Name: Gideon D.

Ganoloñ Course & Year : BSA-3

Nonroutine Decision;

1. Wyeth 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…………………………… P 39
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. What is the minimum breakeven
price per unit to be considered on this special sales order? 75

ANSWER:
Manufacturing cost:
Direct Materials 39
Direct Labor 6
Variable Overhead 8
Selling Expenses:
Variable Expenses 18 (30*60%)
Variable Cost 71

*Work back
Sales 375,000
Less: Variable Cost 355,000 (5,000*71)
Contribution Margin 20,000 to breakeven, CM=FC
Less: Fixed Cost 20,000
Profit 0

Sales 375,000
Number of Units 5,000
Minimum Breakeven Price 75

2. Mina Co. mines 3 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 2005 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, What is the effect on net income of Mina Co?
4,200,000

ANSWER:

Segment Margin, 2005 1,200,000

Unavoidable fixed cost 3,000,000
Decrease in the net income 4,200,000

3. A part used in the assembly of a final product is manufactured by Guba Tool Co. in two
operations. Ordinarily, 150,000 parts are manufactured each year with total manufacturing
costs as follows:

Operation 1;
Direct Materials……………………………… P 84,000
Direct Labor…………………………………. 78,000
Variable costs of supplies and indirect materials. 18,000
Allocated costs of plant occupancy………….. 36,000
Operation 2;
Direct labor…………………………………... 23,000
Variable costs of supplies and indirect materials 11,000
Allocated costs of plant occupancy………….. 27,000
P277,000
=======
Operation 1 can be eliminated if these parts are purchased from an outside supplier at a
price of P1.10 per unit. The space used for Operation 1 can be rented for P6,000 a year. The
parts purchased from an outside supplier will still have to be put through Operation 2. If the
parts are purchased, the company must absorb the freight charges estimated at P15,000 a year.
What is the best alternative and by what amount is it more advantages?

ANSWER:
Current Alternative
Direct materials 84,000
Direct Labor 78,000
Other Variable Cost 18,000
Purchase Costs 165,000
Freight Charges 15,000
Rent Income (savings) . (6,000)
Total Costs 180,000 174,000

Therefore, purchasing the product for Operation 1 is better because the company will have
a net savings of 6,000
4. Canvass Enterprises is engaged in the bottling of a chemical compound used for car paints.
Monthly production averages 200,000 bottles per month for the 3 quarters of the current year.
Each bottle sells for p20 in the market. The annual fixed costs for Canvass is 7.2 millions
evenly distributed on a 12-month period.

The last quarter of the year is a critical period for Canvass. It is during this last 3 months of
the year where the demand for the product is expected to go down due to seasonal variation;
at this period, the demand is estimated to be an average of 40,000 bottles per month.

On the belief that the company will be saved from greater losses, management is
considering to shutdown operations during the last quarter of the year. A decision to shutdown
would decrease the fixed costs by 30%. However, during the shutdown period, additional costs
of P140,000 is needed for security and insurance. To restart operations, the company will spend
P50,000. The following data are gathered from the records of Canvass Enterprises;
Production cost per bottle:
Direct materials……………………………. P 7
Direct labor………………………………… 4
Variable factory overhead………………….. 3
Total………………………………………… 14
====
Variable selling and administrative expense per bottle P2
Compute the following;
1. Shutdown point in units? 87,500
2. Shutdown cost? 1,450,000
3. What is the effect on net income if the company will shutdown? (130,000)

ANSWER:
Annual fixed cost 7,200,000
Multiplied by: 3/12 mos
Fixed cost in 3 months 1,800,000

Unit Sales Price 20

Unit Variable Cost 16
Unit Contribution Margin 4

Fixed Overhead (7,200,000/4*70%) 1,260,000

Unavoidable Fixed Cost 140,000
Cost to restart operations 50,000
Shutdown Costs 1,450,000 P4.2

Fixed Costs 1,800,000

Less: Shutdown Costs (1,450,000)
350,000
Divided by: UCM 4
Shutdown Point 87,500 P4.1
Sales (120,000*20) 2,400,000
VC (120,000*16) (1,920,000)
Fixed Costs (7,200,000/4) (1,800,000)
Net Income (Loss) (1,320,000)
Shutdown Costs (1,450,000)
Decrease in Net Income (130,000) P4.3

