Acctg.

403 Relevant Costing

1. Middle East Company prepared the following tentative forecast concerning Product A for
2010:
ales ! P"00#000$ elling price per unit ! P"$ varia%le costs ! P&00#000$ 'i(ed costs !
P1"0#000
tudy made %y the sales manager disclosed that the unit selling price could %e increased
%y 20)# with an e(pected volume decrease of only 10). Assuming Middle East
incorporates these changes in its 2010 forecast# what should %e the operating income
from Product A*
2. +ur,ey +echnology manufactures a particular computer component. Currently# the costs
per unit are as follows:
-irect materials# P"0$ direct la%or# P"00$ varia%le overhead# P2"0$ .(ed overhead#
P/00. Pa,istan 0nc. has o%tained +ur,ey with an o1er to sell 10#000 units of the component
for P1#100 per unit. 0f +ur,ey accepts the proposal# P2#"00#000 of the .(ed overhead will
%e eliminated. hould +ur,ey ma,e or %uy the component*
&. audi Ara%ia Company is operating at 20) capacity. +he plant manager is considering
ma,ing Part A"33 now %eing purchased from outside suppliers for P110 each# a price that
is pro4ected to increase in the near future. +he plant has the e5uipment and la%or force
re5uired to manufacture Part A"33. +he design engineer estimates that each part re5uires
P/0 of direct materials and P&0 of direct la%or. +he plant overhead is 200) of direct la%or
peso cost# and /0) of the overhead is .(ed. A decision to manufacture Part A"33 will
result in a gain 6or loss7 for each component of how much*
/. 8emen Company manufactures 20#000 units of a certain component per year. +his
component is used in the production of a main product. +he following are the costs to
ma,e the component per unit:
-irect materials# P11$ direct la%or# P1/# varia%le overhead# P9 $and .(ed overhead#
P:.
0f 8emen %uys the component from outside supplier# the company can rent out leased
facilities for P20#000 a year. +he cost of the component per unit as 5uoted %y supplier is
P&3. 30) of the .(ed overhead applied in the manufacture of the component will continue
regardless of what decision is made. 'or all purchases made %y the company# freight and
handling costs are applied at 1) of the purchase price. +he direct materials cost is
e(clusive of the freight and handling cost. ;hat is the economic advantage or
disadvantage of %uying the component*
". <atar Company manufactures Part = for use in the production cycle. +he costs per unit for
10#00 units for Part = are as follows:
-irect materials# P&$ direct la%or# P1"$ varia%le overhead# P3$ .(ed overhead# P9.
>ahrain Company has o1ered to sell <atar 10#000 units of Part = for P&0 per unit. 0f <atar
accepts >ahrain?s o1er# the released facilities could %e used to save P/"#000 in relevant
costs in the manufacture of Part @. 0n addition# P" per unit of .(ed overhead applied to
Part = would %e totally eliminated. ;hat alternative is more desira%le and %y what amount
is it more desira%le*
1
3. Aman 0nc. manufactures coolers that contain a freeBa%le ice %ag. 'or an annual volume of
10#000 units# .(ed manufacturing costs of P"00#000 are incurred. Caria%le costs per unit
amount are:
-irect materials# P90$ direct la%or# P1"$ varia%le factory overhead# P20.
-u%ai Corp. o1ered to supply the assem%led ice %ag for P/0 with a minimum order of
"#000 units. 0f Aman accepts the o1er# it will %e a%le to reduce varia%le la%or and
overhead costs %y "0). +he direct material for the freeBa%le ice %ag will cost Aman P20 if
it will produce it. Considering -u%ai?s o1er# what should Aman do 6produce or %uy# and at
what advantage7*
2. +he >lade -ivision of >aghdad Corp. produces hardened steel %lades. AneDthird of the
>lade -ivision?s output is sold to the Eawn Products -ivision of >aghdad$ the remainder is
sold to outside customers. +he >lade -ivision?s estimated sales and standard cost data for
the .scal year ending Fune &0# 2002 are as follows:
Eawn Products Autsiders
ales P 1"#000 P /0#000
Caria%le costs 6 10#0007 6 20#0007
'i(ed costs 6 &#0007 6 3#0007
0ncome P 2,000 P 14,000
Gnit sales 10#000 units 20#000 units
+he Eawn Products -ivision has an opportunity to purchase 10#000 identical 5uality %lades
from an outside supplier at a cost of P1.2" per unit on a continuing %asis. Assume that the
>lade -ivision cannot sell any additional products to outside customers.
