Saint Columban College

College of Business Education

ACCTG 202 – STRATEGIC COST MANAGEMENT

SHORT-TERM NONROUTINE DECISIONS

MAKE OR BUY
1. 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.
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.

2. 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

3. 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.

4. 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

5. 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.

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6. 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.

7. K Co. uses 10,000 units of a part in its production process. The costs to make a part are: direct
material, $12; direct labor, $25; variable overhead, $13; and applied fixed overhead, $30. K Co.
has received a quote of $55 from a potential supplier for this part. If K Co. buys the part, 70
percent of the applied fixed overhead would continue. K Co. would be better off by
a. $50,000 to manufacture the part. c. $40,000 to buy the part.
b. $150,000 to buy the part. d. $160,000 to manufacture the part.

8. Q Co. produces a part that has the following costs per unit:
Direct material $ 8
Direct labor 3
Variable overhead 1
Fixed overhead 5
Total $17
Z Corp. can provide the part to Q for $19 per unit. Q Co. has determined that 60 percent of its
fixed overhead would continue if it purchased the part. However, if Q no longer produces the part,
it can rent that portion of the plant facilities for $60,000 per year. Q Co. currently produces 10,000
parts per year. Which alternative is preferable and by what margin?
a. Make—$20,000 c. Buy—$10,000
b. Make—$50,000 d. Buy—$40,000

9. Motor Company manufactures 10,000 units of Part M-l each year for use in its production. The
following total costs were reported last year:
$ 20,00
Direct materials.................................. 0
Direct labor........................................ 55,000
Variable manufacturing overhead.......... 45,000
70,00
Fixed manufacturing overhead.............. 0
$190,00
Total manufacturing cost..................... 0
Valve Company has offered to sell Motor 10,000 units of Part M-l for $18 per unit. If Motor accepts
the offer, some of the facilities presently used to manufacture Part M-l could be rented to a third
party at an annual rental of $15,000. Additionally, $4 per unit of the fixed overhead applied to Part
M-l would be totally eliminated. Should Motor Company accept Valve Company's offer, and why?
A) No, because it would be $5,000 cheaper to make the part.
B) Yes, because it would be $10,000 cheaper to buy the part.
C) No, because it would be $15,000 cheaper to make the part.
D) Yes, because it would be $25,000 cheaper to buy the part.

10.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, 1qbut 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

ACCEPT OR REJECT SPECIAL ORDER

11.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

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 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 3.00 50,000
administrative
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

12.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

13.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

14.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

15.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.

16.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

17.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

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 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

18.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

Use the following information for questions 19–21. The Chip Division of Supercomp Corp. produces a
high-quality computer chip. Unit production costs (based on capacity production of 100,000 units per
year) follow:
Direct material $50
Direct labor 20
Overhead (20% variable) 10
Other information:
Sales price 100
SG&A costs (40% variable) 15

19.Assume, for this question only, that the Chip Division is producing and selling at capacity. What
is the minimum selling price that the division would consider on a “special order” of 1,000 chips
on which no variable period costs would be incurred?
a. $100 b. $72 c. $81 d. $94

20.Assume, for this question only, that the Chip Division is operating at a level of 70,000 chips per
year. What is the minimum price that the division would consider on a “special order” of 1,000
chips to be distributed through normal channels?
a. $78 b. $95 c. $100 d. $81

21.Assume, for this question only, that the Chip Division is presently operating at a level of 80,000
chips per year. Accepting a “special order” on 2,000 chips at $88 will
a. increase total corporate profits by $4,000.
b. increase total corporate profits by $20,000.
c. decrease total corporate profits by $14,000.
d. decrease total corporate profits by $24,000.

CONTINUE OR DROP A BUSINESS SEGMENT

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.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.

24.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)

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 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 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.

25.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 annua lly. 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.

26.A company produces and sells three products:

Products
C J P
Sales $200,000 $150,000 $125,000
Separable (product) fixed 60,000 35,000 40,000
costs
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

27.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 28 through 30 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
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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.

