Hiraya

MANAGEMENT ADVISORY SERVICES

RELEVANT COSTING

Problems
1. A proprietor who just inherited a building is considering using it in a new business venture.
Projections for the business are: revenue of $100,000, fixed cost of $30,000, and variable
cost of $50,000. If the business is not started, the owner will work for a company for a wage
of $23,000. Also, there have been two offers to rent the building, one for $1,000 per month
and one for $1,200 per month. What are the expected annual net economic profits (losses) to
the owner if the new business is started?
A. $20,000 B. $(3,000) C. $(15,000) D. $(17,400)

2. Bolsa Co. estimates that 60,000 special zipper will be used in the manufacture of industrial
bags during the next year. Sure Zipper Co. has quoted a price of P6 per zipper. Bolsa would
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
purchase of all 60,000 units at the beginning of the year. Assuming that Bolsa can invest
cash at 12%, the company’s opportunity cost of purchasing the 60,000 units are the
beginning of the year is
a. P21,600 b. P43,200 c. P19,800 d. P39,600

3. Chow Inc. has its own cafeteria with the following annual costs
Food P 400,000
Labor 300,000
Overhead 440,000
Capital P1,140,000
The overhead is 40% fixed. Of the fixed overhead, P100,000 is the salary of the cafeteria
supervisor. The remainder of the fixed overhead has been allocated from total company
overhead. Assuming the cafeteria supervisor will remain and that Chow will continue to pay
said salary, the maximum cost Chow will be willing to pay an outsider firm to service the
cafeteria is
a. P1,140,000 b. P1,040,000 c. P700,000 d. P964,000

4. Listed below are a company’s monthly unit costs to manufacture and market a particular
product.
Unit Costs Variable Cost Fixed Costs
Direct materials $2.00
Direct labor 2.40
Indirect Manufacturing 1.60 $1.00
Marketing 2.50 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 the same level of quality that the company
can make it. Fixed marketing costs would be unaffected, but variable marketing costs would
be reduced by 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. $8.50 b. $6.75 c. $7.75 d. $5.25

5. Picnic Items, Inc. manufactures coolers of 10,000 units that contain a freezable ice bag. For
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
factory overhead – P20
Bags Corp. offered to supply the assembled ice bag for P40 with a minimum order of 5,000
units. If Picnic accepts the offer, it will be able to reduce variable labor and overhead by
50%. The direct materials for the freezable bag will cost Picnic P20 if it will produce it.
Considering Bags Corp. offer, Picnic should
a. Buy the freezable ice bag due to P150,000 advantage.

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b. Produce the freezable ice bag due to P25,000 advantage.

c. Produce the freezable ice bag due to P50,000 advantage.
d. Buy the freezable bag due to P50,000 advantage.

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6. Savage Industries is a multi-product company that currently manufactures 30,000 units of

Part QS42 each month for use in production. 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 Savage were to buy Part QS42 from an outside supplier, the facilities would be
idle, but its fixed costs would continue at 40% of their present amount. The variable
production costs of Part QS42 are P11 per unit.
If Savage 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. B. 32,000 units. C. 80,000 D. 48,000

7. Great Electronics is operating at 70% capacity. The plant manager is considering making
component 501 now being purchased for P110 each, a price that is projected to increase in
the near future. The plant has the equipment and labor force required to manufacture the
component. The design engineer estimates that each component requires P40 of direct
materials and P30 of direct labor. The plant overhead is 200% of direct labor peso cost, and
40% of the overhead is fixed cost. A decision to manufacture component 501 will result in a
gain or (loss) for each component of
a. P28 b. P16 c. P(20) d. P4

