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Toaz - questions with answers
BS Management Accounting (University of Saint Louis)
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Accounting Ed 12. Management Science – Relevant Costing Exercises
Make or Buy
1. ABC company manufactures a particular computer component. Currently, the costs per unit are as follows: direct materials,
P50; direct labor, P500; variable overhead, P250; fixed overhead, P400. XYZ has offered to sell 10,000 units of the
component for P1,100 per unit. If ABC accepts the proposal, P2,500,000 of the fixed overhead will be eliminated. Should
ABC make or buy the component? At what advantage?
ANSWER:
ABC Company should make or manufacture a particular computer component, because the net
advantage of making is 500,000
MAKE
Purchase cost (10,000*1,100)
Variable Manufacturing costs (10,000*800)
Avoidable fixed overhead
Total relevant costs
Less: cost to make
Net advantage of making
P 8,000,000
2,500,000
P 10,500,000
BUY
P 11,000,000
P 11,000,000
10,500,000
P 500,000
*800(P50; direct labor, P500; variable overhead, P250)
2. GHI company manufactures part G for use in the production cycle. The cost per unit for 10,000 units for part G are as
follows: direct materials, P3; direct labor, P15; variable overhead, P6; fixed overhead, P8. TUV Company offered to sell
GHI 10,000 units of part G for P30 per unit. If GHI accepts TUV’s offer, the released facilities could be used to save
P45,000 in relevant costs. In addition, P5 per unit of fixed overhead applied to part G would be totally eliminated. What
alternative is more desirable and by what amount?
ANSWER:
Make
Purchase price (10,000 units x P30)
Variable production costs (10,000 x P24)
Avoidable fixed overhead (10,000 x P5)
Savings from released facilities
Net relevant costs
Savings (P290,000 – P255,000)
Buy
P300,000
P240,000
50,000
P290,000
( 45,000)
P255,000
P 35,000
Buy, you’ll save P35,000
Accept or Reject a Special Order
1. 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 is sold each day. Arnel has a capacity of 800 baskets per day. By closing day time yesterday, a bus
load of teachers who attended a seminar at the Development Academy of the Philippines stopped by Arnel’s stall and
collectively offered P1,500 for 40 baskets.
Required: Decide whether Arnel should accept or reject the offer by computing the contribution
margin or loss.
ANSWER:
The special sales order should be accepted because it increases profit by P300
Sales
Less: Variable Cost (30*40)
Contribution Margin
P 1,500
1,200
P 300
2. Wagner company sells product A at a selling price of P21 per unit. Its cost per unit on the full capacity of 200,000 units are
as follow: direct materials, P4; direct labor, P5; overhead (2/3 of which is fixed), P6. A special order offering to buy 20,000
units were received from a foreign distributor. The only selling costs that would be incurred on this order would be P3 per
units for shipping. The company has sufficient existing capacity to manufacture the additional units.
Required: compute for the minimum selling price that Wagner should accept.
ANSWER:
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Direct Materials
Direct Labor
Variable overhead
Shipping cost
Minimum selling price
P4
5
2
3
P 14
Drop or Continue a Business Segment
1.
Division A of a corporation is being evaluated for elimination. It has contribution to overhead of P400,000. It
receives an allocated overhead of P1 million, 10% of which cannot be eliminated.
Required: Compute by how much the elimination of Division A would affect pre-tax income of the corporation.
ANSWER:
Contribution margin
Controllable fixed overhead (P1,000,000*90%)
Segment Margin
P 400,000
(900,000)
P (500,000)
Since the segment margin is negative, the division should be dropped to eliminate the negative segment margin and
increase in overall net income by P500,000.
2.
A company’s partial income statement data are presented below:
S
J
P
Sales
P200,000
P150,000
P125,000
Separate (product) fixed costs
60,000
35,000
40,000
Allocated fixed costs
35,000
40,000
25,000
Variable costs
95,000
75,000
50,000
The company lost its lease and must move to a smaller facility. As a result, total allocated fixed costs will be reduced by 40%.
However, one product must be discontinued.
Required: Identify the product that should be discontinued and compute the expected income after it is discontinued.