5. Geary Manufacturing has assembled the following data pertaining to two popular products.
Blender Electric Motor
Direct Materials…………………………… P 6 P 11
Direct Labor……………………………….. 4 9
Factory overhead @ P16 per hour 16 32
Costs if purchased from an outside supplier 20 38
Annual demand (Units)………………….. 20,000 28,000

Past experience has shwon that the fixed manufacturing overhead component included in
the cost per machine hour averages P10. Geary has a policy of filling all sales orders, even if it
means purchasing units from outside suppliers.
If 50,000 machine are available, and Geary Manufacturing desires to follow an optimal
strategy. How many units of Blender and/or Electric motor should the company produced?
Blender? 20,000 Electric Motor? 15,000

ANSWER:
Blender Electric Motor Blender
Direct Materials 6 11 FO Total 16
Direct Labor 4 9 Fixed Component 10
Factory Overhead 6* 12 ** Variable component 6
Avoidable Fixed Cost 16 32
Cost if purchased outside 20 38
Cost Savings 4 6
Divide: Machine Hours 1 2

Machine hours available 50,000

Allocation from Blender(1*20k) (20,000)
Excess 30,000
Divide: Machine hours for Electric Motor 2
Allocation for Electric Motor 15,000
Demand 28,000
To be bought from outside supplier 13,000
6 Condensed monthly operating income data for Cosmo Inc. for November 2007 is presented
below. Additional information regarding Cosmo's operation follows the statement.
TOTAL HALL STORE TOWN STORE
Sales P200,000 P80,000 P120,000
Less; Variable costs 116,000 32,000 84,000
Contribution Margin P 84,000 P48,000 P 36,000
Less: Direct Fixed Expenses 60,000 20,000 40,000
Store segment margin P 24,000 P28,000 P (4,000)
Less: Common fixed costs 10,000 4,000 6,000
Operating Income P 14,000 P24,000 P(10,000)
======= ====== =======
One-fourth of each store's direct fixed expenses would continue through December 31,
2008, if either store were closed.
 Management estimates that closing the Town Store would result in a ten
percent decrease in Hall Store. Hall Store would not affect Town Store sales.
 The operating results for November 2007 are representative of all months.
A decision by Cosmo, Inc. to close the Town Store would result in a monthly increase or
decrease in Cosmo's operating income during 2008 of what amount? 10,800

ANSWER:

Hall store sales (80,000*90%) 72,000

Variable costs (32,000*90%) (28,800)
Contribution Margin 43,200
Original CM (48,000)
Increase (decrease) in CM (4,800)
Town store CM (6,000)
Net increase (decrease) (10,800)

Unavoidable Fixed Expenses (40,000*25%) 10,000

Original segment margin (4,000)
Town Store CM 6,000

7. Leland manufacturing uses 10 units of Part Number K137 each month in the production of
radar equipment. the unit cost to manufacture one unit of K137 is presented below.

Direct materials P 1,000

Materials handling (20% of direct material cost) 200
Direct labor 8,000
Manufacturing overhead (150% of direct labor) 12,000

Materials handling represents the direct variable costs of the receiving department that
are applied to direct materials and purchased components on the basis of their costs. This is a
separate charge in addition to manufacturing overhead. Leland's annual manufacturing overhead
budget is one-third variable and two-thirds fixed. Scott Supply, one of Leland's reliable vendors,
has offered to supply Part No. K137 at a unit price of P15,000.

1. If Leland purchase the K137 units from Scott, the capacity Leland used to
manufacture these parts would be idle. Should Leland decide to purchase the parts
from Scoot, what would be the impact on net income? (48,000)
2. Assume Leland Manufacturing is able to rent all idle capacity for P25,000 per
month. If Leland decides to purchase the 10 units from Scott Supply, What is the
impact on costs of K137? 23,000
3. Assume that Leland does not wish to commit to a rental agreement but could use
idle capacity to manufacture another product that would contribute P52,000 per
month. If Leland elects to manufacture K137 in order to maintain quality control,
What is the opportunity cost? 4,000

ANSWER:

Direct Materials 1,000

Material Handling 200
Direct Labor 8,000
Variable Overhead 4,000
Manufacturing cost/unit 13,200
Cost when purchased* 18,000
Loss per unit (4,800)
Multiply: units per month 10
Total effect in net income (48,000)

Purchase Price 15,000

Material Handling (20%) 3,000
Cost when purchased 18,000

Cost when purchased (10 units) 180,000

Rent Income (25,000)
Total cost 155,000
Manufacturing costs (10 units) (132,000)
Increase (decrease) in monthly costs 23,000