8. Part BX is a component that Motors and Engines Co. uses in the assembly of motors. The
cost to produce one BX is presented below:
Direct materials P 4,000
Materials handling (20% of direct materials) 800
Direct labor 32,000
Overhead (150% of direct labor) 48,000
Total manufacturing costs P84,800
Materials handling which is not included in manufacturing overhead, represents the direct
variable costs of the receiving department that are applied to direct materials and purchased
components on the basis of their cost.
The company’s annual overhead budget is one-third variable and two-thirds fixed. Pre-casts
Co., offers to supply BX at a unit price of P60,000. Should the company buy or
manufacture?
a. Buy, due to advantage of P24,800 per product.
b. Manufacture, due to advantage of P7,200 per unit.
c. Buy, due to advantage of P12,800 per unit.
d. Manufacture, due to advantage of P19,200 per unit.

9. Panghulo Company manufactures part H for use in its production cycle. The cost per unit for
3,000 units of Part N are
Direct labor P50 Fixed overhead P30
Direct materials P10 Variable overhead P20
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
relevant costs in its manufacture of Part I. In addition, P15 per unit of fixed overhead applied
to Part H would be totally eliminated.
The alternative that is more desirable and the corresponding net cost savings is
a. b. c. d.
Alternative Manufacture Manufacture Buy Buy
Net cost savings P10,000 P20,000 P55,000 P85,000

10. Tyler Company currently sells 1,000 units of product M for $1 each. Variable costs are
$0.40 and avoidable fixed costs are $400. A discount store has offered $0.80 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. 267 units. b. 500 units. c. 600 units. d. 750 units

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11. The Blue Plate Co. is operating at 50% capacity producing 100,000 units of ceramic plates a
year. With the economic boom that the country is expected to have in the coming year, the
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
process has variable overhead at P1.00 which is 40% of total variable factory overhead.
Total factory overhead is P500 per 100 plates. No increase in fixed factory overhead is
expected even with the substantial increase in production. An offer to sub-contract the
incremental hand-painting job was given at P10.50 per plate but the company will have to
lease an equipment at P10,000 annual rental. The plates sell for P50.00 per plate a piece at
the contribution margin rate of 45%.
Should Blue Plate Company sub-contract? Why?
a. No, because the company will lose P135,000.
b. Yes, because the company will save P65,000.
c. Yes, because the company will earn P15,000 more.
d. No, because there is no benefit for the company.

12. Pixie Co. produces Component 6417 for use in one of its electronic gadgets. Normal annual
production for the item is 100,000 units. The cost per unit lot of the part are as follows:
Direct material P520
Direct labor 200
Manufacturing overhead
Variable 240
Fixed 320
Total manufacturing costs per 100 units P1,280
Bobbie Inc. has offered to sell Pixie all 100,000 units it will need during the coming year for
P1,200 per 100 units. If Pixie accepts the offer from Bobbie, the facilities used to
manufacture Component 6417 could be used in the production of Component 8275. This
change would save Pixie P180,000 in relevant costs. In addition, a P200,000 cost item
included in fixed overhead is specifically related to Part 6417 and would be eliminated. Pixie
should
a. Buy Component 6417 because of P300,000 savings.
b. Buy Component 6417 because of P140,000 savings.
c. Continue producing Component 6417 because of P40,000 savings.
d. Continue producing Component 6417 because of P60,000 savings.

13. Chow Foods operates a cafeteria for its employees. The operations of the cafeteria requires
fixed costs of P470,000 per month and variable costs of 40% of sales. Cafeteria sales are
currently averaging P1,200,000 per month. The company has the opportunity to replace the
cafeteria with vending machines. Gross customer spending at the vending machines is
estimated to be 40% greater than the current sale because the vending machines are available
at all hours. By replacing the cafeteria with vending machines, the company would receive
16% of the gross customer spending and avoid cafeteria costs. A decision to replace the
cafeteria with vending machines will result in a monthly increase (decrease) in operating
income of
a. P182,000 b. P258,800 c. (P588,000) d. P18,800