ANSWER:
S
J
P
Sales
P200,000
P150,000
P125,000
Variable cost
95,000
75,000
50,000
Separate (product) fixed costs
35,000
40,000
25,000
Contribution Margin
P45,000
P40,000
P35,000
Product P gives the lowest profit and shall be discontinued, only two products shall now be produced by the company.
the operating profit of the business shall be:
Contribution margin (P45,000 + P 40,000)
Less: Allocated fixed costs [(P35,000 + P40,000 + P25,000) x 60%]
Operating income
P 85,000
60,000
P 25,000
Optimization of Scarce Resources
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1.
A company has a limited number of machine hours that it can use for manufacturing two products, A & B. Each
product has a selling price of P160 per unit. Product A has 40% contribution margin and product B has 70%
contribution margin. One unit of B takes twice as many machine hours to make as a unit of A.
Required: Identify which product should the limited number of machine hours be used, assuming that either product can be sold
in whatever quantity is produced.
ANSWER:
Unit contribution margin (P160 x 40%)
Divide: No. of hours per unit
Contribution margin per hour
Rank of priority
A
P 64
1 hr.
P 64
(1)
B
P 112 (P160 x 70%)
2 hrs.
P 56
(2)
Product A, having higher contribution margin per hour, should be produced instead of B.
2.
Data regarding four different products manufactured by an organization are presented below. Direct materials and
direct labor are readily available from their respective resources. However, the manufacturer is limited to a maximum
of 3,000 machine hours per month.
Product
A
B
C
D
Selling price/unit
P15
P18
P20
P25
Variable cost/unit
17
11
10
16
Units produced per machine hour
3
4
2
3
Product
A
B
C
D
Selling price/unit
P15
P18
P20
P25
Less: Variable cost/unit
17
11
10
16
Contribution margin
(2)
7
10
9
Multiplied by units produced
P(6)
P 28
P 20
P 27
Required: Identify the most profitable product of the manufacturer.
ANSWER:
The most profitable product is product be which has a contribution margin of P28.00
Retain or Replace an Old Asset
1. A company has an opportunity to acquire a new equipment to replace one of its existing equipment. The new equipment
would cost P900,000 and has a five-year useful life, with a zero terminal disposal price. Variable operating cost would be
P1 million per year. The present equipment has a book value of P500,000 and a remaining life of five years. Its disposal
price now is P50,000 but would be zero after five years. Variable operating costs would be P1,250,000 per year.
Required: Decide whether to replace or retain the old equipment considering the five years in total, but ignoring the time
value of money and income taxes.
ANSWER:
Purchase price
Book value
Useful life (remaining)
Terminal salvage value
Salvage value (now)
Variable operating costs
Annual savings in operating costs (P 1,250,000-P1,000,000)
RETAIN
P 500,000
5
0
50,000
1,250,000
Savings in 5 years (P250,000*5yrs)
Salvage value of old equipment
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REPLACE
P 900,000
5
0
1,000,000
250,000
P 1,250,000
50,000
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Total cash inflows
Purchase price
Net advantage of replacing the old equipment
P
1,300,000
(900,000)
400,000
Therefore A Company should replace the old equipment.
2. A company produces motherboard at a special economic zone in Bicol. It is now considering to shift to new automated
equipment instead of its present facility. Management was given the mandate to shift it. Its breakeven point will materially
be improved with a minimum of 10% reduction in volume. Below is the pertinent information:
Existing
Automation
Sales in units
800,000
900,000
Selling price
P 30
P 30
Variable cost per unit
P 15
P 13
Fixed cost
P 775,000
P 892,500
Required: Compute the basis of deciding whether the company should shift to automation or not.
ANSWER: Shift, since the break even volume will increase by 1% with the automation
EXISTING:
AUTOMATION:
BEP = 775,000/(30-15)
= 51,667u
BEP= 892,500/(30-13)
=52,500u£
Sell as-is or Process Further
1.