Other Revenue 52,000

Loss from purchasing 10 units (48,000)
Total Opportunity cost 4,000

8. MC's 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 is at capacity and the special order is accepted, what would be the effect on operating
income? 20,000

ANSWER:

Sales (32 x 2000) 64,000

Direct Materials 4
Direct Labor 12
Variable manufacturing overhead 6
Total manufacturing costs 22 44,000
Income 20,000

9. Wallace Company produces 15,000 pounds of Product A and 30,000 pounds of Product B
each week by incurring a common variable costs of P400,000. 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 product. Data regarding these two products are as follows:

Product A Product B
Selling price per pound without further processing P12.00 P 9.00
Selling price per pound with further processing 15.00 11.00
Total separate weekly variable costs of further processing P50,000 P45,000

To maximize Wallace Company's manufacturing contribution margin, should the company

process further the product A and Product B? Why?

ANSWER:
A B
Incremental Selling Price 3 2
xUnits 15,000 30,000
Incremental sales 45,000 60,000
Incremental costs 50,000 45,000
Incremental Income (loss) (5,000) 15,000

It is beneficial for the company to process further product B only, as this impacts the
company positively in terms of profit by 15,000, and for Product A, it should be sold now.
10. Pili 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. What would be the effect of closing down the segment of Pili
Company' income? 7,000

ANSWER:

Avoidable Fixed costs 25,000

Segment margin (32,000)
Net Increase/Decrease in income (7,000)

12. Salvar Corp. has its own cafeteria with the following annual costs;

Food P 100,000
Labor 75,000
Overhead 110,000
Total P 285,000
========

The overhead is 40% fixed. Of the fixed overhead, P25,000 is the salary of the cafeteria
supervisor. The remainder of the fixed overhead has been allocated for total company overhead.
Assuming the cafeteria supervisor will remain and that Salvar will continue to pay his/her salary,
what would be the maximum cost Salvar will be willing to pay an outside firm to service the
cafeteria? 241,000

ANSWER:

Food 100,000
Labor 75,000
Variable Overhead (110,000 x 60%) 66,000(excess overhead (fixed) are all unavoidable
Total Costs 241,000

13. The seller of product A has no idle capacity and can sell all it can produce at P20 per unit.
Outlay cost is P4. What is the opportunity cost, assuming the seller sells internally? 16

ANSWER:

Sales 20
Less: Outlay 4
Opportunity cost 16

14. Ceret Tiles has been approached by a large chain store that offers to buy 80,000 tiles at P17.
Delivery must be made within 30 days. Ceret can produce 320,000 tiles per month and has an
inventory of 10,000 tiles on hand. Expected sales at regular prices for the coming month are
300,000 tiles. Ceret’s sales manager believes that about 60% of sales lost during the month
would be made up in later months. Price and cost data are as follows:

Selling price…………………………………………………………………….. P25

Variable costs:
Production……………………………… P12
Selling…………………………………….. 3 15
Contribution Margin……………………………………………………… P10
=====
Variable selling costs on the special order are only P2 per unit.

Compute the following:

a. The lowest price Ceret could charge on the special order and not reduce its income.
15
b. Suppose now that chain offers to buy 60,000 tiles per month at P17. The offer is for
an entire year. Expected sales are 300,000 tiles per month without considering the
special order. Also assume that there is no beginning inventory and that any sales lost
during the year would not be made up in the following year. What is the lowest price
that Ceret could accept? 22

ANSWER:

Current Income 3,000,000 (3M x 10)

Less: Income from regular sales 2,500,000 (250k x 10)
Required net income 500,000
Cost of tiles on hand 120,000 (10k x 12)
Cost of tiles to be manufactured 840,000 (70k x 12)
Variable selling costs on special order 160,000
Total 1,620,000
Less: Recoverable lost sales 384,000 {[25-17) x 80k] x 60 %}
Required sales 1,236,000
Divide: units in special order 80,000
Minimum Price 15

Current Income 3,000,000 (300k x 10)

Less: Income from regular sales 2,400,000 (240k x 10)
Required net income 600,000
Cost of tiles to be manufactured 960,000 (80k x 12)
Variable selling costs on special order 160,000 (80k x 2)
Required sales 1,720,000
Divide: units in special order 80,000
Minimum Price 22