MSQ-05 - Relevant Costing MSQ-05 - Relevant Costing
MSQ-05 - Relevant Costing MSQ-05 - Relevant Costing
THEORY 7. The distinction between avoidable and unavoidable costs is similar to the distinction between
Basic concepts A. discretionary costs and committed costs. C. variable costs and fixed costs.
1. The manner of determining whether favorable results of an alternative are sufficient to justify B. step-variable costs and fixed costs. D. variable costs and mixed costs.
the cost of taking that alternative
A. Cost behavior analysis C. Cost center analysis 8. The type of cost vital to decision making but not recorded in the accounting records
B. Cost benefit analysis D. Cost control analysis A. Direct costs C. Out of pocket costs
B. Opportunity costs D. Sunk costs
2. In the development of accounting data for decision-making, relevant costs are
A. Budgetary costs authorized for the administrative year. 9. What is the opportunity cost of making a component part in a factory given no alternative use
B. Standard costs developed by time and motion experts. of the capacity?
C. Future costs which will differ under each alternative course of action. A. Zero.
D. Historical costs which are the best available basis for estimating future costs. B. The total variable cost of the component.
C. The total manufacturing cost of the component.
3. The relevance of a particular cost to a decision is determined by D. The variable manufacturing cost of the component.
A. Amount of the cost. C. Potential effect on the decision.
B. Number of decision variables. D. Riskiness of the decision. 10 If a cost is irrelevant to a decision, the cost could not be
A. a future cost. C. a variable cost.
4. The term relevant cost applies to all of the following decision situations except the B. a sunk cost. D. an incremental cost.
A. Replacement of equipment.
B. Determination of product price. 11. All of the following are examples of imputed costs except
C. Acceptance of special product order. A. Decelerated depreciation.
D. Manufacture or purchase of a component part. B. The stated interest paid on a bank loan.
C. The use of the firm's internal cash funds to purchase assets.
5. Management accountants are concerned with incremental unit costs. These costs are similar D. Assets that are considered obsolete that maintain a net book value.
to the following except
A. The cost to produce an additional unit. C. The manufacturing unit cost. 12. In analyzing whether to build another regional service office, the salary of the Chief Executive
B. The economic marginal cost. D. The variable cost Officer (CEO) at the corporate headquarters is
A. Relevant because salaries are always relevant.
6. A fixed cost is relevant if it is B. Irrelevant since another imputed costs for the same will be considered.
A. a future cost. C. avoidable. C. Relevant because this will probably change if the regional service office is build.
B. a product cost. D. sunk. D. Irrelevant because it is future cost that will not differ between the alternatives under
consideration.
13. Total unit costs are 18. When there is one scarce resource, the product that should be produced first is the product
A. Irrelevant in marginal analysis. with
B. Relevant for cost-volume-profit analysis. A. the highest demand
C. Needed for determining product contribution. B. the highest contribution margin per unit
D. Independent of the cost system used to generate them. C. the highest sales price per unit of scarce resource
D. the highest contribution margin per unit of the scarce resource
14 Sunk costs
A. Are fixed costs. 19. Fixed costs are ignored in allocating scarce resources because
B. Are relevant to decision making. A. they are sunk.
C. Are substitute for opportunity costs. B. fixed costs only apply to long-run decisions.
D. In and of themselves are not relevant to decision making. C. they are unaffected by the allocation of scarce resources.
D. there are no fixed costs associated with scarce resources.
15 The variable cost of a unit of product made yesterday is
A. A differential cost. C. An incremental cost. Make-or-buy
B. A sunk cost. D. An opportunity cost. 20. Which of the following activities within an organization would be least likely to be outsourced?
A. accounting C. product design
Product mix decision B. data processing D. transportation
16. Assume a company produces three products: A, B, and C. It can only sell up to 3,000 units of
each product. Production capacity is unlimited. The company should produce the product (or 21. Among the costs relevant to a make-or-buy decision include variable manufacturing costs as
products) that has (have) the highest well as
A. sales price per unit. A. Avoidable fixed costs. C. Real estate taxes.
B. gross margin per unit. B. Plant depreciation. D. Unavoidable costs.
C. contribution margin per unit.
22. In a make or buy decision, the opportunity cost of capacity could
D. contribution margin per hour of machine time.
A. be considered to increase the price of units purchased from suppliers.
B. be considered to decrease the price of units purchased from suppliers.
17. There is a market for both product X and product Y. Which of the following costs and revenues
C. be considered to decrease the cost of units manufactured by the company.
would be most relevant in deciding whether to sell product X or process it further to make
D. not be considered since opportunity costs are not part of the accounting records.
product Y?
