PROBLEMS ON RELEVANT COST

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, Salmo’s fixed costs during the fiscal year were P110,000. The incremental
(decremental) cost was:
A. P 40,000 B. P 150,000 C. P( 40,000) D. P(150,000)
1 . Answer: B
Cost of alternative selected P800,000
Cost of alternative rejected 650,000
Incremental cost P150,000

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 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

2 . 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).

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

3 . Answer: A
Additional revenue after rework (24,000(12 – 4) P192,000
Less Additional cost (24,000 x 2) 48,000
Additional profit P144,000

Minimum price
4. Joji Company manufactures and sell FM radios. Information on last year’s operations (sales
and production of the 2006 model) follows:
Selling price P300
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 B. P270 C. P180 D. P 40
4 . Answer: C
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

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 B. P 9.50 C. P13.00 D. P14.50

5 . Answer: B
Regular variable cost P8.00
Overtime premium 1.50
Relevant cost per unit P9.50

6. 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 B. P 40 C. P 30 D. P 50
6 . Answer: C
Full cost 50.00
Fixed overhead (180,000/9,000) 20.00
Relevant unit cost 30.00

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. The special order requires 1,000 kilograms of powdered Nitrocide, a solid chemical regularly
used in the company’s 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 B. P10,300 C. P 8,300 D. P43,500
7 . Answer: B
Cost of 1,000 kg at latest price (1,000 x 8.70) 8,700
Add excess price include on the remaining 4,000 kg. 4,000 x (8.70 – 8.30) 1,600
Relevant cost 10,300

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 B. P31,000 C. P84,000 D. P62,000

8 . Answer: C
Direct materials (2,000 @ 10) 20,000
Direct labor (2,000 @ 12) 24,000
Variable overhead (2,000 @ 6) 12,000
Increase in variable cost due to overtime (2,000 @ 14) 28,000
Incremental cost 84,000

Minimum acceptable price

9. Brace Co. has considerable excess manufacturing capacity. A special job order’s 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 in house
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 B. P101,250 C. P 70,000 D. P108,200

9 . Answer: C
Variable costs P56,250
Additional fixed costs 13,750
Minimum bid price P70,000

10. The cost to produce 24,000 units at 70% capacity consists of:
Direct materials P360,000
Direct labor 540,000
Factory overhead, all fixed 290,000
Selling expense (35% variable, 65% fixed) 240,000
What unit price would the company have to charge to make P22,500 on a sale of 1,500 additional
units that would be shipped out of the normal market area?
A. P 51 B. P 41 C. P 56 D. P 50

10 . Answer: C
Direct material (360,000 ÷ 24,000) P15.00
Direct labor (540,000 ÷ 24,000) 22.50
Variable selling expenses (84,000 ÷ 24,000) 3.50
Total P41.00
Add Profit per unit (22,500 ÷ 1,500) 15.00
Selling price P56.00

11. Kaila Company’s 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
11 . Answer: B
Relevant cost to make and sell:
Direct materials 39
Direct labor 6
Variable OH 8
Reduced selling expenses (30 x 0.06) 18
Add’l fixed cost (20,000 ÷ 5,000) 4
Minimum selling price 75
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 B. P 17 C. P 19 D. P 11

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. 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
13 . 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.

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 B. P29.00 C. P24.50 D. P26.50
14 . Answer: D
Direct materials 4.50
Direct labor 10.00
Variable overhead 3.00
Variable selling expense 1.00
Additional profit (40,000/5,000) 8.00
Required selling price 26.50

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 B. 500 units C. 200 units D. 0 units

15 . 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 6,000
Less Decrease in regular sales’ contribution margin (500 x 12) 6,000
Effect on profit NIL

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. 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

16 . 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

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
17 . 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.

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
latter’s (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 B. gain by P225 C. loss by P375 D. gain by P375
18 . Answer: C
Selling price P6.00
Relevant cost per unit:
Regular cost per unit P7.50
Less: Commission P0.75
Fixed overhead (P3 x 2/3) 2.00 (2.75)
Net amount P4.75
Incremental fixed cost (P150 300) 0.50 5.25
Advantage per unit, Buy P0.75
Number of units 300
Increase in profit P 225

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.

