 16. What is the segment margin of each division? What is the total avoidable fixed costs if the company decides to drop the X Division? Should the company drop the X Division? By how much would the profit be increased/decreased if the company decides to drop the X Division? Sam Corp. manufactures lamp shades. It can produce 10,000 units in a month for a fixed cost of P150,000 and variable cost of P300 per unit. Its current demand is 8,000 units which it sells at P450 per unit. It is approached by Company B for an order of 800 units at P900 per unit. 17. Should the company accept the order? 18. What will be the increase in contribution margin if the special order is accepted? 19. Assuming the company can only produce 8,000 units per month, what will be the advantage/disadvantage of accepting the special order? 20. Should the company accept the offer? 21. Using the additional information on item 19, and assuming that the special order would require the company to replace the normal paint costing P37 into a lime wash paint that would cost P95 per unit, what will be the difference in income when the order is accepted? 22. Should the company accept the special order? Phine company uses 2,000 units of component A13 in production each year. The costs of making one unit of this component are Direct material P4 Variable manufacturing overhead 6 Direct labor 8 Fixed manufacturing overhead 9 An outside supplier has offered to sell Phine this component for P20 per unit and can supply all the units it needs. 23. How much will the net income change if Phine buys the component from the outside supplier instead of making it? 24. Should Phine make or buy the component? 25. Suppose that Phine can rent an equipment that could be used as an alternative to component A13 for P2,500 per month, what will be the effect in net income if the equipment is rented? 26. Should Phine still make the component or rent the equipment? Kristine Co. manufactures phone cases. The labor force is currently working at full capacity. The following information is available: Sales Direct materials Direct wages (320 hours @ P5) P12,000 1,200 1,600 Fixed overhead 4,000 Profit 5,200 A customer asks Kristine to make customized cases for this coming Valentine’s day which would use P50 direct materials and 20 labor hours. 27. What is the minimum price to quote for the special order? 28. What is the minimum price to quote for the special order if spare capacity was available but materials were subject to a quota of P1,200 per year? 29. Committed costs are a. Relevant b. Irrelevant c. Indifferent d. It depends Erick Company currently produces a component with the following costs: Variable costs P220,000 Fixed costs 280,000 Total costs P500,000 Of the annual fixed costs, P50,000 relate specifically to this component while the remaining are unavoidable. Mhay Corp is a manufacturing company that produces the same component, and has offered to supply the part annually for P340,000. The facilities currently used to manufacture the part could be used to manufacture a new product with an expected contribution margin of P80,000 per year. Alternatively, the facilities could be rented out at P50,000 per year. 30. What is Erick Company's lowest net relevant cost for the component? 31. Fixed costs are ignored in allocating scarce resources because a. they are unaffected by the allocation of scarce resources b. they are relevant cost c. there are no fixed costs associated with scarce resources. d. fixed costs only apply to long-run decisions. 32. Relevant costs are a. Past and differential b. Differential and future c. Future and past d. Sunk costs 33. Lea set her prices of cookies high initially to attract the innovator and early adopter crowds. What type of strategy is she using? a. Price skimming strategy b. Penetration pricing strategy c. Odd pricing strategy d. High/low pricing strategy 34. Game publishers introduce their products at peak, only discounting as demand wanes. This is an example of a. Price skimming strategy b. Penetration pricing strategy c. Odd pricing strategy d. High/low pricing strategy Xewlin Company produces components Nelwix for use in one of its electronic gadgets. Normal annual production for the item is 80,000 units. The cost per 100 unit lot of the part is as follows: Direct materials P700 Direct labor 260 Manufacturing overhead: Variable 180 Fixed 420 Total manufacturing P1,560 costs per 100 units Nelwix has offered to sell Xiwlen all 80,000 units it will need during the coming year for P500 per 100 units. If Xiwlen accepts the offer from Nelwix, the facilities used to manufacture component Nelwix t could be used in the production of component Xiwlen. This change would save the latter P300,000 in relevant costs. In Addition, a P140,000 cost item included in fixed overhead is specifically related to part ABC and would be eliminated. 35. Of the total fixed cost, how much is avoidable? 36. What is the maximum price that XYZ would pay for the component? 37. Which of the following is not a characteristic of relevant costing information? a. readily quantifiable b. associated with the decision under consideration c. related to a future endeavor d. significant to the decision maker 38. SWOT analysis analyzes which of the following a. b. c. d. the external marketing environment the internal marketing environment the organization’s current situation the organization’s strategies 39. Which of the following costs would be relevant in short-term decision making? a. incremental fixed costs b. all costs of inventory c. total variable costs that are the same in the considered alternatives d. the cost of a fixed asset that could be used in all the considered alternatives 40. Opportunity costs are considered when a. The company is operating in maximum capacity b. The company is operating with excess capacity c. There are three or more alternative decisions d. The fixed costs are fully avoidable 41. All of the following are a lead performance indicator of a balanced scorecard except? a. return on capital employed b. number of training hours per employee c. number of complaints received from customers d. output per employee Bisoy currently cookies and pastries, and a variety of decorative box used for packaging. An outside supplier has offered to supply all of the needed decorative box for P6.00. For this make-or-buy decision, a cost analysis revealed the following avoidable unit costs for the decorative box: Direct materials 1.06 Direct labor 0.08 Unit-related support 0.25 costs Batch-related support 0.24 costs Product-sustaining 0.44 support costs Facility-sustaining 0.50 support costs Total cost per jar 2.57 42. The net advantage (disadvantage) of accepting the supplier’s offer is? 43. The maximum price that Bisoy should be willing to pay is? 44. If a company has excess capacity, the most it would pay for buying a product that it currently makes would be the a. business function cost of the product b. total variable cost of producing the product plus the cm from the regular product sales c. total cost of producing the product d. total variable cost of producing the product Pantutay Farm, Inc. produces strawberries which it sells to local grocery stores. The Farm is considering turning the strawberry into strawberry jam. The local grocery stores have stated that they would be willing to pay P120 per jar of strawberry jam. The Farm produces 750,000 strawberries per year and sells them to the grocery stores for 60 cents each. The apples cost P120,000 to produce. Each jar of jam would require 50 strawberries. Additional costs related to the production is estimated to be P35 per jar. 45. What is the relevant cost of processing the strawberries further? 46. How much would be the advantage/disadvantage of processing the strawberries into strawberry jam? 47. Should Pantutay Farm sell the strawberries as is or should it be processed further? Ronzel Company currently produces a component at a total cost of P500,000. Annual variable costs are P190,000. Of the annual fixed costs, P38,000 relate specifically to this component. The remaining fixed costs are unavoidable. Maye manufacturer has offered to supply the part annually for P380,000. The facilities currently used to manufacture the component could be used to manufacture a new product with an expected contribution margin of P70,000 per year. Alternatively, the facilities could be rented out at P45,000 per year. 48. What is the relevant cost to make? 49. What is the relevant cost to buy? 50. Should Ronzel continue to make or buy the component?