14. ABC Company receives a one-time special order for 5,000 units of Kleen. Acceptance of this
order will not affect the regular sales of 80,000 units. The cost to manufacture one unit of
this particular product is:
Variable costs (per unit) Fixed costs (per year)
Direct materials $1.50
Direct labor 2.50
Overhead 0.80 $100,000
Selling and administrative 3.00 50,000
Variable selling costs for each of these 5,000 units will be $1.00. What is the differential cost
to ABC Company of accepting this special order?
A. $39,000 B. $34,000 C. $30,250 D. $29,000

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15. PQR 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. PQR Company has received a special order from a
wholesaler who has offered to buy 2,000 units at P45 each.
. What is the incremental cost associated with this special order?
a. P84,000 b. P31,000 c. P62,000 d. P42,000

16. Clay Co. has considerable excess manufacturing capacity. A special job order’s cost sheet
includes the following applied manufacturing overhead costs: fixed costs - $21,000, and
variable costs - $33,000.
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
$7,750. What is the total amount to be included in the calculation to determine the minimum
acceptable price for the job?
a. $36,700 b. $40,750 c. $54,000 d. $58,050

17. Sandow Co. is currently operating at a loss of $15,000. The sales manager has received a
special order for 5,000 units of product, which normally sells for $35 per unit. Costs
associated with the product are: direct material, $6; direct labor, $10; variable overhead, $3;
applied fixed overhead, $4; and variable selling expenses, $2. The special order would allow
the use of a slightly lower grade of direct material, thereby lowering the price per unit by
$1.50 and selling expenses would be decreased by $1. If Sandow wants this special order to
increase the total net income for the firm to $10,000, what sales price must be quoted for
each of the 5,000 units?
a. $23.50 b. $24.50 c. $27.50 d. $34.00

18. 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. 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.

19. Kirklin Co. is a manufacturer operating at 95% of capacity. Kirklin has been offered a new
order at $7.25 per unit requiring 15% of capacity. No other use of the 5% current idle
capacity can be found. However, if the order were accepted, the subcontracting for the
required 10% additional capacity would cost $7.50 per unit. The variable cost of production
for Kirklin on a per-unit basis follows:
Materials $3.50
Labor 1.50
Variable overhead 1.50
$6.50
In applying the contribution margin approach to evaluating whether to accept the new order,
assuming subcontracting, what is the average variable cost per unit?
A. $6.83 B. $7.00 C. $7.17 D. $7.25

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20. 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.
As a result of the special order, the operating income would increase by
a. P34,000 b. P24,000 c. P10,000 d. P0

21. High Class Townhouse, Inc. manages five upscale townhouse in Makati, Ortigas, and
Greenhills area. Shown below are the summary income statements for each complex:
In Thousand Pesos
One Two Three Four Five
Rent Income 10,000 12,100 23,470 18,780 10,650
Expenses 8,000 13,000 26,000 24,000 13,000
Profit 2,000 (900) (2,530) (5,220) (2,350
Included in the expenses is P12,000,000 of corporate overhead allocated to the townhouse
based on rental income. The complex that the company should consider selling is (are)
a. Three, Four & Five. c. Two, Three, Four & Five.
b. Four & Five. d. Four.

22. Division A of Decision Experts Corporation is being evaluated for elimination. It has
contribution to overhead of P400,000. It receives an allocated overhead of P1 million, 10%
of which cannot be eliminated. The elimination of Division A would affect pre-tax income
by
a. P400,000 decrease. c. P500,000 decrease.
b. P400,000 increase. d. P500,000 increase.

23. Data covering QMB Corporation’s two product lines are as follows:
Product “W” Product “Z”
Sales P36,000 P25,200
Income before income tax 15,936 (8,388)
Sales price per unit 30.00 14.00
Variable cost per unit 8.50 15.00
The total unit sold of “W” was 1,200 and that of “Z” was 1,800 units.
If Product “Z” is discontinued and this results in a 400 units decrease in sales of Product
“W”, the total effect on income will be
a. P13,600 decrease. b. P6,800 decrease. c. P8,600 decrease. d. P5,000 decrease.