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

20. KC Industries manufactures a product with the following costs per unit at the expected production
of 30,000 units.
Direct materials P4
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 B. P4,000 increase C. P16,000 decrease D. P 0 effect

20 . Answer: A
Special price 32
Relevant cost:
Direct materials 4
Direct labor 12
Variable overhead 6 22
Unit contribution margin 10
Units ordered 2,000
Additional profit 20,000

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
21 . Answer: A
Sales 60,000
Less: Variable production cost (1,500 x 30) 45,000
Additional Fixed cost 5,000
Labeling cost (1,500 x 2.50) 3,750 53,750
Profit 6.250
Question Nos. 22 and 23 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, P20
Overhead (20% variable), P10
Other information:
Sales price, P100
SG & A costs (40% variable), P15
The Disk Division is operating at a level of 70,000 chips per year.
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 B. P 81 C. P 78 D. P 6
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. 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 B. P 94 C. P 72 D. P 90
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

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 B. 1, 3, 4, and 5 C. 1, 3, and 4 D. 2, 3, and 4

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.

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 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

25 . Answer: D
Relevant Costs
BetaZetaDirect materials 4.00 80.00Direct labor10.00 47.00Factory overhead 40% 16.00
8.00Relevant Unit
costP30.00135.00

Maximum buy price

26. The following are a company’s monthly unit costs to manufacture and market a particular
product.
Manufacturing Costs:
Direct materials, P2.00
Direct labor, P 2.40
Variable indirect, P 1.60
Fixed indirect, P 1.00
Marketing Costs:
Variable, P 2.50
Fixed,P 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 B. P7.75 C. P6.75 D. P5.25
26 . 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.

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
the 1,000 units externally?
A. P102,000. C. P 96,000. B. P 94,000. D. P 88,000.
27 . Answer: B
Direct materials 64,000
Direct labor 16,000
Variable overhead 8,000
Avoidable fixed overhead 6,000
Total relevant cost to make 94,000

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. B. P 96,000. C. P110,000. D. P104,000.
28 . Answer: D
Direct materials 64,000
Direct labor 16,000
Variable overhead 8,000
Additional contribution margin 16,000
Total relevant cost to make 104,000

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
29 . Answer: B
Variable cost to make parts (30,000 x 12) 360,000
Cost buy (30,000 x 15) 450,000
Cost savings – “Make” decision 90,000

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
30 . Answer: A
Direct materials 80,000
Direct labor 13,000
Variable overhead 40,000
Avoidable fixed overhead 4,000
Relevant cost – make 137,000
Purchase price 145,000
Advantage – Make 8,000

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.
31 . Answer: A
Direct materials 64,000
Direct labor 16,000
Variable overhead 8,000
Total variable cost 88,000
Less Purchase cost 104,000
Avoidable fixed cost 16,000
Add unavoidable FC 5,000
Total fixed overhead 21,000

Effect of buy decision

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
32 . Answer: B
Purchase cost (2,000 x P15) P30,000
Relevant cost to make:
Variable cost (2,000 x P16) – 8,000 P24,000
Avoidable fixed cost (8,000 x 0.25) 2,000 26,000
Additional cost – Buy (Decrease in profit) P 4,000
Alternative computation for relevant cost to make:
Total cost (2,000 x P16) P32,000
Less unavoidable fixed cost (8,000 x 0.75) 6,000
Relevant cost to make P26,000

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
33 . Answer: C
Cost of purchase (2,000 x P15) P30,000
Relevant cost – make:
Variable cost (2,000 x P16) – P8,000 P24,000
Avoidable fixed cost (P8,000 x 0.25) 2,000
Opportunity cost – rent 6,000 32,000
Cost savings – Buy (increase in profit) P( 2,000)

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 B. gain P20,000 C. lose P45,000 D. gain P45,000
34 . Answer: C
Relevant costs to make
Direct materials P 90,000
Direct labor 120,000
Variable overhead 15,000
Supervisor’s salary 30,000
Opportunity costs, rent 65,000
Total 320,000
Relevant cost to buy (15,000 x P20) 300.000
Advantage - Buy P 20,000
If the company would purchase the units, it would save P20,000.

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
35 . Answer: B
Cost of ink cartridges (5,000 x P15) P75,000
Less: Relevant cost to produce (5,000 x P8) 40,000
Additional cost if ink cartridges are purchased P35,000

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, P30
Variable overhead, P12
Fixed overhead applied, P 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 Reeves’s 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 B. P125,000 C. P 85,000 D. P140,000
36 . Answer: B
Direct material (20,000 @ 6) 120,000
Direct labor (20,000 @30) 600,000
Variable overhead (20,000 @ 120 240,000
Avoidable fixed cost (20,000 @ 9) 180,000
Total relevant costs - Make 1,140,000
Purchase cost (20,000 @ 60) 1,200,000
Add net savings 25,000
Total 1,225,000
Less: Cost to make 1,140,000
Opportunity cost 85,000