28.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

29.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

30.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

31.Down Co. has 3 divisions: R, S, and T. Division R’s income statement shows the following for the year
ended December 31, 2001:
Sales $1,000,000
Cost of goods sold (800,000)
Gross profit $ 200,000
Selling expenses $100,000
Administrative expenses 250,000 (350,000)
Net loss $ (150,000)
Cost of goods sold is 75 percent variable and 25 percent fixed. Of the fixed costs, 60 percent are
avoidable if the division is closed. All of the selling expenses relate to the division and would be
eliminated if Division R were eliminated. Of the administrative expenses, 90 percent are applied from
corporate costs. If Division R were eliminated, Down Co. income would
a. increase by $150,000.
b. decrease by $ 75,000.
c. decrease by $155,000.
d. decrease by $215,000.

32.Schoof Company has two sales territories—North and South. Financial information for the two
territories for 2001 follows:
North South
Sales $980,000 $750,000
Direct costs:
Variable (343,000) (225,000)
Fixed (450,000) (325,000)
Allocated common costs (275,000) (175,000)
Net income (loss) $ (88,000) $ 25,000
Because the company is in a start-up stage, corporate management feels that the North sales
territory is creating too much of a cash drain on the company and it should be eliminated. If North is
discontinued, one sales manager (whose salary is $40,000 per year) will be relocated to the South
territory. By how much would Schoof’s income change if the North territory is eliminated?
a. increase by $88,000 c. decrease by $267,000
b. increase by $48,000 d. decrease by $227,000

33.Rice Corporation currently operates two divisions which had operating results last year as
follows:
West Troy
Division Division
Sales................................................. $600,000 $300,000
Variable costs..................................... 310,000 200,000
Contribution margin............................ 290,000 100,000
Traceable fixed costs........................... 110,000 70,000
Allocated common corporate costs........ 90,000 45,000
Net operating income (loss)................. $ 90,000 ($ 15,000

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 )
Since the Troy Division also sustained an operating loss in the prior year, Rice's president is
considering the elimination of this division. Troy Division's traceable fixed costs could be avoided if
the division were eliminated. The total common corporate costs would be unaffected by the decision.
If the Troy Division had been eliminated at the beginning of last year, Rice Corporation's operating
income for last year would have been:
A) $15,000 higher C) $45,000 lower
B) $30,000 lower D) $60,000 higher

34.The following information relates to next year's projected operating results of the Children's
Division of Grunge Clothing Corporation:
Contribution margin........ $200,000
Fixed expenses............... 500,000
($300,000
Net operating loss........... )
If Children's Division is dropped, half of the fixed costs above can be eliminated. What will be the
effect on Grunge's profit next year if Children's Division is dropped instead of being kept?
A) $50,000 increase C) $250,000 decrease
B) $250,000 increase D) $550,000 increase

SELL AS IS OR PROCESS FURTHER

35.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 processing P100,000 P90,000
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

36.The Freed Company produces three products, X, Y, Z, from a single raw material input. Product Y
can be sold at the splitoff point for total revenues of $50,000, or it can be processed further at a
total cost of $16,000 and then sold for $68,000. Product Y:
A) should be sold at the split-off point, rather than processed further.
B) would increase the company's overall net operating income by $18,000 if processed
further and then sold.
C) would increase the company's overall net operating income by $68,000 if processed
further and then sold.
D) would increase the company's overall net operating income by $2,000 if processed
further and then sold.

37.Pendall Company manufactures products Dee and Eff from a joint process. Product Dee has been
allocated $2,500 of the $20,000 in total joint costs associated with the production of 1,000 units
each of Dee and Eff each year. Dee can be sold at the split-off point for $3 per unit, or it can be
processed further with additional costs of $1,000 and sold for $5 per unit. If Dee is processed
further and sold, the result would be:
A) A break-even situation.
B) An additional gain of $1,000 from further processing.
C) A loss of $1,000 from further processing.
D) An additional gain of $2,000 from further processing.

38.Faustina Chemical Company manufactures three chemicals (TX14, NJ35, and KS63) from a joint
process. The three chemicals are in industrial grade form at the split-off point. They can either be
sold at that point or processed further into premium grade. Costs related to each batch of this
chemical process is as follows:
TX14 NJ35 KS63
$16,00 $12,00 $5,00
Sales value at split-off point................. 0 0 0
$6,00
Allocated joint costs............................ $6,000 $6,000 0
$20,00 $18,00 $9,00
Sales value after further processing...... 0 0 0
$2,00
Cost of further processing.................... $5,000 $3,000 0
For which product(s) above would it be more profitable for Faustina to sell at the split-off point
rather than process further?