hould >aghdad allow its Eawn Products -ivision to purchase the %lades from the outside
supplier 6cite the advantage or disadvantage7*
9. Cairo Manufacturing uses 10 units of Part Hum%er IF/" each month in the production of
radar e5uipment. +he unit costs to manufacture one unit of IF" are as follows:
-irect materials# P1#000$ materials handling 620) of direct material cost7 P200$
direct la%or# P9#000$
manufacturing overhead 61"0) of direct la%or7# P12#000.
Materials handling represents the direct varia%le costs of the Jeceiving -epartment that
are applied to direct materials and purchased components on their cost. +his is a separate
charge in addition to manufacturing overhead. Cairo?s annual manufacturing overhead
%udget is oneDthird varia%le and twoDthirds .(ed. Egypt uppliers# one of Cairo?s relia%le
vendors# has o1ered to supply Part IF/" at a unit price of P 1"#000.
0f Cairo purchases the IF/" units from Egypt# the capacity Cairo used to manufacture these
parts would %e idle. hould Cairo decide to purchase the parts from Egypt# the unit cost of
IF/" would increaseK6decrease7 %y how much*
:. Assume data in Ho. 9 and that Cairo is a%le to rent all idle capacity for P2"#00 per month.
0f Cairo decides to purchase the 10 units from Egypt upply# Cairo?s monthly cost for IF/"
would increaseK7decrease7 %y how much*
10.0ran Company needs 20#000 of a certain part to use in its production cycle. +he following
information is availa%le:
Cost to 0ran to ma,e the part: direct materials# P/$ direct la%or# P13$ varia%le
overhead#P19$
'i(ed overhead applied# P 10
Cost to %uy the part from yria Company: P&3
2
0f 0ran %uys the part from yria Company instead of ma,ing it# 0ran could not use the
released facilities in another manufacturing activity. 30) of the .(ed overhead applied will
continue regardless of what decision is made. 0n deciding whether to ma,e or %uy the part#
the total relevant costs to ma,e the part will %e how much*
11.Emirates 0nc. has %een manufacturing "#000 units of Part 12&/" which is used to
manufacture one of its products. At this level of production# the cost per unit of
manufacturing Part 12&/" is as follows:
-irect materials# P1$ direct la%or# P9$ varia%le overhead# P/$ .(ed overhead applied#
P3.
Fordan Company has o1ered to sell Emirates "#000 units of Part 12&/" for P1: a unit.
Emirates has determined that it could use the facilities presently used to manufacture Part
12&/" and generate an operating pro.t of P/#000. Emirates has also determined that two
thirds of the .(ed overhead applied will continue even if Part 12&/" is purchased from
Fordan. +o determine whether to accept Fordan?s o1er# what would %e the net relevant
manufacturing costs to Emirates*
12.+ehran has a stall that specialiBes in handcrafted fruit %as,ets that sell for P30 each. -aily
.(ed costs are P1"#000 and varia%le costs are P&0 per %as,et. An average of P2"0 %as,ets
is sold each day. +ehran has a capacity of 900 %as,ets. >y closing time yesterday# a tourist
%us stopped %y +ehran?s stall. Collectively# the passengers o1ered +ehran P1#"00 for /0
%as,ets.
;hat should +ehran do 6acceptKre4ect the o1er$ cite reason7*
1&.=iven the following target selling price for a unit of product:
-irect materials P19
-irect la%or 2
Averhead 620) varia%le7 1"L 6%ased on 2"#000 units produced each year7
Cost of manufacture /0
-esired mar,up D&0) 12
+arget selling price per unit P 52
A foreign distri%utor has o1ered to purchase "#000 units at a special price of P&9 per unit.
+he company is selling only 20#000 units per year through regular channels and so it has
idle capacity. Caria%le selling costs associated with the special order would %e P2 per unit.
0f the special order is accepted# the company?s overall net income will increaseKdecrease
%y how much*
1/.+he Jiyadh Corp. that has e(perienced e(cess production capacity received a special o1er
for its Product > at P29 per unit for 100#000 units. 0t has %een using the varia%le costing
method and has %een pricing its product at P:3 per unit %ased on a mar,up of 30) as
follows:
-irect materials P &0
-irect la%or 20
Caria%le overhead 3
Caria%le selling M admin. /
+otal varia%le e(penses P 30
30) mar,up &3
elling price P 96
Assuming that the special o1er will not a1ect the regular mar,et for the product# how
much would the company gainKlose if it decides to accept the special o1er*
&
1".Ee%anon Company produces and sells 9#00 units of Product N each year. Each unit of
Product N sells for P1 and has a contri%ution of P3. 0t is estimated that if Product N is
discontinued# P"0#000 of the P30#000 in .(ed costs charged to Product N could %e
eliminated. +hese data indicate that if Product N is discontinued# overall company
operating income should increaseKdecrease %y how much*
13.+he Gganda Company has two divisions ! East and ;est. +he divisions have the following
revenues and e(penses: East ;est
ales P220#000 P&"0#000
Caria%le costs &20#000 2/0#000
+racea%le .(ed costs 1&0#000 90#000
Allocated common corporate costs 120#000 "0#000
Aperating incomeK6loss7 P100,000 (P20,000)
+he management of Gganda is pondering the elimination of the ;est -ivision since it has
shown an operating loss for the past several years. 0f the ;est -ivision were eliminated#
its tracea%le .(ed costs could %e avoided. +he total common corporate costs would %e
una1ected %y this decision. =iven these data# the elimination of the ;est -ivision would
result in an overall company operating income of how much*
12.A company produces and sells three products as follows:
C F POOOOO
ales P200#000 P1"0#000 12"#000
epara%le 6product7 .(ed costs 30#000 &"#000 /0#000
Allocated .(ed costs &"#000 /0#000 2"#000
Caria%le costs :"#000 2"#000 "0#000
+he company lost its lease and must move to a smaller facility. As a result# total allocated
.(ed costs will %e reduced %y /0). @owever# one of its products must %e discontinued in
order for the company to .t in the new facility. >ecause the company?s o%4ective is to
ma(imiBe pro.ts# what is its e(pected net pro.t after the appropriate product has %een
discontinued*
19.Ail Corporation uses a 4oint process to produce three products: A# > and C# all derived from
one input. +he company can sell three products at the point of splitDo1 6end of the 4oint
process7 or process them further. +he 4oint production costs during Acto%er were P10#000.
Ail Corporation allocates 4oint costs to the products in proportion to the relative physical
volume of output. Ather information follows:
0f processed further
Gnits produced Gnit sales price at splitDo1 point Gnit sales price
Gnit additional
A 1#000 P /.00 P ".00 P 0.2"
> 2#000 P 2.2" P /.00 P 1.20
C 1#"00 P &.00 P &.2" P 0.:0
Assuming enough demand e(ists# Ail Corp. could sell all the products at the prices a%ove
at either the splitDo1 point or after further processing. 0n order to ma(imiBe its pro.ts# Ail
Corp. should sell what product6s7 at splitDo1 and perform additional processing on which
product6s7*
/
1:.udan Company produces three products A. > and C. Ane machine is used to produce the
products. +he contri%ution margins# sales demands and time on the machine 6in minutes
are as follows:
-emand CM Minutes on Machine
A 100 P 20 10 per unit
> 90 P 19 " per unit
C 1"0 P 2" 10 per unit
+here are 2#/00 minutes availa%le on the machine during the wee,.
@ow many units should %e produced and sold for each product to ma(imiBe the wee,ly
contri%ution*
20.+he income statement of a certain product is reproduced %elow:
ales P 90#000
Costs and e(penses :2#000
Het loss (P12,000)
P&2#300 of the costs and e(penses a%ove are .(ed of which P21#300 is unavoida%le
regardless of whether the product will %e dropped or not.
;hat is the product elimination point*
"