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), P 200
Direct labor, P8,000
Manufacturing overhead (150% of direct labor), P12,000
 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 Garland, the unit cost of WS73
would
A. Increase by P4,800 C. Decrease by P6,200
B. Decrease by P3,200 D. Increase by P1,800
37 . Answer: A
Purchase price 15,000
Handling cost (20% x P15,000) 3,000
Total 18,000
Cost to make (21,200 – 8,000)* 13,200
Increase in unit cost if goods are purchased 4,800
*Fixed OH (12,000 x 2 ÷ 3) = 8,000

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, P 5,000
Variable overhead, P 5,000
Fixed overhead, P 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
38 . Answer: A
Cost to make:
Direct materials P10,000
Direct labor 5,000
Variable overhead 5,000
Avoidable fixed OH (20% x 30,000) 6,000
Relevant cost P26,000
Purchase costs (1,000 @ 30) 30,000
Decrease in profit in profit P 4,000

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.
39 . Answer: B
Relevant costs to make per unit:
Direct materials 6.00
Direct labor 4.00
Variable overhead 1.00
Relevant cost – “to make” 11.00
Purchase price per unit 12.50
Increase in per unit cost if purchased 1.50

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, P5,000
Variable overhead, P 5,000
Fixed overhead, P 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
40 . Answer: A
Direct materials 10,000
Direct labor 5,000
Variable overhead 5,000
Avoidable fixed overhead (30,000 x 0.2) 6,000
Total relevant cost 26,000
Purchase cost 30,000
Additional cost if purchased 4,000

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, P 15
Variable overhead, P 6
Fixed overhead, P 8
Total P32
Pampanga Company has offered to sell Bulacan 10,000 units of part G for P30 per unit. If Bulacan
accepts Pampanga’s 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

41 . Answer: C
Direct materials 3.00
Direct labor 15.00
Variable overhead 6.00
Avoidable fixed cost 3.00
Total per unit 27.00
Number of unit x10,000
Total 270,000
Add savings from the manufacture of other product 45,000
Total relevant cost – make 315,000
Total purchase cost (10,000 x 30) 300,000
Advantage “Buy” 15,000

42. Blade Division of Dana Company produces hardened steel blades. One-third of the Blades
Division’s output is sold to the Lawn Products Division of Dana; the remainder is sold to outside
customers. The Blade Division’s 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
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
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 Dana’s profit if goods are purchased 2,500

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, P 3.50
Variable overhead, P 1.50
Fixed overhead, P 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
43 . Answer: C
Total purchase cost (5,000 x 7.75) 38,750
Less Relevant cost to make
Direct materials @ 2.5 12,500
Direct labor @ 3.5 17,500
Variable overhead @ 1.5 7,500
Avoidable fixed cost @ 0.5 2,500
Opportunity cost 6,000 46,000
Net saving – purchase (7,250)

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
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

Point of indifference - price

45. Calero Manufacturing Company can make 100 units of a necessary component part with the
following costs:
Direct Materials, P80,000
Direct Labor, P 13,000
Variable Overhead, P 40,000
Fixed Overhead, P 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. B. P153,000. C. P113,000. D. P133,000.
45 . Answer: C
Direct materials 80,000
Direct labor 13,000
Variable overhead 40,000
Avoidable fixed overhead 20,000
Total relevant cost 153,000

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. B. P6.00. C. P7.00. D. P5.50.
46 . 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) P6.00
Variable cost per unit 1.00
Selling price P7.00

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
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. The Hingis Corporation manufactures two products: X and Y. Contribution margin per unit is
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
48 . Answer: D
Production order: Y, X
Product X: 60 ÷ 6 = 10
Product Y: 42 ÷ 3 = 14
Total capacity – MH 42,000
Machine hours devoted to Product Y (8,000 x 3) 24,000
Hours available to X 18,000
Production of X: 18,000 ÷ 6 = 3,000

49. Mary Manufacturing has assembled the following data pertaining to two popular products.
Blender Electric mixer
Direct materials P6 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
49 . 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
Blender’s requirement and just purchase units of electric mixer that cannot be accommodated by the
remaining capacity.
Product:
Blender 20,000
Electric Mixer [50,000 – (20,000 @ 1)] ÷ 2 15,000
Purchase:
Electric Mixer (28,000 – 15,000) 13,000

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.
50 . Answer: A
CM – Product A 36/2 x 1,000 18,000
CM – Product B 45/3 x 1,000 15,000
Difference in contribution margin 3,000