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 A) TX14 only C) TX14 and KS63 only
B) KS63 only D) NJ35 and KS63 only

39.Two products, QI and VH, emerge from a joint process. Product QI has been allocated $9,600 of
the total joint costs of $12,000. A total of 9,000 units of product QI are produced from the joint
process. Product QI can be sold at the split-off point for $13 per unit, or it can be processed
further for an additional total cost of $54,000 and then sold for $18 per unit. If product QI is
processed further and sold, what would be the effect on the overall profit of the company
compared with sale in its unprocessed form directly after the split-off point?
A) $18,600 less profit C) $600 more profit
B) $108,000 more profit D) $9,000 less profit

40.Two products, UG and BC, emerge from a joint process. Product UG has been allocated $29,400
of the total joint costs of $42,000. A total of 9,000 units of product UG are produced from the
joint process. Product UG can be sold at the split-off point for $15 per unit, or it can be
processed further for an additional total cost of $63,000 and then sold for $17 per unit. If
product UG is processed further and sold, what would be the effect on the overall profit of the
company compared with sale in its unprocessed form directly after the split-off point?
A) $74,400 less profit C) $45,000 less profit
B) $15,600 less profit D) $90,000 more profit

41.Priddy Corporation processes sugar cane in batches. The company purchases a batch of sugar
cane for $62 from farmers and then crushes the cane in the company's plant at the cost of $18.
Two intermediate products, cane fiber and cane juice, emerge from the crushing process. The
cane fiber can be sold as is for $28 or processed further for $13 to make the end product
industrial fiber that is sold for $36. The cane juice can be sold as is for $43 or processed further
for $23 to make the end product molasses that is sold for $85. Which of the intermediate
products should be processed further?
A) Cane fiber should NOT be processed into industrial fiber; Cane juice should be
processed into molasses
B) Cane fiber should be processed into industrial fiber; Cane juice should NOT be
processed into molasses
C) Cane fiber should be processed into industrial fiber; Cane juice should be processed into
molasses
D) Cane fiber should NOT be processed into industrial fiber; Cane juice should NOT be
processed into molasses

42.Vannorman Corporation processes sugar beets in batches. A batch of sugar beets costs $78 to
buy from farmers and $18 to crush in the company's plant. Two intermediate products, beet fiber
and beet juice, emerge from the crushing process. The beet fiber can be sold as is for $25 or
processed further for $16 to make the end product industrial fiber that is sold for $57. The beet
juice can be sold as is for $39 or processed further for $22 to make the end product refined
sugar that is sold for $84. How much profit (loss) does the company make by processing one
batch of sugar beets into the end products industrial fiber and refined sugar?
A) ($134) B) ($32) C) $7 D) $39

43.The Anthony Company makes two products, X and Y, in a joint process. At the split-off point,
60,000 units of product X and 70,000 units of product Y are available each month. Monthly joint
production costs total $200,000. Product X can be sold at the split-off point for $3.20 per unit.
Product Y can be either sold at the split-off point for $2.60 per unit or it can be processed further
and sold for $5.80 per unit. If product Y is processed further, additional processing costs of $2.30
per unit will be incurred. If product Y is processed further, rather than being sold at the split-off
point, the impact on monthly operating income should be:
A) $137,000 decrease C) $63,000 increase
B) $245,000 increase D) $244,000 increase

44.Dodd Company makes two products from a common input. Joint processing costs up to the split-
off point total $35,000 a year. The company allocates these costs to the joint products on the
basis of their total sales values at the split-off point. Each product may be sold at the split-off
point or processed further. Data concerning these products appear below:
Product X Product Y Total
$35,00
Allocated joint processing costs............ $14,000 $21,000 0
$50,00
Sales value at split-off point................. $20,000 $30,000 0
$40,40
Costs of further processing................... $23,500 $16,900 0
$93,00
Sales value after further processing...... $45,500 $47,500 0
What is the net monetary advantage (disadvantage) of processing Product X beyond the split-off
point?
A) 0 C)
$22,00 B) $8,000

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 $28,00 0 D) $2,000

45.What is the net monetary advantage (disadvantage) of processing Product Y beyond the split-off
point?
A) 0 D) $600
B) $9,600 $39,60
$30,60 C) 0

CONTINUE OR TEMPORARY SHUTDOWN

46.San Antonio Spurs had been experiencing a slowdown in business activities in March and April
and is considering a temporary shutdown during those months. The company's only product has
selling price of P 290 and contribution margin of P 200. Variable marketing expenses, monthly
fixed overhead and fixed expenses are P 400,000, 360,000, 210,000 respectively. Total annual
sales is P 128,760,000 and total sales in March and April is 44,000 units. If the company shuts
down its operation, P200,000 monthly security and safety costs and P 160,000 set up costs will
be incurred. In addition, regular fixed overhead and fixed expenses decrease to 40% and 70%
respectively.