A. Total cost of making Y and the revenue from sale of Y. 23. A purchasing agent has two potential firms to buy materials from for production. If both firms
B. Total cost of making X and the revenue from sale of X and Y. charge the same price, the material cost is
C. Additional cost of making X, given the cost of making Y, and additional revenue from Y. A. a committed cost. C. an irrelevant cost
D. Additional cost of making Y, given the cost of making X, and additional revenue from Y. B. a sunk cost D. an opportunity cost
24. Which of the following costs are relevant to a make-or-buy decision? B. Positively motivate employees.
A. annual depreciation of the equipment C. Result in less than normal contribution margin.
B. original cost of the production equipment D. Reduce the overall operating income to sales ratio.
C. the amount that would be received if the production equipment were sold
D. the cost of direct materials purchased last month and used to manufacture the component 29. Pinoy Company temporarily has excess production capacity, the idle plant facilities can be
used to manufacture a low-margin item. The low-margin item should be produced if it can be
25. Which of the following is NOT relevant in a make-or-buy decision about a part the entity uses sold for more than its
in some of its products? A. Fixed costs.
A. The reliability of the outside supplier. B. Variable costs.
B. The number of units of the part needed each period. C. Variable costs plus opportunity cost of idle facilities.
C. The outside supplier’s per-unit variable cost to make the part. D. Indirect costs plus any opportunity cost of idle facilities.
D. The alternative uses of owned equipment used to make the part.
30. An opportunity cost commonly associated with a special order is
Special Order A. The variable costs of the order.
26. When only differential manufacturing costs are taken into account for special-order pricing, an B. The contribution margin on lost sales.
essential assumption is that C. Additional fixed costs related to the increased output.
A. Manufacturing fixed and variable costs are linear. D. Any of the above.
B. Acceptance of the order will not affect regular sales.
C. Selling and administrative fixed and variable costs are linear. 31. Which of the following costs is NOT relevant to a special order decision?
D. Acceptance of the order will not cause unit selling and administrative variable costs to A. the direct labor costs to manufacture the special order units
increase. B. the portion of the cost of leasing the factory that is allocated to the special order
C. the variable manufacturing overhead incurred to manufacture the special-order units
27. If a firm is at full capacity, the minimum special order price must cover D. All of the above costs are relevant.
A. variable costs associated with the special order
B. variable and incremental fixed costs associated with the special order Keep-or-drop
C. variable and fixed manufacturing costs associated with the special order 32. A manager is attempting to determine whether a segment of the business should be
D. variable costs and incremental fixed costs associated with the special order plus foregone eliminated. The focus of attention for this decision should be on
contribution margin on regular units not produced A. sales minus total expenses of the segment.
E. both B and D. B. sales minus total direct expenses of the segment.
C. the net income shown on the segment's income statement.
28. Idle capacity in the interim (normally temporary) will generate short-term benefit in accepting D. sales minus total variable expenses and avoidable fixed expenses of the segment.
sales at price that
A. Increase total fixed costs.
MSQ-05 – RELEVANT COSTING Page 3 of 12
33. An increase in direct fixed costs could reduce all of the following except 37. In equipment-replacement decisions, which one of the following does not affect the decision-