A company owns a large processing line which segregates coconuts into its components upon contract with breaker of the
machine. Presently, it sells the coconut meat, juice, shell and husk to various manufacturers. A feasibility study is being
made to process its components into “buko pies” for the meat, “buko juice” for the juice, flower pots for the shells and
fuel briquettes for the husk. At the segregation point, you gathered the following data per unit:
Selling price
Allocated joint cost
Profit(loss)
Meat
P 4.00
.13
3.87
Juice
P 2.00
.06
1.94
Shell
P 1.00
.03
.97
Husk
P 1.00
.03
.97
The study shows that after further application of additional manufacturing process, the following is projected:
Selling price
Additional processing cost
Meat
P 12.00
3.8
Juice
P 4.00
2.90
Shell
P 2.00
1.95
Husk
P 2.00
1.95
Fixed cost of the plant amounts to P500,000. Interest rate is 12%.
Required: Identify which product/s should go through the additional manufacturing process.
ANSWER:
Incremental sales
Incremental cost
Incremental profit
Meat
P 8.00
3.8
P 4.20
Juice
P 2.00
2.90
(P .90)
Shell
P 1.00
1.95
(P .95)
Husk
P 1.00
1.95
(P .95)
Coconut meat only because it will give incremental profit of P4.20
2.
A company produces 3 products from a joint process costing P 100,000. The following information is available:
Selling price
@
Cost/s to Process
Sales price after
Product/s
Unit/s
Split -off
Further
processing further
A
10,000
P 35
P 60,000
P 40
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B
C
20,000
30,000
P 40
P 20
P 20,000
P 90,000
P 45
P 25
Required: Identify which product/s should go through the additional manufacturing process.
ANSWER:
Sales value after processing
Sales value at split-off point
Incremental revenue from further processing
Incremental cost of further processing
Profit (Loss) from further processing
A
P400,000
350,000
50,000
60,000
(P10,000)
B
P900,000
800,000
100,000
20,000
P80,000
C
P750,000
600,000
150,000
90,000
P60,000
Products B and C Since, there will be a profit from further processing of P80,000 and P60,000 respectively.
Bid Price
1. A company manufactures engines for the military equipment on a cost-plus basis. The cost of a particular machine the
company manufactures is shown below:
Direct materials
P 400,000
Direct labor
300,000
Overhead Supervisor’s salary
40,000
Fringe benefits on direct labor
30,000
Depreciation
24,000
Rent
22,000
Total
P 816,000
Required: Compute the minimum bid price if the production of the engine was discontinued, the production capacity would
be idle and the supervisor will be laid off.
ANSWER:
Direct materials
Direct Labor
Supervisor’s salary
Fringe benefits on direct labor
Incremental costs
P 400,000
300,000
40,000
30,000
P 770,000
The costs of depreciation and rental are irrelevant costs since they are expected to be incurred regardless of whether
the bidding is won or not. The minimum bid price is the incremental costs of P770,000
2. A company has its own cafeteria with the following annual costs: food, P 400,000; labor, P 300,000; overhead, P440,000.
The overhead is 40% fixed. Of the fixed overhead, P100,000 is the salary of the cafeteria supervisor. The remainder of the
fixed overhead has been allocated from total company overhead.
Required: Determine the maximum cost that the company is willing to pay an outsider to operate the cafeteria assuming
that the cafeteria supervisor will remain and the company will continue to pay his salary.
ANSWER:
Food
Labor
Variable overhead (440,000*60%)
Total Incremental cost
P 400,000
300,000
264,000
P 964,000
Temporarily Shut Down Operations or Continue
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1. A corporation has been experiencing a slowdown in business activities in August and September and is considering
temporarily shutting down its operations during those months. The accounting department has provided the following
normal operating data for consideration: unit sales price, P 150; unit variable production cost, P 60; unit variable marketing
cost, P10; monthly fixed overhead, P 500,000, monthly fixed expenses, P200,000; regular sales in units, 10,000 per month;
estimated sales in units in August and September, 5,000 per month.
If the company shuts down its operations, the following costs are expected to be incurred: security and safety, P 200,000 per
month; restart-up costs, P 100,000 per set-up, regular fixed overhead, 40% of total will remain; regular fixed expenses,
reduced by 30%.
Required: Compute the total shutdown costs, shutdown point in two months, and the advisable alternative (continuing or
discontinuing the operations) with its advantage amount.