1. How much is the total shutdown costs? P1,142,000

2. Shutdown Point

3. What selling price would make the company indifferent between shutting down and
continuing? P199.975

BID PRICE … MAXIMIZE OR MINIMIZE

47.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

48.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

49.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

50.Boston Shoe Cobblers has been asked to submit a bid on supplying 1,000 pairs of military dress
boots to the Pentagon. The company’s costs per pair of boots are as follows:
Direct material $8
Direct labor 6
Variable overhead 3
Variable selling cost (commission) 3
Fixed overhead (allocated) 2
Fixed selling and administrative cost 1

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Assuming that there would be no commission on this potential sale, the lowest price the firm can bid
is some price greater than
a. $23. b. $20. c. $17. d. $14.

Use the following information for questions 51 and 52.

Robco manufactures and sells FM radios. Information on last year’s operations (sales and production of
the 2000 model) follows:
Sales price per unit $30
Costs per unit:
Direct material 7
Direct labor 4
Overhead (50% variable) 6
Selling costs (40% variable) 10
Production in units 10,000
Sales in units 9,500

51.At this time (April 2001), the 2001 model is in production and it renders the 2000 model radio
obsolete. If the remaining 500 units of the 2000 model radios are to be sold through regular
channels, what is the minimum price the company would accept for the radios?
a. $30 b. $27 c. $18 d. $4

52.Assume that the remaining 2000 model radios can be sold through normal channels or to a
foreign buyer for $6 per unit. If sold through regular channels, the minimum acceptable price will
be
a. $30. b. $33. c. $10. d. $4.

53.R Corp. sells a product for $18 per unit, and the standard cost card for the product shows the
following costs:
Direct material $ 1
Direct labor 2
Overhead (80% fixed) 7
Total $10
R received a special order for 1,000 units of the product. The only additional cost to R would be
foreign import taxes of $1 per unit. If R is able to sell all of the current production domestically,
what would be the minimum sales price that R would consider for this special order?
a. b. c. d.

$18.00 $11.00 $5.40 $19.00

54.Assume that R has sufficient idle capacity to produce the 1,000 units. If R wants to increase its
operating profit by $5,600, what would it charge as a per-unit selling price?
a. b. c. d.

$18.00 $10.00 $11.00 $16.60

OPTIMIZATION OF SCARCE RESOURCE

55.Holden Company produces three products, with costs and selling prices as follows:
Product A Product B Product C
100 100 100
Selling price per unit............ $30 % $20 % $15 %
Variable costs per unit.......... 18 60% 15 75% 6 40%
Contribution margin per unit. $12 40% $5 25% $9 60%

A particular machine is a bottleneck. On that machine, 3 machine hours are required to produce
each unit of Product A, 1 hour is required to produce each unit of Product B, and 2 hours are
required to produce each unit of Product C. In which order should it produce its products?
A) C, A, B D) The order of production doesn't
B) A, C, B matter.
C) B, C, A

56.P Co. has only 25,000 hours of machine time each month to manufacture its two products.
Product X has a contribution margin of $50, and Product Y has a contribution margin of $64.
Product X requires 5 hours of machine time, and Product Y requires 8 hours of machine time. If P
wants to dedicate 80 percent of its machine time to the product that will provide the most
income, P will have a total contribution margin of
a. b. c. $210,000. d.
$250,000. $240,000. $200,000.

