Problem 1: Multiple Choice Theory Question
1. The cost of a machine purchased last year and used in the production process is called a(n):
a. opportunity cost c. incremental cost b. relevant cost d. sunk cost
2. Which of the following would NOT be relevant in a make-or-buy decision?
a. direct materials c. direct labor b. factory depreciation d. variable overhead
3. Which of the following should not be considered for every option in the decision process?
a. Incremental Revenues c. Future costs
b. Historical costs d. Opportunity costs
4. Which of the following is not a correct use of the term opportunity cost?
a. Opportunity costs are considered period costs rather than inventoriable costs for accounting purposes.
b. Opportunity costs must be considered by managers when making decisions.
c. Opportunity cost plus the incremental future revenues and costs equal the relevant revenues and costs of any alternative when capacity is
constrained.
d. The opportunity cost of holding inventory is the income forgone by tying up money in inventory and not investing it elsewhere.
5. What is always the question to ask to determine if revenues or costs are relevant?
a. What is the time frame for achieving results?
b. What difference will an action make?
c. Who will be responsible?
d. How much will it cost?
6. Differential cost is:
a. Relevant revenue from one alternative minus relevant cost from that alternative
b. Relevant revenue for the company’s product minus cost of goods sold c. Relevant cost from one alternative minus relevant cost from another
alternative
d. Relevant cost of one alternative minus actual cost of another alternative 7. In the decision to replace an old machine with a new machine, which of the
following would be considered a relevant cost?
a. The book value of the old equipment
b. Depreciation expense on the old equipment c. The loss on the disposal of the old equipment d. The current disposal price for the old equipment 8. The decision to drop a product line should be based on:
a. the fact that the product line shows a net loss over several periods
b. the ability of the firm to eliminate some fixed costs as a result of dropping the product
c. whether the fixed costs that can be avoided by dropping the product line are less than the contribution margin that will be lost
d. whether the fixed costs that can be avoided by dropping the product line are greater than the contribution margin lost
9. To maximize total contribution margin, a firm should:
a. promote those products having the highest unit contribution margins b. promote those products having the highest contribution margin ratios c. promote those products having the highest contribution margin per unit of
a constrained resource
d. promote those products having the highest contribution margins and contribution margin ratios
10. Two or more products produced from a common input are termed:
a. common costs c. joint products
b. joint costs d. by-products
11. In a decision to sell or process further beyond the split-off point, a manager should base the decision on
a. the amount of joint product costs allocated
b. the incremental revenue attainable beyond the split-off point c. the incremental cost incurred beyond the split-off point
d. the incremental operating income attainable beyond the split-off point 12. Costs that are always relevant in decision-making are
a. Avoidable costs c. Fixed Costs
b. Sunk Costs d. Variable Costs
13. The managers of a firm are in the process of deciding whether to accept or reject a special offer for one of its products. A cost that is not relevant to their decision is the
a. common fixed overhead that will continue if the special offer is not accepted
b. direct materials
c. fixed overhead that will be avoided if the special offer is accepted d. variable overhead
14. For decision making, a listing of the relevant costs:
a. will help the decision maker concentrate on the pertinent data b. will only include future costs
c. will only include costs that differ among alternatives d. All of these answers are correct.
15. When making decisions:
a. quantitative factors are the most important b. qualitative factors are the most important
c. appropriate weight must be given to both quantitative and qualitative factors
d. both quantitative and qualitative factors are unimportant 16. Opportunity costs are:
a. not used for decision making c. the same as variable costs.
b. the same as historical costs d. relevant to decision making.
17. Freestone Company is considering renting Machine Y to replace Machine X. It is expected that Y will waste less direct materials than does X. If Y is rented, X will be sold on the open market. For this decision, which of the following factors is (are) relevant?
a. Cost of direct materials used c. Both a and b b. Resale value of Machine X d. None of the above
18. In a sell or process further decision, which of the following costs are relevant?
a. A variable production cost incurred prior to the split-off point.
b. An avoidable fixed production cost incurred after the split-off point.
c. Both a and b d. Neither a nor b
19. VIGAN Corporation is contemplating dropping a product because of ongoing losses. Costs that would be relevant in this situation would include variable manufacturing costs as well as:
a. Factory depreciation c. Corporate administrative costs.
b. Avoidable fixed costs d. Unavoidable fixed costs.