A. corporate net income. C. product line operating income. making process?
B. product line contribution margin. D. product line segment margin. A. Cost of the new equipment.
B. Operating costs of the old equipment.
34. A product should be dropped if C. Current disposal price of the old equipment.
A. It has negative incremental profit. D. Original fair market value of the old equipment.
B. It has a negative contribution margin.
C. It is not essential to the company’s product line. PROBLEM
D. Dropping it will increase the total profit of the company. Basic concepts
1. A proprietor who just inherited a building is considering using it in a new business venture.
Operate-or-shutdown Projections for the business are: revenue of $100,000, fixed cost of $30,000, and variable cost
35. The Mark X Corp. contemplates the temporary shutdown of its plant facilities in a provincial of $50,000. If the business is not started, the owner will work for a company for a wage of
area which is economically depressed due to natural disasters. Below are certain $23,000. Also, there have been two offers to rent the building, one for $1,000 per month and
manufacturing and selling expenses. one for $1,200 per month. What are the expected annual net economic profits (losses) to the
1. Depreciation 5. Sales commissions owner if the new business is started?
2. Property tax 6. Delivery expenses A. $20,000 C. $(15,000)
3. Interest expense 7. Security of premises B. $(17,400) D. $(3,000)
4. Insurance of facilities
Which of the following expenses will continue during the shutdown period? 2. Bolsa Co. estimates that 60,000 special zipper will be used in the manufacture of industrial
A. Items 1, 2 and 3 only. C. All except 5 and 6. bags during the next year. Sure Zipper Co. has quoted a price of P6 per zipper. Bolsa would
B. Items 1, 2, 3, 4, 6, and 7 only. D. All expenses in the list. prefer to purchase 5,000 units per month but Sure is unable to guarantee this delivery
schedule. In order to ensure the availability of these zippers, Bolsa is considering the
Equipment replacement purchase of all 60,000 units at the beginning of the year. Assuming that Bolsa can invest cash
36. The consulting firm of Magaling Corporation is considering the replacement of their computer at 12%, the company’s opportunity cost of purchasing the 60,000 units are the beginning of
system. Taking into account the income tax effect and considering the carrying value of the the year is
old system (CVOS) and the salvage value of the new system (SVNS), which combination A. P19,800 C. P39,600
below applies to the decision making process? B. P21,600 D. P43,200
A. B. C. D.
CVOS Relevant Relevant Irrelevant Irrelevant Sell-as-is-or-process further
SVNS Relevant Irrelevant Relevant Irrelevant 3. Julius International produces weekly 15,000 units of Product JI and 30,000 units of JII 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 information:
MSQ-05 – RELEVANT COSTING Page 4 of 12
The company must decide to continue making the product or buy it from an outside supplier. 10. Great Electronics is operating at 70% capacity. The plant manager is considering making
The supplier has offered to make the product at the same level of quality that the company can component 501 now being purchased for P110 each, a price that is projected to increase in
make it. Fixed marketing costs would be unaffected, but variable marketing costs would be the near future. The plant has the equipment and labor force required to manufacture the
reduced by 30% if the company were to accept the proposal. What is the maximum amount component. The design engineer estimates that each component requires P40 of direct
per unit that the company can pay the supplier without decreasing its operating income? materials and P30 of direct labor. The plant overhead is 200% of direct labor peso cost, and
A. $5.25 C. $7.75 40% of the overhead is fixed cost. A decision to manufacture component 501 will result in a
B. $6.75 D. $8.50 gain or (loss) for each component of
A. P(20) C. P16
8. Picnic Items, Inc. manufactures coolers of 10,000 units that contain a freezable ice bag. For B. P4 D. P28
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 11. Part BX is a component that Motors and Engines Co. uses in the assembly of motors. The
factory overhead – P20 cost to produce one BX is presented below:
Bags Corp. offered to supply the assembled ice bag for P40 with a minimum order of 5,000 Direct materials P 4,000
units. If Picnic accepts the offer, it will be able to reduce variable labor and overhead by 50%. Materials handling (20% of direct materials) 800
The direct materials for the freezable bag will cost Picnic P20 if it will produce it. Considering Direct labor 32,000
Bags Corp. offer, Picnic should Overhead (150% of direct labor) 48,000
A. Buy the freezable bag due to P50,000 advantage. Total manufacturing costs P84,800
B. Buy the freezable ice bag due to P150,000 advantage. Materials handling which is not included in manufacturing overhead, represents the direct
C. Produce the freezable ice bag due to P25,000 advantage. variable costs of the receiving department that are applied to direct materials and purchased
D. Produce the freezable ice bag due to P50,000 advantage. components on the basis of their cost.
The company’s annual overhead budget is one-third variable and two-thirds fixed. Pre-casts
9. Savage Industries is a multi-product company that currently manufactures 30,000 units of Part Co., offers to supply BX at a unit price of P60,000. Should the company buy or manufacture?