57.Handy Combs, Inc. makes and sells brushes and combs. It can sell all of either product it can

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 make. The following data are pertinent to each respective product:
Brushes Combs
Units of output per machine hour 8 20
Selling price per unit $12.00 $4.00
Product cost per unit
Direct material $1.00 $1.20
Direct labor 2.00 0.10
Variable overhead 0.50 0.05
Total fixed overhead is $380,000. The company has 40,000 machine hours available for production.
What sales mix will maximize profits?
a. 320,000 brushes and 0 combs
b. 0 brushes and 800,000 combs
c. 160,000 brushes and 600,000 combs
d. 252,630 brushes and 252,630 combs

58.Wood Carving Corporation manufactures three products. Because of a recent lack of skilled wood
carvers, the corporation has had a shortage of available labor hours. The following per unit data
relates to the three products of the corporation:
Letter Elvis Candle
Openers Statues Holders
Sales price................ $30 $80 $42
Variable costs............ $20 $40 $20
Labor hours required. . 1 6 2
Assume that Wood Carving only has 1,800 labor hours available next month. Also assume that Wood
Carving can only sell 800 units of each product in a given month. What is the maximum amount of
contribution margin that Wood Carving can generate next month given this labor hour shortage?
A) B) C) D)

$12,00 $19,00 $19,60 $19,80

0 0 0 0

59.Banfield Corporation makes three products that use compound W, the current constrained
resource. Data concerning those products appear below:
VP YI WX
$248.0 $230.6 $505.4
Selling price per unit................. 4 6 4
$190.7 $172.1 $388.8
Variable cost per unit................ 1 4 0
Centiliters of compound W......... 3.90 3.80 8.10
Rank the products in order of their current profitability from most profitable to least profitable. In
other words, rank the products in the order in which they should be emphasized.
A) WX, VP, YI C) WX, YI, VP
B) YI, VP, WX D) VP, WX, YI

60.Browning Company makes four products in a single facility. These products have the following
unit product costs:
Product Product Product Product
A B C D
Direct materials........................... $10.60 $7.90 $6.10 $3.80
Direct labor................................ 11.40 16.80 8.70 11.40
Variable manufacturing overhead. . 3.70 4.10 5.40 6.10
Fixed manufacturing overhead...... 24.60 34.40 21.50 19.30
Unit product cost......................... $50.30 $63.20 $41.70 $40.60

Additional data concerning these products are listed below.

Product Product Product Product
A B C D
Grinding minutes per unit............. 2.60 1.80 2.50 1.40
Selling price per unit.................... $69.50 $74.80 $59.50 $59.60
Variable selling cost per unit......... $1.60 $1.50 $2.60 $3.40
Monthly demand in units.............. 4,000 2,000 3,000 4,000

The grinding machines are potentially the constraint in the production facility. A total of 24,500
minutes are available per month on these machines. Direct labor is a variable cost in this company.
How many minutes of grinding machine time would be required to satisfy demand for all four
products?
A) 21,500 B) 27,100 C) 13,000 D) 24,500

61.Which product makes the LEAST profitable use of the grinding machines?
A) Product A C) Product C
B) Product B D) Product D

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62.Which product makes the MOST profitable use of the grinding machines?
A) Product A C) Product C
B) Product B D) Product D

63.Smith Manufacturing has 27,000 labor hours available for producing X and Y. Consider the
following information:
Product Product
X Y
Required labor time per unit (hours) 2 3
Maximum demand (units) 6,000 8,000
Contribution margin per unit $5.00 $6.00
Contribution margin per labor hour $2.50 $2.00
If Smith follows proper managerial accounting practices, which of the following production
schedules should the company set?
Product X Product Y
A. 0 units 8,000
units
B. 1,500 8,000
units units
C. 6,000 0 units
units
D. 6,000 5,000
units units

64.Bush Manufacturing has 31,000 labor hours available for producing M and N. Consider the
following information:
Product M Product
N
Required labor time per unit (hours) 2 3
Maximum demand (units) 6,500 8,000
Contribution margin per unit $5.00 $5.70
Contribution margin per labor hour $2.50 $1.90
If Bush follows proper managerial accounting practices in terms of setting a production schedule,
how much contribution margin would the company expect to generate?
A. B. C. D.

$31,450 $63,100 $66,700 $78,100

. . . .

65.Johnson Company makes two products: Carpet Kleen and Floor Deodorizer. Operating information
from the previous year follows.
Carpet Floor
Kleen Deodorizer
Units produced and sold 5,000 4,000
Machine hours used 5,000 2,000
Sales price per unit $7 $10
Variable cost per unit $4 $8
Fixed costs of $20,000 per year are presently allocated equally between both products. If the
product mix were to change, total fixed costs would remain the same. The contribution margin per
machine hour for Floor Deodorizer is:
A. $0.25. B. $2.00. C. $4.00. D. $5.00.