20. Which of the following statements regarding relevant costs and sunk costs is incorrect?
a. A serious drawback associated with the incremental approach of relevant cost study is that the incremental approach is cumbersome if more than two alternatives are considered.
b. The type of cost presented to management for an equipment replacement decision should be limited to relevant costs.
c. A sunk cost is a cost which cannot be avoided because it already has been incurred.
d. Relevant costs can be studied using an incremental approach but should not be considered with a full project approach.
Problem 2: Relevant and Irrelevant Costs
Required: Identify whether the cost is a relevant or irrelevant cost. If a cost is a relevant cost, identify whether it is a differential or an opportunity costs, if it is an irrelevant cost, identify whether it is a committed or sunk cost.
a) Rental Fee to be earned as alternative usage of plant space b) Joint production costs incurred
c) Research and development costs incurred in the prior months
d) Cost of special device that is necessary if a special order is accepted e) Cost of obsolete inventory acquired several years ago.
f) Purchase price of the old machine
g) Current Market Value of the old machine
h) Executive Managers’ Salaries
i) Real Property Taxes of the Plant/Factory j) Direct Materials and Direct Labor
k) Additional Fixed selling Costs to be incurred due to increase in sales l) Utilities, Indirect Materials and Indirect Labors
m) Depreciation of the production equipment
n) Cost of Further Processing a product after the joint production process o) Shutdown cost to be incurred if a factory will be temporarily closed Problem 3: Relevant and Irrelevant Costs
A number of costs are listed below that may be relevant in a decision faced by the management of Bulacan Company. Bulacan normally runs at capacity and the old Model Printing machine is the company’s constraint. Management is considering purchasing a new printing machine, and the old one will be sold. The new machine is more efficient and can produce 20% more units than the old one. Demand for Bulacan’s product is greater than what they can supply. If the new machine is purchased, there should be a reduction in maintenance costs however the new machine is very costly and the company will need to borrow money in order to make the purchase. The increase in volume will be large enough to require increases in fixed selling expense, but general administrative expenses will remain unchanged.
Required: For each cost listed determine whether the cost is relevant or irrelevant to the decision to replace the old printing machine.
a) Sales Revenue b) Direct materials c) Direct labor
d) Variable manufacturing overhead e) Rent on the factory building f) Janitorial salaries
g) President’s salary h) Book Value of CY1000 i) Cost of CY1000
j) Cost of CZ4000
k) Interest on money borrowed to make purchase.
l) Shipping costs
m) Market value of old machine CY1000 n) Insurance on factory building
o) Salaries paid to personnel in sales office Problem 4: Make or Buy
Tarlac Corporation is now making a small part that is used in one of its products. The company’s accounting department reports the following per unit costs of producing the part internally:
Direct Materials P15.00
Direct Labor 10.00
Variable Manufacturing Overhead 2.00 Fixed Manufacturing Overhead, traceable 4.00 Fixed Manufacturing Overhead, allocated 5.00
Depreciation of special equipment represents 75% of the traceable fixed
manufacturing overhead cost with supervisory salaries representing the balance.
The special equipment has no resale value and does not wear out through use. The
supervisory salaries could be avoided if production of the part were discontinued.
An outside supplier has offered to sell the part to Tarlac Corporation for P30 each, based on an order of 5,000 parts per year and Tarlac will be incurring an additional P2 per unit for quality inspection of incoming parts.
Required:
1. Should Tarlac accept this offer, or continue to make the parts internally?
2. Assuming that if Tarlac accept the offer it will have enough idle capacity to produce another product that will have a contribution margin of P 15,000, should Tarlac accept the offer or continue to make the parts internally?
Problem 5: Make or Buy
Abra Corporation makes the 1-gallon plastic milk jugs used to package its premium goat’s milk. The company has been approached by a plastic molding company with an offer to produce the milk jugs at a cost of P14.00 per thousand jugs. Abra
Corporation’s president believes the company should continue to produce the jugs and the plant manager has recommended accepting the offer because the cost to produce the jugs is greater than the purchase price. The company’s cost to produce one thousand jugs is as follows:
Direct materials P4.00
Direct labor 2.75
Variable manufacturing overhead 3.50 Fixed manufacturing overhead, traceable 3.00 Fixed manufacturing overhead, common 2.50
Total production cost P15.75
One-half of the traceable fixed manufacturing costs represent supervisory salaries and other costs that can be eliminated if the milk jugs are purchased. The balance of the traceable fixed manufacturing costs is depreciation of manufacturing
equipment that has no resale value. Some of the space being used to produce the milk jugs could be used to store empty jugs, eliminating a rented warehouse and reducing common fixed costs by 20%. The rest of the space could be rented to another company for P 30,000 per year. Abra Corporation produces 10,000,000 milk jugs per year.