QS42 each month for use in production. The facilities now being used to produce Part QS42 A. Buy, due to advantage of P12,800 per unit.
have fixed monthly cost of P150,000 and a capacity to produce 84,000 units per month. If B. Buy, due to advantage of P24,800 per product.
Savage were to buy Part QS42 from an outside supplier, the facilities would be idle, but its C. Manufacture, due to advantage of P7,200 per unit.
fixed costs would continue at 40% of their present amount. The variable production costs of D. Manufacture, due to advantage of P19,200 per unit.
Part QS42 are P11 per unit.
If Savage Industries is able to obtain Part QS42 from an outside supplier at a unit purchase 12. Panghulo Company manufactures part H for use in its production cycle. The cost per unit for
price of P12.875, the monthly usage at which it will be indifferent between purchasing and 3,000 units of Part N are
making Part QS42 is Direct labor P50 Fixed overhead P30
A. 30,000 units. C. 48,000 units Direct materials P10 Variable overhead P20
B. 32,000 units. D. 80,000 units Quebadia Company has offered to sell Panghulo 3,000 units of part H for P100 per unit. If
Panghulo accepts Quebada’s offer, the released facilities could be used to save P70,000 in
MSQ-05 – RELEVANT COSTING Page 6 of 12
relevant costs in its manufacture of Part I. In addition, P15 per unit of fixed overhead applied Bobbie Inc. has offered to sell Pixie all 100,000 units it will need during the coming year for
to Part H would be totally eliminated. P1,200 per 100 units. If Pixie accepts the offer from Bobbie, the facilities used to manufacture
The alternative that is more desirable and the corresponding net cost savings is Component 6417 could be used in the production of Component 8275. This change would
A. B. C. D. save Pixie P180,000 in relevant costs. In addition, a P200,000 cost item included in fixed
Alternative Buy Buy Manufacture Manufacture overhead is specifically related to Part 6417 and would be eliminated. Pixie should
Net cost savings P55,000 P85,000 P10,000 P20,000 A. Buy Component 6417 because of P300,000 savings.
B. Buy Component 6417 because of P140,000 savings.
13. The Blue Plate Co. is operating at 50% capacity producing 100,000 units of ceramic plates a C. Continue producing Component 6417 because of P40,000 savings.
year. With the economic boom that the country is expected to have in the coming year, the D. Continue producing Component 6417 because of P60,000 savings.
company plans to utilize 75% capacity. Part of the manufacturing process is hand-painting
which has a variable cost of material at P4.50 and labor at P5.50 per plate. This painting 15. Chow Foods operates a cafeteria for its employees. The operations of the cafeteria requires
process has variable overhead at P1.00 which is 40% of total variable factory overhead. Total fixed costs of P470,000 per month and variable costs of 40% of sales. Cafeteria sales are
factory overhead is P500 per 100 plates. No increase in fixed factory overhead is expected currently averaging P1,200,000 per month. The company has the opportunity to replace the
even with the substantial increase in production. An offer to sub-contract the incremental cafeteria with vending machines. Gross customer spending at the vending machines is
hand-painting job was given at P10.50 per plate but the company will have to lease an estimated to be 40% greater than the current sale because the vending machines are
equipment at P10,000 annual rental. The plates sell for P50.00 per plate a piece at the available at all hours. By replacing the cafeteria with vending machines, the company would
contribution margin rate of 45%. receive 16% of the gross customer spending and avoid cafeteria costs. A decision to replace
Should Blue Plate Company sub-contract? Why? the cafeteria with vending machines will result in a monthly increase (decrease) in operating
A. No, because the company will lose P135,000. income of
B. Yes, because the company will save P65,000. A. P18,800 C. P258,800
C. No, because there is no benefit for the company. B. P182,000 D. (P588,000)
D. Yes, because the company will earn P15,000 more.
Questions 16 and 17 are based on the following information.
14. Pixie Co. produces Component 6417 for use in one of its electronic gadgets. Normal annual Hermo Company has just completed a hydro-electric plant at a cost of $21,000,000. The plant will
production for the item is 100,000 units. The cost per unit lot of the part are as follows: provide the company's power needs for the next 20 years. Hermo will use only 60% of the power
Direct material P520 output annually. At this level of capacity, Hermo's annual operating costs will amount to
Direct labor 200 $1,800,000, of which 80% are fixed.