ANSWER:
Unavoidable fixed overhead (P500,000*40%*2)
Unavoidable fixed expenses (P200,000*70%*2)
Security and Safety (P200,000*2)
Restart up costs
Total shut down costs
P 400,000
280,000
400,000
100,000
P 1,180,000
Fixed costs and expenses [(P500,000+P200,000)*2 months]
Less: Shut down costs
Divide: Contribution Margin (P150-P60-P10)
Shutdown point in two months
Contribution Margin (P5,000u*2 months*80)
Less: Fixed costs and expenses
Loss on continuing the operations
Less: Shut down costs
Net advantage of continuing the operations
P 1,400,000
1,080,000
80
P
2,750
P 800,000
1,400,000
(600,000)
1,180,000
P 580,000
Scrap or Rework Defective Units
1. A company has 2,000 obsolete light fixtures that are carried in inventory at a manufacturing cost of P30,000. If the fixtures
are reworked for P10,000, they could be sold for P 18,000. Alternatively, the light fixtures could be sold for P 3,000 to a
jobber located in a distant city.
Required: Compute the opportunity cost in the decision to scrap or rework defective units.
ANSWER:
Sales from reworked units
P18,000
Less: Additional cost of reworking (10,000)
Income from reworking
8,000
Less: Income from scrapping
3,000
Net advantage of reworking
P 5,000
The alternative that gives the higher profitability shall be taken and in this case is the alternative of
reworking. And the alternative of scrapping should be set aside. This alternative would have possibly provide
P3,000 amount of income. The opportunity cost is P3,000.
2. A company has 7,000 obsolete toys carried in inventory at a manufacturing cost of P 6 per unit. If the toys are reworked for
P 2 per unit they could be sold for P 3 per unit. If the toys are scrapped, they could be sold for P1.85 per unit.
Required: Compute the total peso amount of the advantage of the desired alternative.
ANSWER:
Income from reworking units (7,000* P1)
Income from scrapping (7,000*P1.85)
Net advantage of scrapping
P 7,000
(12,950)
P (5,950)
*P1 (P3.00 per unit-P2.00 per unit)
Indifference Point
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1. A company owns and operates a chain of movie theaters. The theaters in the chain vary from low volume, small town to
high volume, Big City/Downtown theaters. Management is considering installing machines that will make popcorn on the
premises. This proposed feature would be properly advertised and is intended to increase patronage at the company’s
theaters. These machines are available in two different sizes with the following details:
Annual capacity
Costs:
Annual machine rental
Popcorn cost per box
Cost of each box
Other variable costs/box
Economy Popper
50,000 boxes
Regular Popper
120,000 boxes
P 80,000
1.30
.80
2.20
P 110,000
1.30
.80
1.40
Required: Compute the level of output at which the two poppers would earn the same profit/loss.
ANSWER:
Fixed costs
Unit variable costs
Economy Popper
P 80,000
4.30
Regular Popper
P 110,000
3.50
P80,000+4.30X = P110,000+3.50X
4.30X-3.50X = P110,000-P80,000
0.80X = 30,000
X = 37,500u
At 37,500 units sold, the total cost and income of economy and regular popper is the same.
2. A company employs 45 personnel to market its cars. The average car sells for P 690,000 and a 6% commission is paid to
the sales person. It is considering changing the scheme to a commission arrangement that would pay each person a package
of P 30,000 plus a commission of 2% of the sales made by the person.
Required: Compute the indifference point where the total payments to sales personnel will be the same.
ANSWER:
We have:
Commission 1: 6% (P690,000x) = 41,400x
Commission 2: (P30,000 x 45 personnel) + 2% (P690,000x)
= P1,350,000 + 13,800x
At indifference point:
Commission 1 = Commission 2
By substitution:
41,400x = 1,350,000 + 13,800x
41,400x – 13,800x = 1,350,000
27,600x = 1,350,000
x = 1,350,000/27,600
x = 48.913043
Total Sales = P690,000x
= P690,000 (48.913043)
= P33,750,000
At the sales level of P33,750,000, the commission expense of the company will be the same regardless of the commission
payment models to be used.
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