51. The Baco Company produces three products with the following costs and selling prices:
A B C
Selling price per unit P16 P21 P21
Variable cost per unit 7 11 13
Contribution margin per unit P9 P10 P8
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 company’s 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
51 . Answer: A
Based on DLH
ProductsUCMDLH/unitCM/DLHPriorityA91.09.01STB101.56.672ndC82.04.003rd
Based on MH
ProductsUCMMH/unitCM/MHPriorityA94.52.03rdB1025.01stC82.53.22nd

52. 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
*Variable manufacturing overhead is applied on the basis of direct labor hours.
**Fixed manufacturing overhead is applied on the basis of machine hours.
Scarce’s annual requirements for these bearings is 7,000 units of Plastic and 11,000 units of
Metal. Recently, Scarce’s 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 purchasng
A. 7,000 units of Plastic and manufacturing the remaining bearings.
B. 11,000 units of Metal and manufacturing 7,000 units of Plastic.
C. 6,000 units of Plastic and manufacturing the remaining bearings.
D. 5,000 units of Metal and manufacturing the remaining bearings.
52 . 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

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 B. Deluxe model C. Pro Model D. Equally
53 . 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

54. 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 . Answer: B
Unit contribution margin:
Product A P12 – P10 P2
Product B P15 – P12 P3
Contribution margin per hour:
Product A P2 ÷ 0.8 P2.50
Product B P3 ÷ 1.25 P2.40
Total capacity in hours 350,000
Less hours used by Product A 200,000 x 0.8 (160,000)
Available hours for production of Product B 190,000
Less hours by Product B 152,000 x 1.25 (190.000)
Number of units to be produced:
Product A 200,000
Product B 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. 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 B. P210,000 C. P240,000 D. P200,000
55 . Answer: B
CM per hour:
Product X: 50/5 10
Product Y: 64/8 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) 240,000

Sell-as-is-or-process-further
Minimum sales
56. Snow Clean Corporation produces cleaning compounds and solutions for industrial andhousehold
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 ¼
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 B. 7,000 C. 5,600 D. 4,667
56 . Answer: A
Selling price per unit – silver polish P40
Less variable costs:
Grit 337 (P20 ÷ 4) P 5
Ingredients, direct labor and variable OH 25
Variable selling costs 3 33
Contribution margin per unit P 7
Minimum number of jars of silver polish to be produced:
Avoidable fixed costs ÷ Contribution margin per jar P56,000 ÷ P7 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.

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.
57 . Answer: D
Increase in selling price 116 – 90 26
Additional processing cost 18
Addition profit per unit 8

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
58 . 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.

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
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
59 . Answer: D
Additional sales (350,000 – 250,000) P100,000
Additional costs (75,000 + 15,000) 90,000
Additional profit P 10,000

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
(all variable) P15 P30
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
60 . 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. 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 B. P10 C. P15 D. P12
61 . Answer: A
Additional Sales Price (65 – 50) 15.00
Additional Cost (30 x 40%) 12.00
Additional profit 3.00
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:
M N
Unit selling price without further processing P25 P19
Unit selling price with further processing P31 P23
Total separate weekly variable costs of further processing P100,000 P110,000
To maximize Matador’s manufacturing contribution margin, the total separate variable costs of
further processing that should be incurred each week are
A. P105,000 B. P110,000 C. P100,000 D. P210,000
62 . 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

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.
63 . 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.

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 Banahaw’s 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
64 . Answer: A
Avoidable fixed cost (benefit) 210,000
Lost contribution margin 240,000
Decrease in profit 30,000

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
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. 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
Company’s before tax profit would be
A. P12,000 decrease C. P12,000 increase
B. P 7,000 decrease D. P 7,000 increase
66 . Answer: B
Avoidable common expenses (45,000 – 20,000) P 25,000
Segment margin lost 32,000
Decrease in profit P (7,000)

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.
Employment-contract strikes in the companies that purchase the bulk of the E14 have caused
Bulusan Company’s 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
67 . 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.

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
68 . Answer: D
Total Savings 5 year (125,000 – 100,000 ) 5 125,000
Less:
Additional depreciation (90,000 – 50,000) (40,000)
Loss on sale of old machine (5,000 – 50,000) (45,000)
Increase in profit 40,000

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:
A. P15,000. B. P25,000. C. P 5,000. D. P12,500.
69 . Answer: A
Lease arrangement:
Rental income (5 years) 48,000
Cost of repairs, insurance and property taxes 10,000
Net income 38,750
Sale arrangement:
Net proceeds (25,000 x 0.95) 23,750
Differential income –lease 15,000