Manufacturing overhead Quigley Company currently purchases its power from MP Electric at an annual cost of $1,200,000.
Variable 240 Hermo could supply this power, thus increasing output of the plant to 90% of capacity. This would
Fixed 320 reduce the estimated life of the plant to 14 years.
Total manufacturing costs per 100 units P1,280
16. If Hermo decides to supply power to Quigley, it wants to be compensated for the decrease in 20. PQR Company expects to incur the following costs at the planned production level of 10,000
the life of the plant and the appropriate variable costs. Hermo has decided that the charge for units:
the decreased life should be based on the original cost of the plant calculated on a straight-line Direct materials P100,000
basis. The minimum annual amount that Hermo would charge Quigley would be Direct labor 120,000
A. $450,000. C. $800,000 Variable overhead 60,000
B. $630,000. D. $990,000. Fixed overhead 30,000
The selling price is P50 per unit. The company currently operates at full capacity of 10,000
17. The maximum amount Quigley would be willing to pay Hermo annually for the power is units. Capacity can be increased to 13,000 units by operating overtime. Variable costs
A. $600,000. C. $1,050,000. increase by P14 per unit for overtime production. Fixed overhead costs remain unchanged
B. $1,000,000 D. $1,200,000. when overtime operations occur. PQR Company has received a special order from a
wholesaler who has offered to buy 2,000 units at P45 each.
Special Order What is the incremental cost associated with this special order?
18. Tyler Company currently sells 1,000 units of product M for $1 each. Variable costs are $0.40 A. P31,000 C. P62,000
and avoidable fixed costs are $400. A discount store has offered $0.80 per unit for 400 units B. P42,000 D. P84,000
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 21. Clay Co. has considerable excess manufacturing capacity. A special job order’s cost sheet
become unprofitable. includes the following applied manufacturing overhead costs: fixed costs - $21,000, and
A. 267 units. C. 600 units. variable costs - $33,000.
B. 500 units. D. 750 units The fixed costs include a normal $3,700 allocation for in-house design costs, although no in-
house design will be done. Instead, the job will require the use of external designers costing
19. ABC Company receives a one-time special order for 5,000 units of Kleen. Acceptance of this $7,750. What is the total amount to be included in the calculation to determine the minimum
order will not affect the regular sales of 80,000 units. The cost to manufacture one unit of this acceptable price for the job?
particular product is: A. $36,700 C. $54,000
Variable costs (per unit) Fixed costs (per year) B. $40,750 D. $58,050
Direct materials $1.50
Direct labor 2.50 22. Sandow Co. is currently operating at a loss of $15,000. The sales manager has received a
Overhead 0.80 $100,000 special order for 5,000 units of product, which normally sells for $35 per unit. Costs associated
Selling and administrative 3.00 50,000 with the product are: direct material, $6; direct labor, $10; variable overhead, $3; applied fixed
Variable selling costs for each of these 5,000 units will be $1.00. What is the differential cost to overhead, $4; and variable selling expenses, $2. The special order would allow the use of a
ABC Company of accepting this special order? slightly lower grade of direct material, thereby lowering the price per unit by $1.50 and selling
A. $29,000 C. $34,000 expenses would be decreased by $1.
B. $30,250 D. $39,000
If Sandow wants this special order to increase the total net income for the firm to $10,000, 25. Kirklin Co. is a manufacturer operating at 95% of capacity. Kirklin has been offered a new
what sales price must be quoted for each of the 5,000 units? order at $7.25 per unit requiring 15% of capacity. No other use of the 5% current idle capacity
A. $23.50 C. $27.50 can be found. However, if the order were accepted, the subcontracting for the required 10%
B. $24.50 D. $34.00 additional capacity would cost $7.50 per unit. The variable cost of production for Kirklin on a
per-unit basis follows:
23. Tagaytay Open-Air Flea Market is along the highway leading to Taal Vista Lodge. Arnel has a Materials $3.50
stall which specializes in hand-crafted fruit baskets that sell for P60 each. Daily fixed costs are Labor 1.50
P15,000 and variable costs are P30 per basket. An average of 750 baskets are sold each Variable overhead 1.50
day. Arnel has a capacity of 800 baskets per day. By closing time, yesterday, a bus load of $6.50
teachers who attended a seminar at the Development Academy of the Philippines stopped by In applying the contribution margin approach to evaluating whether to accept the new order,
Arnel’s stall. Collectively, they offered Arnel P1,500 for 40 baskets. Arnel should have assuming subcontracting, what is the average variable cost per unit?