24. Ysabelle Industries, Inc. has an opportunity to acquire a new equipment to replace one of its
existing equipments. The new equipment would cost P900,000 and has a five-year useful
life, with a zero terminal disposal price. Variable operating costs would be P1 million per
year. The present equipment has a book value of P500,000 and a remaining life of five years.
Its disposal price now is P50,000 but would be zero after five years. Variable operating costs
would be P1,250,000 per year. Considering the five years in total, but ignoring the time
value of money and income taxes. Ysabelle should
a. Replace due to P400,000 advantage.
b. Not replace due to P150,000 disadvantage.
c. Replace due to P350,000 advantage.
d. Not replace due to P100,000 disadvantage.

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25. Nakinnat Corporation’s Outlet No. 5 reported the following results of operations for the
period just ended:
Sales P2,500,000
Less: Variable expenses 1,000,000
Contribution margin P1,500,000
Less: Fixed expenses
Salaries & wages P 750,000
Insurance on inventories 50,000
Depreciation on equipment 325,000
Advertising 500,000 1,625,000
Net income (loss) (P125,000)
The management is contemplating on dropping outlet No. 5 due to the unfavorable
operational results. If this would happen, one employee will have to be retained with an
annual salary of P150,000. The equipment has no resale value. Outlet No. 5 should
a. Not be dropped due to foregone overall income of P350,000.
b. Be dropped due to foregone overall income of P325,000.
c. Not be dropped due to foregone overall income of P25,000.
d. Be dropped due to overall operational loss of P25,000.

Questions 26 through 28 are based on the following information.

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 1981 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 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
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 P30,000 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.

26. 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

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27. 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

28. 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

29. 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 has a current market value of P80,000. The replacement machine would
cost P160,000, have a 4-year useful life, save P50,000 per year in cash operating costs. If the
replacement machine would be depreciated using straight-line method and the tax rate is
40%, what would be the increases in annual income taxes if the company replaces the
machine?
A. P21,000 B. P14,000 C. P32,000 D. P20,000

Questions 30 and 31 are based on the following information.

The Sampaguita Steam Laundry bought a laundry truck that can be used for 5 years. The cost of
the truck is P225,000 with a salvage value of P35,000. Since the truck is not working efficiently,
management has thought of selling the truck immediately and buy a delivery wagon which will
serve the company’s purposes more properly. The estimated net returns of the truck for 5 years
is P150,000. If the truck is sold, management can only recover P175,000. (In all calculations,
use the straight line method of depreciation)

30. The net gain (loss) that will arise if the Company decides to sell the truck is:
a. P(50,000) b. P(75,000) c. P75,000 d. P140,000

31. If the firm decides to keep the truck, the net gain (loss) over the 5-year period is
a. P(40,000) b. P(75,000) c. P50,000 d. P140,000

32. Arlene Inc. currently has annual cash revenues of P2,400,000 and annual operating cost of
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 (1) revenues to P2,900,000; (2) operating cost to P2,050,000; and (3) depreciation to
P500,000 per year. Assuming a 35% income tax rate, Arlene’s annual incremental after-tax
cash flows from the machine would be
a. P330,000 b. P345,000 c. P292,500 d. P300,000

33. 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:
JI JII
Unit selling price without further processing P24 P18
Unit selling price with further processing P30 P22
Total separate weekly variable costs of further P100,000 P90,000
processing
To maximize Julius’ manufacturing contribution margin, the total separate variable costs of
further processing that should be incurred each week are
a. P95,000 b. P90,000 c. P100,000 d. P190,000

34. A manufacturing company's primary goals include product quality and customer satisfaction.
The company sells a product, for which the market demand is strong, for $50 per unit. Due to
the capacity constraints in the Production Department, only 300,000 units can be produced
per year. The current defective rate is 12% (i.e., of the 300,000 units produced, only 264,000
units are sold and 36,000 units are scrapped). There is no revenue recovery when defective

