MANAGEMENT ADVISORY SERVICES

QUESTIONS & ANSWERS

COMPILED BY: MA. CRISTINA P. OBESO, CPA
1. The following pertains to Sure Company:
Sales (50,000 units)
Direct Materials and Direct Labor
Factory Overhead
Variable
Fixed
Selling and General Expenses
Variable
Fixed

P1,000,000
300,000
40,000
70,000
10,000
60,000

How much was Sure's break-even point in number of units?

a. 9,848
b. 10,000
c. 18,571

d. 15,700

2. Michael Company began its operations on Jan. 1,2008 and produces a single product that sells
for P10/unit. Michael uses the actual (historical) cost system. In 2008, 100,000 units
were produced and 80,000 units were sold. There was no work-in-process inventory at
Dec. 31, 2008.
Manufacturing costs and selling and administrative expenses for 2008 were as
follows:
Fixed costs
Variable costs
Raw materials
2.00/unit produced
Direct labor
1.25/unit produced
Factory overhead
120,000
0.75/unit produced
Selling and administrative
70,000
1.00/unit produced
What would be Michael's finished goods inventory at Dec. 31, 2008 under absorption
costing method?
a. 80,000
b. 104,000
c. 110,000
d. 210,000
3. Hope Company manufactures Part P for use in its production cycle. The cost per unit for
10,000 units of part P are as follows:
Direct materials
3
Direct labor
15
Variable overhead
6
Fixed overhead
8
32
Hope can buy 10,000 units of Part P at P30 per unit. If Hope buys Part P. the
released facilities could be used to save P45,000 in relevant costs in the manufacture of
Part T. In addition, P5/unit of the fixed overhead applied to Part P would be totally eliminated.
What alternative is more desirable and by what amount is it more desirable?
a.
b.
c.
d.

Manufacture
P10,000
Manufacture
P15,000
Buy
P35,000
none of the choices

4. Bonifacio Company makes and sells a popular product and its average annual sales is 14,000

units at P65 each. Details of its costs are as follows:

Variable manufacturing costs per unit

Variable selling expenses per unit
Annual fixed manufacturing overhead
Annual fixed selling and administrative

37
8
112,000
65,000

Sales are expected to go down to 1,200 units during the next three months due to road
construction. Hence, management plans to close for three months and avoid 60% of all fixed
costs. But additional shut down costs of P10,500 will be incurred.
The company should operate since its expected sales in 3 months exceed
a. 803 units
b. 1,000 units
c. 574 units d. 790 units
5. Right Corporation projects the following transactions for 2009, its first year of operations:
Proceeds from issuance of common stock
1,000,000
Sales on account
2,200,000
Collections of accounts receivable
1,800,000
Cost of goods sold
1,400,000
Disbursements for purchases of merchandise
and expenses
1,200,000
Disbursements for income tax
250,000
Disbursements for purchase of fixed assets
800,000
Depreciation on fixed assets
150,000
Proceeds from borrowings
700,000
Payments on borrowings
80,000
The projected cash balance at Dec. 31, 2009 is
a. 1,170,000
b. 1,220,000
c. 1,370,000

d. 1,500,000

6. KC Corporation is planning to invest P80,000 in a three-year project.KC's expected rate of

return is 10%. The present value of P1 is at 10% for one year is .909, for two years is .826, and
for three years is .751. The cash flow, net of income tax, will be P30,000, for the first year
(present value of P27, 270) and P36,000 for the second year (present value of of P29,736).
Assuming the rate of return is exactly 10%, what will be the cash flow, net of income tax, for
the third year?
a. P22,000
b. P22, 994
c. P30,618
d. 27,270
7. The Dec. 31, 2007 balance sheet of Cyber Inc is presented below. These are only acounts
in Cyber's balance sheet. Amounts indicated by a question mark (?) can be calculated from the
additional information given
Assets
Cash
25,000
Accounts receivable (net)
?
Inventory
?
Property, plant and equipment (net)
294,000
432,000
Liabilities & Stockholders' Equity
Current ratio (at year end)