A. Rejected the offer since he could have lost P500. A. $6.83 C. $7.17
B. Rejected the offer since he could have lost P900. B. $7.00 D. $7.25
C. Accepted the offer since he could have P300 contribution margin.
D. Accepted the offer since he could have P700 contribution margin. Keep-or-drop
26. High Class Townhouse, Inc. manages five upscale townhouse in Makati, Ortigas, and
24. Sta. Elena Company manufactures men’s caps. The projected income statement for the year Greenhills area. Shown below are the summary income statements for each complex:
before any special order is as follows: In Thousand Pesos
One Two Three Four Five
Amount Per Unit Rent Income 10,000 12,100 23,470 18,780 10,650
Sales P 400,000 P 20 Expenses 8,000 13,000 26,000 24,000 13,000
Cost of goods sold 320,000 16 Profit 2,000 (900) (2,530) (5,220) (2,350
Gross margin P 80,000 P 4 Included in the expenses is P12,000,000 of corporate overhead allocated to the townhouse
Selling expenses 30,000 3 based on rental income. The complex that the company should consider selling is (are)
Operating income P 50,000 P 1 A. Four. C. Three, Four & Five.
Fixed costs included in above projected income statement are P80,000 in cost of goods sold B. Four & Five. D. Two, Three, Four & Five.
and P9,000 in selling expenses.
A special order offering to buy 2,000 caps for P17 each was made to Sta. Elena. No 27. Division A of Decision Experts Corporation is being evaluated for elimination. It has
additional selling expenses will be incurred if the special order is accepted. Sta. Elena has the contribution to overhead of P400,000. It receives an allocated overhead of P1 million, 10% of
capacity to manufacture 2,000 more caps. which cannot be eliminated. The elimination of Division A would affect pre-tax income by
As a result of the special order, the operating income would increase by A. P400,000 decrease. C. P500,000 decrease.
A. P0 C. P24,000 B. P400,000 increase. D. P500,000 increase.
B. P10,000 D. P34,000
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28. Data covering QMB Corporation’s two product lines are as follows: 30. A company produces and sells three products:
Product “W” Product “Z” Products
Sales P36,000 P25,200 C J P
Income before income tax 15,936 (8,388) Sales $200,000 $150,000 $125,000
Sales price per unit 30.00 14.00 Separable (product) fixed costs 60,000 35,000 40,000
Variable cost per unit 8.50 15.00 Allocated fixed costs 35,000 40,000 25,000
The total unit sold of “W” was 1,200 and that of “Z” was 1,800 units. Variable costs 95,000 75,000 50,000
If Product “Z” is discontinued and this results in a 400 units decrease in sales of Product “W”, The company lost its lease and must move to a smaller facility. As a result, total allocated fixed
the total effect on income will be costs will be reduced by 40%. However, one of its products must be discontinued in order for
A. P5,000 decrease. C. P8,600 decrease. the company to fit in the new facility. Because the company's objective is to maximize profits,
B. P6,800 decrease. D. P13,600 decrease. what is its expected net profit after the appropriate product has been discontinued?
A. $10,000 C. $20,000
29. Nakinnat Corporation’s Outlet No. 5 reported the following results of operations for the period B. $15,000 D. $25,000
just ended:
Sales P2,500,000 Questions 31 through 33 are based on the following information.
Less: Variable expenses 1,000,000 The owners of Dynamics, Inc. has engaged you to assist them in arriving at certain decisions.
Contribution margin P1,500,000 Dynamics maintains its home office in Manila and rents factory plants in Bulacan, Laguna and
Less: Fixed expenses Naga, all of which produce the same product.