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units are scrapped. The full manufacturing cost of a unit is $29.50, including
Direct materials $17.50
Direct labor 4.00
Fixed manufacturing overhead 8.00
The company's designers have estimated that the defective rate can be reduced to 2% by
using a different direct material. However, this will increase the direct materials cost by
$2.50 per unit to $20 per unit. The net benefit of using the new material to manufacture the
product will be
A. $(120,000) B. $120,000 C. $750,000 D. $1,425,000

35. The Table Top Model Corp. produces three products. “Tic,” “Tac.”, and “Toc.” The owner
desires to reduce production load to only one product line due to prolonged absence of the
production manager. Depreciation expense amounts to P600,000 annually. Other fixed
operating expenses amount to P660,000 per year. The sales and variable cost data of the
three products are (000’s omitted)
Tic Tac Toc
Sales P6,600 P5,300 P10,800
Variable costs 3,900 1,700 8,900
Which product must be retained and what is the opportunity cost of selecting such product
line?
a. Retain product “Tac”; opportunity cost is P4.6 million.
b. Retain product “Tac”; opportunity cost is P3.14 million.
c. Retain product “Tic”; opportunity cost is P4.04 million.
d. Retain product “Toc”; opportunity cost is P4.84 million.

36. A company produces and sells three products:

Products
C J P
Sales $200,000 $150,000 $125,000
Separable (product) fixed costs 60,000 35,000 40,000
Allocated fixed costs 35,000 40,000 25,000
Variable costs 95,000 75,000 50,000
The company lost its lease and must move to a smaller facility. As a result, total allocated
fixed costs will be reduced by 40%. However, one of its products must be discontinued in
order for the company to fit in the new facility. Because the company's objective is to
maximize profits, what is its expected net profit after the appropriate product has been
discontinued?
A. $10,000 B. $15,000 C. $20,000 D. $25,000

Questions 37 and 38 are based on the following information.

Hermo Company has just completed a hydro-electric plant at a cost of $21,000,000. The plant
will provide the company's power needs for the next 20 years. Hermo will use only 60% of the
power output annually. At this level of capacity, Hermo's annual operating costs will amount to
$1,800,000, of which 80% are fixed.
Quigley Company currently purchases its power from MP Electric at an annual cost of
$1,200,000. Hermo could supply this power, thus increasing output of the plant to 90% of
capacity. This would reduce the estimated life of the plant to 14 years.

37. If Hermo decides to supply power to Quigley, it wants to be compensated for the decrease in
the life of the plant and the appropriate variable costs. Hermo has decided that the charge for
the decreased life should be based on the original cost of the plant calculated on a straight-
line basis. The minimum annual amount that Hermo would charge Quigley would be
A. $450,000. B. $630,000. C. $990,000. D. $800,000

38. The maximum amount Quigley would be willing to pay Hermo annually for the power is
A. $600,000. B. $1,050,000. C. $1,200,000. D. $1,000,000

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ANSWER KEY
Theory Problems
1. B 16. B 31. C 1. D 16. B 31. A
2. C 17. A 32. C 2. C 17. A 32. B
3. D 18. B 33. D 3. D 18. C 33. B
4. B 19. C 34. C 4. B 19. C 34. C
5. D 20. A 35. B 5. B 20. C 35. A
6. B 21. B 36. C 6. D 21. B 36. D
7. D 22. C 37. B 7. D 22. D 37. B
8. C 23. A 8. D 23. B 38. C
9. C 24. C 9. C 24. A
10. A 25. C 10. A 25. A
11. D 26. D 11. B 26. D
12. C 27. B 12. B 27. B
13. D 28. A 13. D 28. C
14. B 29. A 14. D 29. B
15. D 30. A 15. A 30. A

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