A. Tagaytay Open-Air Flea Market is along the highway leading to Taal Vista Lodge.

Arnel
has a stall which specializes in hand-crafted fruit baskets that sell for P60 each. Daily
fixed costs are P15,000 and variable costs are P30 per basket. An average of 750 baskets
are sold each day. Arnel has a capacity of 800 baskets per day. By closing time,
yesterday, a bus load of teachers who attended a seminar at the Development Academy of
the Philippines stopped by Arnel’s stall. Collectively, they offered Arnel P1,500 for 40
baskets. 1500 – ( 40 x P30 ) = 300
1. Arnel should have
a. Rejected the offer since he could have lost P500.
b. Rejected the offer since he could have lost P900.
c. Accepted the offer since he could have P300 contribution margin.
d. Accepted the offer since he could have P700 contribution margin.

B. Sta. Elena Company manufactures men’s caps. The projected income statement for the year
before any special order is as follows:
Amount Per Unit
Sales P 400,000 P 20
Cost of goods sold 320,000 16
Gross margin P 80,000 P 4
Selling expenses 30,000 3
Operating income P 50,000 P 1
Fixed costs included in above projected income statement are P80,000 in cost of goods sold
and P9,000 in selling expenses.
A special order offering to buy 2,000 caps for P17 each was made to Sta. Elena. No
additional selling expenses will be incurred if the special order is accepted. Sta. Elena has
the capacity to manufacture 2,000 more caps.
2. As a result of the special order, the operating income would increase by
a. P34,000 b. P24,000 c.P10,000 d. P0
17 x 2,000 = 34,000 Sales
12 x 2,000 24,000 VC
Profit 10,000

C.The owners of Dynamics, Inc. has engaged you to assist them in arriving at certain decisions.
Dynamics maintains its home office in Manila and rents factory plants in Bulacan, Laguna and
Naga, all of which produce the same product.
The management of Dynamics provided you with a projection of operations for 2020 as follows:
TOTAL Bulacan Laguna Naga
Sales P 2,200,000 P 1,100,000 P 700,000 P 400,000
Variable costs 725,000 332,500 212,500 180,000
Fixed costs:
Factory 550,000 280,000 140,000 130,000
Administrative 175,000 105,000 55,000 15,000
Allocated home office costs 250,000 112,500 87,500 50,000
Total costs 1,700,000 830,000 495,000 375,000
Net profit from operations 500,000 270,000 205,000 25,000
The sales price per unit is P12.50.
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 2020. 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
the following three alternatives:
1. Expand the operations of Laguna plant by using space presently idle. This move would
result in the following changes in that plant operations;
Increase over plant’s current operations
Sales 50%
Fixed costs – factory 20%
– administrative 10%
Under this proposal, variable costs would be P4.00 per unit sold.
2. Enter into a long-term contract with another company who will serve the area’s
customers. This company will pay Dynamics a royalty of P2.00 per unit based upon an
estimate of 30,000 units being sold.
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.

3. The estimated net profit from total operations of Dynamics, Inc. that would result from
expansion of Laguna plant (Alternative 1) is
a. P425,000 b. P485,000 c. P535,000 d. P618,000

4. The estimated net profit from total operations of Dynamics, Inc. that would result from
negotiation of long-term contract on a royalty basis (Alternative No. 2) is
a. P425,000 b. P485,000 c. P535,000 d. P560,000

5.. The estimated net profit from total operations of Dynamics, Inc. that would result from
shutdown of Naga plant with no expansion of other locations (Alternative No. 3) is
a. P330,000 b. P345,000 c. P425,000 d. P475,000

3. Sales, Laguna ( 700,000 x 1.5) 1,050,000

Variable costs ( 56,000 x 1.50 ) x 4 336,000
Contribution margin 714,000
Less : FFOH ( 140,000 x 1.2 ) 168,000
FSE ( 55,000 x 1.1 ) 60,500
Allocated HO costs 87,500 316,000
Net income 398.000
Add : Net income, Bulacan 270,000
Total 668.000
Less : Allocated HO cost , Naga 50,000
Net income 618,000
4. Net income Laguna 205,000
Net income, Bulacan 270,000
Royalty revenue 30,000 x 2 60,000
Total 535,000
Less : Allocated HO cost of Naga 50,000
Net income 485,000

5. Net income, Bulacan 270,000

Add: Net income, Laguna 205,000
Total 475,000
Less : Allocated HO cost , Naga 50,000
Net income 425,000