Salaries & wages P 750,000 The management of Dynamics provided you with a projection of operations for 1981 as follows:
Insurance on inventories 50,000 TOTAL Bulacan Laguna Naga
Depreciation on equipment 325,000 Sales P 2,200,000 P 1,100,000 P 700,000 P 400,000
Advertising 500,000 1,625,000 Variable costs 725,000 332,500 212,500 180,000
Net income (loss) (P125,000) Fixed costs:
The management is contemplating on dropping outlet No. 5 due to the unfavorable operational Factory 550,000 280,000 140,000 130,000
results. If this would happen, one employee will have to be retained with an annual salary of Administrative 175,000 105,000 55,000 15,000
P150,000. The equipment has no resale value. Outlet No. 5 should Allocated home office costs 250,000 112,500 87,500 50,000
A. Be dropped due to overall operational loss of P25,000. Total costs 1,700,000 830,000 495,000 375,000
B. Be dropped due to foregone overall income of P325,000. Net profit from operations 500,000 270,000 205,000 25,000
C. Not be dropped due to foregone overall income of P25,000. The sales price per unit is P12.50.
D. Not be dropped due to foregone overall income of P350,000.
Due to the poor results of operations of the plant in Naga, Dynamics has decided to cease
operations and offer the plant’s machinery and equipment for sale by the end of 1980. The
company expects to sell these assets at a good price to cover all termination costs.
Dynamics, however, wishes to continue serving its customers in Naga and is considering one of Equipment replacement
the following three alternatives: 34. Ysabelle Industries, Inc. has an opportunity to acquire a new equipment to replace one of its
1. Expand the operations of Laguna plant by using space presently idle. This move would existing equipments. The new equipment would cost P900,000 and has a five-year useful life,
result in the following changes in that plant operations; with a zero terminal disposal price. Variable operating costs would be P1 million per year.
Increase over plant’s current operations The present equipment has a book value of P500,000 and a remaining life of five years. Its
Sales 50% disposal price now is P50,000 but would be zero after five years. Variable operating costs
Fixed costs – factory 20% would be P1,250,000 per year. Considering the five years in total, but ignoring the time value
– administrative 10% of money and income taxes. Ysabelle should
Under this proposal, variable costs would be P4.00 per unit sold. A. Replace due to P350,000 advantage.
2. Enter into a long-term contract with another company who will serve the area’s customers. B. Replace due to P400,000 advantage.
This company will pay Dynamics a royalty of P2.00 per unit based upon an estimate of C. Not replace due to P100,000 disadvantage.
P30,000 units being sold. D. Not replace due to P150,000 disadvantage.
3. Close the Naga plant and not expand the operations of the Laguna plant.
The total home office costs of P250,000 will remain the same under each situation. 35. JKL Company is considering replacing a machine with a book value of P100,000, a remaining
useful life of 4 years, and annual straight-line depreciation of P25,000. The existing machine
31. The estimated net profit from total operations of Dynamics, Inc. that would result from has a current market value of P80,000. The replacement machine would cost P160,000, have
expansion of Laguna plant (Alternative 1) is a 4-year useful life, save P50,000 per year in cash operating costs. If the replacement
A. P425,000 C. P535,000 machine would be depreciated using straight-line method and the tax rate is 40%, what would
B. P485,000 D. P618,000 be the increases in annual income taxes if the company replaces the machine?
A. P14,000 C. P21,000
32. The estimated net profit from total operations of Dynamics, Inc. that would result from B. P20,000 D. P32,000
negotiation of long-term contract on a royalty basis (Alternative No. 2) is
A. P425,000 C. P535,000 36. Arlene Inc. currently has annual cash revenues of P2,400,000 and annual operating cost of
B. P485,000 D. P560,000 P1,850,000 (all cash items except depreciation of P350,000). The company is considering the
purchase of a new machine costing P1,200,000 per year. The new machine would increase
33. The estimated net profit from total operations of Dynamics, Inc. that would result from (1) revenues to P2,900,000; (2) operating cost to P2,050,000; and (3) depreciation to
shutdown of Naga plant with no expansion of other locations (Alternative No. 3) is P500,000 per year. Assuming a 35% income tax rate, Arlene’s annual incremental after-tax
A. P330,000 C. P425,000 cash flows from the machine would be
B. P345,000 D. P475,000 A. P292,500 C. P330,000
B. P300,000 D. P345,000