Required: Should Abra Corporation make or buy the milk jugs?
Problem 6: Make or Buy
Cebu Corporation makes steel blades for lawn mowers that is heat treats, assembles, and sells. The cost accounting system gives the following data:
Direct Materials P 50,000
Direct Labor P 30,000
Variable Factory Overhead P 60,000 Fixed Factory Overhead P 90,000
Units Produced 100,000 units
Cebu has an opportunity to purchase its 100,000 blades from an outside supplier at a cost of P2.20 per blade. Inspection of the purchased blades will cost an additional P 5,000 in the quality assurance department. Certain leased equipment, which costs P 30,000 and is included in fixed overhead, can be avoided if the blades are
purchased. The released space could be used to make a part that is not purchased, which would net Cebu a savings of P 46,000.
Required: Should Cebu buy the blades from the outside suppler?
Problem 7: Make or Buy
The Tagaytay Company is now producing a sub-assembly that does into its final product. The company reports the following costs of producing the sub-assembly:
Per unit 8,000 units
Direct materials P 3 P 24,000
Direct labor 4 32,000
Variable overhead 4 32,000
Fixed overhead, direct 5 40,000
Fixed overhead, common ( but
allocated) 8 64,000
TOTAL P 24 P192,000
The Tagaytay Company has received an offer from a supplier who will provide 8,000 sub-assemblies a year at a firm price of P21 each. The space now being used to produce the sub-assemblies could be used to produce a new product line that would generate a segment margin of P50,000 net per year:
Required: The president asks your opinion on whether or not Tagaytay, should stop producing the sub-assemblies and start purchasing them from the suppliers.
Problem 8: Accept or Reject
Pampanga Corporation manufactures two pizzas, Hawaiian and Italian. Direct material is the only variable manufacturing cost because the production process is fully automated. The only variable selling cost is a 5% commission on the selling price. All other manufacturing, selling, general and administrative costs are fixed and the production capacity is limited to 235,000 machine hours. Budgeted information for the year:
Hawaiian Italian
Budgeted sales (units) 100,000 90,000 Regular selling price P300 P450 Direct materials P100 P160
Machine time per unit 1 hour 1.4 hours Manufacturing costs, other than direct materials, budgeted for the year are P
1,590,000 and are allocated to Hawaiian and Italian based on units. Selling, general and administrative costs, other than commission, budgeted for the year are P
3,895,000 and are allocated to Hawaiian and Italian based on sales revenue.
Required:
1. Buyer Ltd. has approached Pampanga Corporation and would like to purchase 10,000 customized units of the Hawaiian for P 440 each. Because of capacity concerns, possible opportunity costs, and a one-time setup cost of P 100,000, the manager of sales is willing to cut the commission from the regular 5% to 3% on this special order. The opportunity cost in accepting the special order is:
2. If Pampanga Corporation accepts the special order, its income will increase/
(decrease) by:
Problem 9: Accept or Reject
KFC Corporation has the following cost per unit information about its only product Zinger:
Direct Materials P 40.00
Direct Labor 30.00
Variable Overhead 20.00
Fixed Overhead 10.00*
Other Costs:
Variable Selling Expenses 15.00
Fixed Selling Expenses 50,000
*Based on 10,000 units of normal production
The company is currently operating at 90% of normal capacity. A prospective customer has approach management offering to buy 1,500 units at a special price of P 95.00 instead of the regular price of P130.00. The company will be able to save on variable selling expenses while variable overhead will decrease by 25% but will be required to purchase special equipment amounting to P 10,000 which will have no other use after the order has been served.
Required:
1. What should be the minimum price of the special order for KFC to accept such?
2. What should have been the current operating capacity of in the company in order for the decision to be indifferent?
Problem 10: Accept or Reject
BATANGAS Corporation manufactures and sells a type of knife. The company has never been able to sell all it can produce (which is 50,000 knives, meaning it has enough excess capacity). The cost sheet for the knife appears below:
Direct material P 6.00
Direct labor 7.00
Overhead @ 100% of direct labor 7.00
TOTAL COST P 20.00
Variable overhead is P2.00 per unit and variable selling and administrative expense is P1.00 per unit. The company received an order from a new customer for 5,000 knives at a special price of P 18.00 instead of the regular price of 25.00.