66.Assuming there is unlimited demand for both products and Johnson has 10,000 machine hours
available, how many units of each product should be produced and sold?
Carpet Floor Deodorizer
Kleen
A. 0 units 0 units
B. 0 units 20,000 units
C. 5,000 units 10,000 units
D. 8,000 units 4,000 units

RETAIN OR REPLACE AN OLD ASSET

67.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. disadvantage.
b. Not replace due to P150,000 c. Replace due to P350,000 advantage.
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 d. Not replace due to P100,000 disadvantage.

68.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

69.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

70.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). 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

71.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

72.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

Use the following information for questions 73–76.

Big City Motors is trying to decide whether it should keep its existing car washing machine or
purchase a new one that has technological advantages (which translate into cost savings) over the
existing machine. Information on each machine follows:
Old machine New machine
Original cost $9,000 $20,000
Accumulated depreciation 5,000 0
Annual cash operating costs 9,000 4,000
Current salvage value of old machine 2,000
Salvage value in 10 years 500 1,000
Remaining life 10 yrs. 10 yrs.

73.The $4,000 of annual operating costs that are common to both the old and the new machine are
an example of a(n)
a. sunk cost. c. future avoidable cost.
b. irrelevant cost. d. opportunity cost.

74.The $9,000 cost of the original machine represents a(n)

a. sunk cost. c. historical relevant cost.
b. future relevant cost. d. opportunity cost.

75.The $20,000 cost of the new machine represents a(n)

a. sunk cost. c. future irrelevant cost.
b. future relevant cost. d. opportunity cost.

76.The estimated $500 salvage value of the existing machine represents a(n)
a. sunk cost.
b. opportunity cost of selling the existing machine now.
c. opportunity cost of keeping the existing machine for 10 years.
d. opportunity cost of keeping the existing machine and buying the new machine.

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77.The capital budgeting committee of the Virginia Iron Works is evaluating the possibility of
replacing its old pipe-bending machine with a more advanced model. Information on the existing
machine and the new model follows:
Existing machine New machine
Original cost $200,000 $400,000
Market value now 80,000
Market value in year 5 0 20,000
Annual cash operating costs 40,000 10,000
Remaining life 5 yrs. 5 yrs.

If the company buys the new machine and disposes of the existing machine, corporate profit over
the five-year life of the new machine will be ____________________ than the profit that would
have been generated had the existing machine been retained for five years.
a. $150,000 lower c. $230,000 lower
b. $170,000 lower d. $150,000 higher

78.Big City Motors is trying to decide whether it should keep its existing car washing machine or
purchase a new one that has technological advantages (which translate into cost savings) over
the existing machine. Information on each machine follows:
Old machine New machine
Original cost $9,000 $20,000
Accumulated depreciation 5,000 0
Annual cash operating costs 9,000 4,000
Current salvage value of old machine 2,000
Salvage value in 10 years 500 1,000
Remaining life 10 yrs. 10 yrs.
The incremental cost to purchase the new machine is
a. $11,000. c. $13,000.
b. $20,000. d. $18,000.

SCRAP OR REWORK
79.Armstrong Co. has 15,000 units in inventory that had a production cost of $3 per unit. These
units cannot be sold through normal channels due to a significant technology change. These units
could be reworked at a total cost of $23,000 and sold for $28,000. Another alternative is to sell
the units to a junk dealer for $8,500. The relevant cost for Armstrong to consider in making its
decision is
a. $45,000 of original product costs.
b. $23,000 for reworking the units.
c. $68,000 for reworking the units.
d. $28,000 for selling the units to the junk dealer.

80.Hodge Inc. has some material that originally cost $74,600. The material has a scrap value of
$57,400 as is, but if reworked at a cost of $1,500, it could be sold for $54,400. What would be
the incremental effect on the company's overall profit of reworking and selling the material
rather than selling it as is as scrap?
A) -$79,100 C) -$4,500
B) -$21,700 D) $52,900

81.Khiem, Inc. manufactures baseball gloves that normally sell for $55 each. Khiem currently has 400
defective gloves in inventory that have $35 of materials, labor, and overhead assigned to each
glove. The defective gloves can either be completely repaired at a cost of $25 per glove or sold as
is at a reduced price of $18 per glove. Khiem would be better off by:
A) $2,000 to sell the gloves at the reduced price.
B) $2,800 to sell the gloves at the reduced price.
C) $4,800 to repair the gloves and sell them at the normal price.
D) $5,200 to sell the gloves at the reduced price.

---END---

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