1.5 to 1

Total liabilities divided by total stockholders'

equity
Inventory turnover (based on ending inventory)
Cost of sales for 2007

What was Cybers' Dec. 31, 2007 inventory?

a. 21,000
b. 30,000
c. 70,000

0.8
10.5 times
735,000

d. 88,000

8. The Heaven Co. makes and sells a single product called Zoom. Overhead costs are applied
to products on a basis of direct labor hours. The following data applies to the company's
activities for the month of November:
Actual fixed overhead cost incurred
161,450
Budgeted direct labor hours (denominator activity)
40,000
Number of zoom completed
21,000
Fixed overhead budget variance - favorable
11,450
Standard direct labor hours allowed per Zoom
2
Standard overhead rate
5
The volume variance for November is:
a. 6,800 unfavorable
c. 7,500 favorable

b. 6,800 favorable
d. cannot be determined

9. The following information pertains to material R which is used by Barney Co.

Annual usage in units
20,000
Working days per year
250
Safety stock in units
800
Normal lead time in working days
30
Units of material R will be required evenly throughout the year. The order point is
a. 1,600
b. 2,400
c. 3,200
d. 3,600

ANSWERS
1. B

Total fixed costs (expenses)

Div. by Contribution margin per unit
Selling price (P1,000,000/50,000)
Variable cost (350,000/50,000)
Break-even point in units

P130,000
20
7

2. B

Total manufacturing costs per unit: P4.00 + P1.20 = P5.20

Finished goods inventory: (20,000 x P5.20) = P104,000

3. C

If part P is purchased:
Decrease in costs (savings):
Variable manufacturing (P10,000 x P24)
Fixed manufacturing eliminated (10,000 x P5)
Relevant costs savings
Total decrease in costs
Increase in cost (purchase price):
(10,000 x P30)
Net cost savings if part P is bought

4. A

240,000
50,000
45,000
335,000
300,000
35,000

Shut down costs:

Fixed costs in 3 months (P177,000 x 1/4)
Less: Avoidable cost (loss)

44,250
28,200
16,050
20
802.5

div. by Contribution margin per unit

Shutdown point
5. A

Cash receipts:
Issuance of common stock
Collection of accounts receivable
Proceeds from borrowings
Cash disbursements
Disbursements for purchases of
merchandise and expenses
Disbursements for income tax
Purchase of fixed assets
Payments on borrowings

6. C
Year 1

Present value of cash flow:

Cash flow
PV Factor
30,000
x
0.909

13
10,000

1,000,000
1,800,000
700,000

3,500,000

1,200,000
250,000
800,000
80,000

2,330,000

27,270.00

Year 2
36,000
x
0.826
Year 3
?
x
0.75
Present value of cash flow:
Investment outlay
Net present value using 10% rate of return

29,736.00
?
?
80,000
0

Total present value for the three years

Less: Present value for 2 years( P27,270+29736)
Present value of cash flow for the third year
Divide by PV factor for the third year
Cash flow for the third year
7. C

Inventory turnover =

Cost of sales =
Inventory, end

80,000
57,006
22,994
0.751
30,618
10.5

10.5 =

735,000
?
Inventory, Dec. 31 = P735,000/10.5 = 70,000
8C

Budget based on standard hours:

Budgeted fixed overhead (P161,450-11,450)
(Fixed overhead rate: 150,000/40,000= 3.75)
Variable overhead 42,000 hrs x (P5.00-3.75)
Standard overhead cost:
42,000 hours x P5.00 =
Volume variance-favorable

9C

150,000
52,500
202,500
210,000
7,500

The order point (reorder point) = lead time usage + safety stock
Lead time usage:
Daily usage (20,000 units / 250 days)
80 units
Normal lead time
x 30
Lead time usage
2,400 units
Add: Safety stock
800
Order point
3,200 units

1,170,000