Required:
1. Based on the foregoing information, how much is the net advantage (disadvantage) if the company accepts the special order?
2. What if the company is currently able to sell 48,000 knives to its regular customers, how much is the net advantage (disadvantage) of accepting the special order?
3. What if the company has enough excess capacity but the special order requires a special tool worth P 30,000 that will have no other use after the order has been served, how much is the net advantage (disadvantage) of accepting the special order?
Problem 11: Accept or Reject
The Samar Corporation has an annual plant capacity of 25,000 units. Predicted data on sales and costs are given below:
Sales (20,000 units @ P50) P 1,000,000
Manufacturing costs:
Variable (materials, labor, and overhead) P 40 per unit
Fixed overhead P 30,000
Selling and administrative expenses:
Variable (sales commission – P 1 per unit) P 2 per unit
Fixed P 7,000
A special order has been received from outside for 6,000 units at a selling price of P 45 each. This order will have no effect on regular sales. The usual sales commission on this order will be reduced by one-half. However, special equipment costing P 12,000 will be needed to be acquired by Samar to make the special features that the outside customer is requesting.
Required: Should the company accept the order?
Problem 12: Drop or Maintain
Sophisticates' Corner sells clothing, shoes, and accessories at a suburban location near Boston. Information for the just concluded calendar year follows.
Clothing Shoes Accessori Operating Income 50,000 (20,000) P 25,500
Management is considering closing the shoe operation because of the loss and to permit expanding the space that is currently devoted to accessories sales. A
salaried salesperson in the shoe department who earns P 45,000 will be terminated;
however, all other departmental fixed costs will continue to be incurred.
Sophisticates' Corner will spend P 16,000 on remodeling costs and anticipates that accessories sales will increase by P 70,000. This additional sales revenue is
expected to generate a 35% contribution margin for the firm. Finally, because clothing customers often purchased shoes and feel strongly about "one-stop shopping," clothing sales are expected to fall by 15% if the shoe department is closed.
Required: Determine whether the shoe department should be closed.
Problem 13: Drop or Maintain
Rustic Shoe Company produces and sells shoes to domestic retailers. For one brand of shoe, the company sells 10,000 pairs in the general market and 10,000 pairs to a single customer. The market price is P13 per pair and the price to the single
customer is P10 per pair. The production and selling costs are as follows:
Variable production cost P6.50 per pair
Variable selling costs P1.75 per pair (market sales) P0.75 per pair (single customer)
Fixed production costs P 34,000
Fixed selling costs P 20,000
Capacity 20,000 pairs
The company is considering not selling the 10,000 pairs to the single customer, but instead also selling these pairs in the general marketplace. It is confident that the market can absorb the additional 10,000 pairs. In order to sell to the general
marketplace, the company’s variable selling expenses on the additional pairs will be
the same as they are now. An increase of P 5,000 in fixed selling expenses will also be necessary.
Required:
1. What is the advantage (disadvantage) of discontinuing selling to a single customer?
2. Disregarding capacity, determine the number of units the single customer should order in order for the company’s management’s decision to be indifferent.
Problem 14: Drop or Maintain
Romblon Corporation produces and sells shoes to domestic retailers. For one brand of shoe, the company sells 10,000 pairs in the general market and 10,000 pairs to a single customer. The market price is P13 per pair and the price to the single
customer is P10 per pair. The production and selling costs are as follows:
Variable production cost P6.50 per pair
Variable selling costs P1.75 per pair (market sales) P0.75 per pair (single customer)
Fixed production costs P 34,000
Fixed selling costs P 20,000
Capacity 20,000 pairs
The company is considering not selling the 10,000 pairs to the single customer, but instead, also selling these pairs in the general marketplace. Romblon Corporation is confident that the market can absorb the additional 10,000 pairs. In order to sell to the general marketplace, the company’s variable selling expenses on the additional pairs will be the same as they are now. An increase of P5,000 in fixed selling
expenses will also be necessary.
Required:
1. What is the advantage (disadvantage) of discontinuing selling to a single customer?
2. Disregarding capacity, determine the number of units the single customer should order in order for the company’s management’s decision to be indifferent.
Problem 15: Drop or Maintain
Camarines Company currently operates 3 departments: Bedding, Furniture and Kitchen departments. The income statement of the company for the year ended March 2012 shows the Furniture department is making a loss as follows:
Camarines Company currently operates 3 departments: Bedding, Furniture and Kitchen departments. The income statement of the company for the year ended March 2012 shows the Furniture department is making a loss as follows: