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Incremental Analysis

MODULE 6 INCREMENTAL ANALYSIS Basic concepts Steps in decision making process 5. What is the first step in the decision making process? A. Specify the criteria by which the decision is to be made. B. Consider the strategic issues regarding the decision context. C. Perform an ana ysis in which the re e!ant information is de!e oped and ana y"ed. #. Compare the a ternati!es. $. A ma%or accounting contribution to the manageria decision&making process in e!a uating possib e courses of action is to A. assign responsibi ity for the decision. B. pro!ide re e!ant re!enue and cost data about each course of action. C. determine the amount of money that shou d be spent on a pro%ect. #. decide which actions that the management shou d consider. '. An ana ysis of re e!ant costs and re e!ant re!enues A. Wi enab e the decision maker to assess a decision(s impact on profit B. )s usefu in assessing a !ariety of a ternati!e decisions C. Pro!ides sufficient and comp ete e!idence with which to make a decision #. Answers a. and b. are correct Pitfa s in decision making *. When discussing the pitfa s to be a!oided in decision&making+ four reminders usua y emerge. Which is ,-. one of those reminders? A. )gnore sunk costs. B. Beware of a ocated fixed costs/ identify the a!oidab e costs. C. Pay specia attention to identifying and inc uding opportunity costs. #. #o not o!er ook the time !a ue of money in short&run decisions. *0. Which one of the fo owing is not a common mistake in a decision&making process? A. Considering sunk costs as re e!ant. B. Considering opportunity cost+ an imputed cost+ being re e!ant. C. Considering fixed costs as a!oidab e fixed costs. #. 1niti"ing fixed costs.
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23. -ne of the beha!iora prob ems with re e!ant cost ana ysis is the o!eremphasis on short&term goa s+ which can ead to neg ect of4 A. sa es promotion C. 5uarter y net income resu ts B. expense contro #. ong&term strategic goa s )ncrementa ana ysis 25. )ncrementa ana ysis is the process of identifying the financia data that4 A. do not change under a ternati!e courses of action B. are mixed under a ternati!e courses of action C. change under a ternati!e courses of action #. no correct answer is gi!en 3'. )ncrementa ana ysis is most usefu A. in e!a uating the master budget. B. in choosing between the net present !a ue method and the interna rate of return method. C. in de!e oping re e!ant information for management decisions. #. as a rep acement techni5ue for !ariance ana ysis. 6e e!ant information 2. Predicted future cost and re!enue data that wi differ among a ternati!e courses of action are known as A. re e!ant information C. margina costs B. direct information #. incrementa costs 3. Which of the fo owing is described as data that are pertinent to a decision? A. 5ua itati!e characteristics C. time y information B. accurate information #. re e!ant information 7. Which of the fo owing best describes re e!ant information? A. 8ocused on the past and differs between the a ternati!es under consideration. B. 8ocused on the past and not re ated to the decision under consideration. C. 8ocused on the future and differs between the a ternati!es under consideration. #. 8ocused on the future and not re ated to the decision under consideration. App ication of incrementa ana ysis 9. )ncrementa ana ysis wou d not be appropriate for A. a make or buy decision. B. an a ocation of imited resource decision. C. e imination of an unprofitab e segment.

Incremental Analysis

#. ana ysis of manufacturing !ariances. Irrelevant costs Sunk costs 0. .he kind of cost that can be ignored in a short&term decision making is a:an; A. differentia cost C. sunk cost B. incrementa cost #. %oint cost 9<. Sunk costs are A. Costs that increase due to a higher !o ume of acti!ity or the performance of an additiona acti!ity B. Costs that a company must incur to perform an acti!ity at a gi!en e!e + but wi not be incurred if a company reduces or discontinues the acti!ity C. .he profits that a company forgoes by fo owing a particu ar course of action #. Costs that were incurred prior to making a decision 99. A sunk cost is4 A. a cost incurred in the past and not re e!ant to any future course of action. B. an opportunity cost. C. usefu in ana ysis of a ternati!e courses of action. #. re e!ant to current decision making. *9. Which of the fo owing is east ike y to be a re e!ant item in deciding whether to rep ace an o d machine? A. ac5uisition cost of the o d machine B. out ay to be made for the new machine C. annua sa!ings to be en%oyed on the new machine #. ife of the new machine 1nit costs 22. 1nit costs can mis ead decision makers. Which of the fo owing situations dea ing with unit costs are not expected to resu t in a fau ty ana ysis? A. 1nit costs used in make&or&buy decisions might inc ude costs such as a!oidab e fixed costs. B. =ariab e unit cost direct y !aries with the changes in production units. C. .ota fixed costs increase as more units are produced within the re e!ant range. #. Contribution margin on products that can be manufactured in using the freed capacity is irre e!ant in the decision.
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Relevant costs *7. 6e e!ant costs are A. a fixed and !ariab e costs B. a costs that wou d be incurred within the re e!ant range of production C. past costs that are expected to be different in the future #. anticipated future costs that wi differ among !arious a ternati!es *3. .he >ea th Care #i!ision of Piedmont )nsurance emp oys three c aims processors capab e of processing 5+<<< c aims each. .he di!ision current y processes *2+<<< c aims. .he manager has recent y been approached by two sister di!isions. Auto #i!ision wou d ike the >ea th Care #i!ision to process approximate y 2+<<< c aims. Property #i!ision wou d ike the >ea th Care #i!ision to process approximate y 5+<<< c aims. .he >ea th Care #i!ision wou d be compensated by Auto #i!ision or Property #i!ision for processing these c aims. Assume that these are mutua y exc usi!e a ternati!es. C aims processor sa ary cost is re e!ant for A. Auto #i!ision a ternati!e on y B. Property #i!ision a ternati!e on y C. both Auto #i!ision and Property #i!ision a ternati!es #. neither Auto #i!ision nor Property #i!ision a ternati!es #ifferentia costs 9*. .he difference in cost between or among !arious a ternati!e courses of action appropriate y describes a:an;4 A. differentia cost C. constraint B. ad hoc discount #. scarce resource -pportunity cost *<. An important concept in decision making is described as ?the contribution to income that is forgone by not using a imited resource in its best a ternati!e use.@ .his concept is ca ed A. Aargina cost C. )ncrementa cost B. Cost out ay #. -pportunity cost **. An A. B. C. #. ?opportunity cost@ is the difference in tota costs that resu ts from se ecting one a ternati!e instead of another the profit forgone by se ecting one a ternati!e instead of another a cost that may be sa!ed by not adopting an a ternati!e a cost that may be shifted to the future with itt e or no effect on current operations

*2. .he best characteri"ation of an opportunity cost is that it is A. re e!ant to decision making but is not usua y ref ected in accounting records

Incremental Analysis

B. not re e!ant to decision making and is not usua y ref ected in accounting records C. re e!ant to decision making and is usua y ref ected in accounting records #. not re e!ant to decision making and is usua y ref ected in accounting records *'. .he potentia benefit that may be obtained from fo owing an a ternati!e course of action is ca ed A. opportunity benefit C. re e!ant cost B. opportunity cost #. sunk cost 27. -pportunity cost is the A. cash out ay re5uired to imp ement an a ternati!e. B. difference in tota costs between the a ternati!es. C. maximum a!ai ab e contribution to profit that is gi!en up when using imited resources for another purpose. #. fixed cost a!oided when a product+ department+ or business unit is abandoned. 2'. -pportunity costs are A. Costs that increase due to a higher !o ume of acti!ity or the performance of an additiona acti!ity B. Costs that a company must incur to perform an acti!ity at a gi!en e!e + but wi not be incurred if a company reduces or discontinues the acti!ity C. .he profits that a company forgoes by fo owing a particu ar course of action #. Costs that were incurred prior to making a decision 2$. 1sing opportunity cost to ana y"e the income effects of a gi!en a ternati!e is referred to as A. engineering ana ysis C. account ana ysis B. mixed&cost ana ysis #. differentia ana ysis A!oidab e *5. A fixed cost is re e!ant if it is A. future cost B. sunk

B. ))

#. )) and )))

20. A!oidab e costs are A. Costs that increase due to a higher !o ume of acti!ity or the performance of an additiona acti!ity B. Costs that a company must incur to perform an acti!ity at a gi!en e!e + but wi not be incurred if a company reduces or discontinues the acti!ity C. .he profits that a company forgoes by fo owing a particu ar course of action #. Costs that were incurred prior to making a decision -ut&of&pocket costs 29. Which of the fo owing is a cost that re5uires a future out ay of cash that is re e!ant for future decision&making? A. -pportunity cost C. -ut&of&pocket cost B. 6e e!ant benefits #. )ncrementa re!enue Sensitivity analysis 2<. Sensiti!ity ana ysis is usefu in decision making when4 A. there is a degree of uncertainty about the re e!ant data. B. there is an opportunity cost inc uded in the ana ysis. C. sunk cost is inc uded in the ana ysis. #. the ana ysis is sub%ect to a re!iew by the management. 2*. .o determine the possib e outcome in a decision ana ysis if a key prediction or assumption pro!es to be wrong+ managers wi use4 A. sensiti!ity ana ysis. C. incrementa ana ysis. B. tota ana ysis. #. regression ana ysis. Make or !"y #ecision Bua itati!e Considerations 9'. Which of the fo owing e ements of the !a ue chain shou d be considered when deciding whether to make or buy a component needed for production? A. Aarketing C. Aanufacturing B. #istribution #. a of these choices Make decision 93. Aanufacturing parts interna y by a company causes4 A. the company to be dependent upon supp iers for time y de i!ery of parts B. the 5ua ity of the parts to be under the contro of the company
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C. a!oidab e #. a product cost

*$. Which of the fo owing is :are; a true statement:s; about cost beha!iors in incrementa ana ysis? ). 8ixed costs wi not change between a ternati!es. )). 8ixed costs may change between a ternati!es. ))). =ariab e costs wi a ways change between a ternati!es. A. ) C. )))

Incremental Analysis

C. ower parts costs to be assured #. a companyCs operations to be more efficient than when the parts are purchased from supp iers 33. A company shou d decide to make+ rather than buy+ a part re5uired for their product+ if A. .he company(s production faci ity is at fu capacity B. .he re e!ant cost per&unit of making the part exceeds the per&unit re e!ant costs of purchasing the part C. .he supp ier of the part can produce a higher&5ua ity part #. .he supp ier of the part has 5uestionab e re iabi ity Buy decision 95. )n any make or buy decision confronting a company+ which of the fo owing factors shou d be considered? A. Can the supp ier pro!ide a sufficient 5uantity to meet the companyCs current and future needs? B. #o the supp ierCs items meet product and 5ua ity specifications? C. )s the supp ier re iab e? #. A of the abo!e shou d be considered. 3*. Which of the fo owing 5ua itati!e factors fa!ors the buy choice in a make or buy decision for a part? A. maintaining a ong&term re ationship with supp iers B. 5ua ity contro is critica C. uti i"ation of id e capacity #. part is critica to product 6e e!ant costs Fixed costs 97. Within the context of the make or buy decision+ when are fixed costs re e!ant? A. 8ixed costs are a ways re e!ant B. 8ixed costs are ne!er re e!ant C. 8ixed costs are re e!ant when they differ among a ternati!es #. )t cannot be determined without c ose y examining each particu ar situation 9$. )n a make or buy decision4 A. -n y !ariab e costs are re e!ant. B. 8ixed costs that can be a!oided in the future are re e!ant. C. 8ixed costs that wi continue regard ess of the decision are re e!ant.
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#. -n y con!ersion costs are re e!ant. Opportunity costs 90. )n a make&or&buy decision+ which of the fo owing is true? A. =ariab e costs are the on y re e!ant costs. B. A ocated fixed costs are re e!ant. C. A ternati!e uses of space and machinery are re e!ant. #. Aaking the product is the correct decision when there is id e capacity. 3<. .he opportunity cost of making a component part in a factory with excess capacity for which there is no a ternati!e use is A. the tota manufacturing cost of the component. B. the tota !ariab e cost of the component. C. the fixed manufacturing cost of the component. #. "ero. 37. .he cost of not recei!ing rent from a space because you decide to make the part rather than buying it from an outside supp ier is considered a:an; A. sunk cost C. opportunity cost B. future cost #. fixed cost 3$. )n a make&or&buy decision+ an opportunity cost that shou d be considered is the4 A. income that cou d be generated from id e production space. B. tota costs to produce the item C. !ariab e costs to produce the item #. fixed costs to produce the item #ecision ru e 32. >aribon Company is faced with a make&or&buy decision. >aribon shou d agree to buy the part from a supp ier pro!ided the price is ess than >aribon(s A. tota costs B. !ariab e production costs p us a!oidab e fixed production costs C. tota manufacturing costs #. !ariab e costs '3. A company owns e5uipment that is used to manufacture important parts for its production process. .he company p ans to se the e5uipment for P*<+<<< and to se ect one of the fo owing a ternati!es4 :*; ac5uire new e5uipment for P'<+<<<

Incremental Analysis

:2; purchase the important parts from an outside company at P3 per part. .he company shou d 5uantitati!e y ana y"e the a ternati!es by comparing the cost of manufacture the parts A. P us P'<+<<< to the cost of buying the parts ess P*<+<<<. B. to the cost of buying the parts ess P*<+<<<. C. Dess P*<+<<< to the cost of buying the parts. #. .o the cost of buying the parts. Special or#er #ecision Process 30. )n making a specia order decision+ management shou d4 A. compute a reasonab e sa es price for items not norma y produced. B. consider additiona o!erhead cost. C. consider norma and re e!ant costs. #. A of the abo!e. 52. Which of the fo owing factors shou d be considered in deciding whether to accept a specia order? A. the sa es price of the product or ser!ice B. the production capacity of the company C. the impact on regu ar customers #. a of these choices )rre e!ant cost '9. )n considering a specia order that wi enab e a company to make a use of present y id e capacity+ which of the fo owing costs wou d be irre e!ant. A. Aateria s C. #irect abor B. #epreciation #. =ariab e -> 53. Ei!en the fo owing ist of costs+ which one shou d be ignored in a decision to produce additiona units of product for a factory that is operating at ess than *<<F capacity+ and the additiona business wi not use up the remainder of the p ant capacity? A. #irect materia cost per unit C. 8ixed se ing expenses B. #irect abor cost per hour #. =ariab e se ing expenses 6e e!ant costs Long-run decision 5'. .he sa es price of a product+ in the ong run+ must be enough to co!er what type of costs? A. #esigning costs C. Ser!icing costs
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B. Aarketing costs

#. A of the abo!e

Opportunity costss 5<. An opportunity cost common y associated with a specia order is A. the contribution margin on ost sa es B. the !ariab e costs of the order C. additiona fixed cost that is re ated to the increased output #. any of the abo!e 59. -perating at or near fu capacity wi re5uire a firm considering a specia order to recogni"e the4 A. opportunity cost arising from ost sa es B. !a ue of fu emp oyment C. time !a ue of money #. need for good management #ecision ru e '2. Production of a specia order wi increase gross profit when the additiona re!enue from the specia order is greater than A. .he non!ariab e costs incurred in producing the order. B. .he direct materia and abor costs in producing the order. C. .he fixed costs incurred in producing the order. #. .he margina cost of producing the order. 5*. )f the firm is operating under capacity+ the minimum specia order price shou d be high enough to co!er4 A. a !ariab e costs and incrementa fixed costs associated with the specia order minus foregone contribution margin on regu ar units not produced. B. !ariab e and incrementa fixed costs associated with the specia order and a profit margin. C. imited !ariab e costs associated with the specia order. #. neither !ariab e nor fixed costs associated with the specia order. 5$. Ereen Eiant 8oods has some excess manufacturing capacity that it can ea!e id e+ use to produce its own boxes for fro"en foods+ or use to process another company(s fro"en foods. )t wi be more profitab e for Ereen Eiant to process the competitor(s fro"en foods as ong as the net cost is A. greater than both the cost to buy the boxes and the cost to ea!e the p ant id e. B. ess than the cost to ea!e the p ant id e and greater than the cost to buy the boxes. C. greater than the cost to ea!e the p ant id e and ower than the cost to buy boxes from a

Incremental Analysis

supp ier. #. ess than both the cost to ea!e the p ant id e and the cost to make or buy the boxes. Ainimum acceptab e price With excess capacity 55. )f there is excess capacity+ the minimum acceptab e price for a specia order must co!er A. !ariab e costs associated with the specia order. B. !ariab e and fixed manufacturing costs associated with the specia order. C. !ariab e and incrementa fixed costs associated with the specia order. #. !ariab e costs and incrementa fixed costs associated with the specia order p us the contribution margin usua y earned on regu ar units. At full capacity 57. )f a firm is at fu capacity+ the minimum specia order price must co!er A. !ariab e costs associated with the specia order. B. !ariab e and fixed manufacturing costs associated with the specia order. C. !ariab e and incrementa fixed costs associated with the specia order. #. !ariab e costs and incrementa fixed costs associated with the specia order p us foregone contribution margin on regu ar units not produced. $ro#"ct li%e cycle 35. A product ife cyc e inc udes the phases of A. research and de!e opment and design B. purchasing and production

desired profit. 72. Which of the fo owing is ,-. a cost concept common y used in app ying the cost&p us approach to product pricing? A. .ota cost concept. C. =ariab e cost concept. B. Product cost concept. #. 8ixed cost concept. 79. .he cost&p us pricing formu a that takes into consideration a costs && fixed+ !ariab e+ and manufacturing+ as we as se ing and administrati!e costs && is ca ed the percentage of A. fu costs. C. tota !ariab e costs. B. !ariab e manufacturing costs. #. absorption costs. .arget pricing 39. .he concept of target pricing is emp oyed when4 A. a company wishes to set price in order to capture a predetermined market share. B. a price is pre&set by market conditions. C. a company wishes to meet marketing goa s. #. A of the abo!e. .arget cost approach 7*. )n contrast to the tota product and !ariab e cost concepts used in setting se erCs prices+ the target cost approach assumes that4 A. a markup is added to tota cost. C. a markup is added to !ariab e cost. B. se ing price is set by the marketp ace. #. a markup is added to product cost. Sell as is or process %"rt'er Goint products 7$. .wo or more manufactured products that ha!e significant sa es !a ues and are not uni5ue y identifiab e as indi!idua products unti the sp it&off point are ca ed A. common products. C. co&ming ed products. B. %oint products. #. cooperati!e products. 6e e!ant costs Incremental revenue 92. )ncrementa re!enue is4 A. a difference in costs between two decisions. B. a concession based on competiti!e inf uences. C. additiona re!enue across decision choices from potentia sa es. #. the difference between se ing price and !ariab e costs.
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C. marketing and distribution #. a of the abo!e

$ro#"ct pricin& =ariab e cost approach 7<. Aanagers who often make specia pricing decisions are more ike y to use which of the fo owing cost concepts in their work? A. .ota cost. C. =ariab e cost. B. Product cost. #. 8ixed cost. Cost&p us approach 50. )n using the !ariab e cost concept of app ying the cost&p us approach to product pricing+ what is inc uded in the markup? A. .ota costs p us desired profit. B. #esired profit. C. .ota se ing and administrati!e expenses p us desired profit. #. .ota fixed manufacturing costs+ tota fixed se ing and administrati!e expenses+ and

Incremental Analysis

#. decrease in direct fixed costs. ost to process further 75. Which of the fo owing costs is re e!ant in deciding whether to se %oint products at sp it&off or process them further? A. .he una!oidab e costs of further processing. B. .he additiona costs of further processing. C. .he !ariab e costs of operating the %oint process. #. .he cost of materia s used to make the %oint products. 7'. What are the manufacturing costs incurred beyond the sp it&off point ca ed? A. Separab e costs. C. Se!erance costs. B. Goint costs. #. Common costs. #ecision ru e 73. >ow does a company determine whether to se a product ?as is@ or process it further? A. )f the costs to process further exceed the costs of current production+ the product shou d be so d Has is.@ B. )f the costs to process further exceed the costs of current production+ the product shou d be processed further. C. )f the increase in re!enue from se ing the product after further processing is greater than the additiona costs incurred in further processing+ the company shou d opt for further processing. #. )f the re!enues generated by processing the product further exceed the re!enues from se ing the product ?as is+@ the company shou d process further. (eep or #rop #ecision Strategic considerations 77. .he decision to keep or drop products or ser!ices in!o !es strategic consideration of the4 A. potentia impact on remaining products or ser!ices B. impact on emp oyee mora e C. growth potentia of the firm #. A of the abo!e answers are correct Eoa $'. .he goa in deciding whether to add or drop products+ ser!ices+ or departments is to obtain the greatest A. reduction in tota costs. B. contribution possib e to co!er una!oidab e costs. C. increase in sa es re!enues.
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)rre e!ant cost '<. Which of the fo owing shou d not enter into decision of whether to drop product? A. 1na!oidab e costs B. A!oidab e costs C. 6e!enue that wou d be ost #. ,onfinancia impacts of the decision #ecision ru e $0. As ong as its margina cost is ower than its margina re!enue+ a company shou d A. suspend additiona production and sa es acti!ities. B. perform a cost&benefit ba ance ana ysis before producing and se ing additiona products. C. engage in additiona production and sa es acti!ities. #. examine cost beha!iors and de!e op a cost function to measure the cost of future production. S'ort r"n pro%it )a*i)i+ation 8actors affecting sa es mix $<. Which of the fo owing is an important factor affecting the sa es mix of any company? A. organi"ationa ad!ertising expenditures B. organi"ationa sa es force compensation p an C. product se ing price #. A of the abo!e .o re ax a constraint $9. Which of the fo owing wi re ax a constraint? A. -utsourcing a or part of the bott eneck operation B. Working o!ertime at the bott eneck operation C. 6etraining emp oyees and shifting them from the bott eneck #. A and B+ on y #ecision ru e $7. A product mix decision in!o !es A. )nf uencing the sa es !o ume mix of the products to minimi"e cost. B. )nf uencing the sa es !o ume mix of the products to maximi"e re!enue. C. Producing the maximum amount of items that pro!ide the highest contribution margin. #. Producing the maximum amount of items that carry the owest per&unit cost.

Incremental Analysis

$*. A usefu de!ice for so !ing production prob ems in!o !ing mu tip e products and imited resources is4 A. gross sa es per unit of product C. net profit per unit of product B. contribution per unit of scarce resource #. tota benefit $2. When there is on y one production constraint and excess demand+ it is genera y best to focus production and sa es on the product with the highest4 A. Contribution per unit of scarce resource C. Contribution margin in pesos B. Aargin of Safety #. -perating De!erage 70. When there is one scarce resource+ the product that shou d be produced first is the product with the highest A. contribution margin per unit of the scarce resource. B. sa es price per unit of scarce resource. C. demand. #. contribution margin per unit. $3. 1ranus Company has 2 products that use the same manufacturing faci ities and cannot be subcontracted. Iach product has sufficient orders to uti i"e the entire manufacturing capacity. 8or short&run profit maximi"ation+ 1ranus shou d manufacture the product with the A. Dower tota manufacturing costs for the manufacturing capacity. B. Dower tota !ariab e manufacturing costs for the manufacturing capacity. C. Ereater gross profit per hour of manufacturing capacity. #. Ereater contribution margin per hour of manufacturing capacity. $5. Profit can be maximi"ed by producing products with the highest A. se ing price B. contribution margin C. contribution margin per unit of items that are best se ers #. contribution per unit of the constraining resource $$. A company shou d ad!ertise those products that A. 6e5uire the owest commitment of resources to produce B. >a!e the argest tota contribution margin C. Can be outsourced #. >a!e the argest tota contribution margin after deducting the cost of the ad campaign Pitfa '*. .he ma%or pitfa in the contribution margin approach to pricing is
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A. B. C. #.

its fai ure to recogni"e fixed costs. its fai ure to recogni"e depreciation expense. its inabi ity to contro waste. its inabi ity to recogni"e financing costs of the production in 5uestion.

$ROBLEMS, Incre)ental -#ecre)ental. cost * . 8or the year ended Apri 9<+ 2<<$+ Sa mo Company incurred direct costs of P'<<+<<< based on a particu ar course of action. >ad a different course of action been taken+ direct costs wou d ha!e been P75<+<<<. )n addition+ Sa mo(s fixed costs during the fisca year were P**<+<<<. .he incrementa :decrementa ; cost was4 A. P 3<+<<< C. P *5<+<<< B. P: 3<+<<<; #. P:*5<+<<<; Opport"nity cost 2 . Du"on 8abricators+ )nc. estimates that 7<+<<< specia components wi be used in the manufacture of a specia ty stee window for the who e next year. )ts supp ier 5uoted a price of P7< per component. Du"on prefers to purchase 5+<<< units per month+ but its supp ier cou d not guarantee this de i!ery schedu e. )n order to ensure a!ai abi ity of these components+ Du"on is considering the purchase of a the 7<+<<< units at the beginning of the year. Assuming Du"on can in!est cash at 'F+ the company(s opportunity cost of purchasing a the 7<+<<< units at the beginning of the year is A. P*92+<<< C. P*33+<<< B. P*5<+<<< #. P273+<<< De%ective/o!solete inventory )ncrementa net income 9 . Sieney J Company has 23+<<< defecti!e units of a product that cost P' per unit to manufacture+ and can be so d for P3 per unit. .hese units can be reworked for P2 per unit and so d at their fu price of P*2 each. )f Sieney reworks the defecti!e units+ how much incrementa net income wi resu t? A. P*33+<<< C. P $2+<<< B. P 07+<<< #. P 3'+<<< Ainimum price 3 . Go%i Company manufactures and se 8A radios. )nformation on ast year(s operations :sa es and production of the 2<<7 mode ; fo ows4 Se ing price P9<<

Incremental Analysis

Cost per unit4 #irect materia s $< #irect abor 3< -!erhead :5<F !ariab e; 7< Se ing costs :3<F !ariab e; *<< Production in units *<+<<< Sa es in units 0+5<< At this time :Aay 2<<$;+ the 2<<$ mode is in production and it renders the 2<<7 mode radio obso ete. A foreign firm is wi ing to purchase the obso ete products at a net price of P*3< each. )f the remaining 5<< units of the 2<<7 mode radios are to be so d through regu ar channe s+ what is the minimum price the company wou d accept for the radios? A. P9<< C. P2$< B. P*'< #. P 3< Special or#er 1nit re e!ant cost 5 . =enus Company+ a manufacturer of amps+ budgeted sa es of 3<<+<<< amps at P2< per unit for the year. =ariab e manufacturing costs were budgeted at P' per unit+ and fixed manufacturing costs at P 5 per unit. A specia order offering to buy 3<+<<< amps for P**.5< each was recei!ed by =enus in Apri . =enus has sufficient p ant capacity to manufacture the additiona 5uantity of amps/ howe!er+ the production wou d ha!e to be done by the present work force on an o!ertime&basis at an estimated additiona cost of P*.5< per amp. =enus wi not incur any se ing expenses as a resu t of the specia order. =enus Company wou d ha!e a unit re e!ant cost of A. P '.<< C. P 0.5< B. P*9.<< #. P*3.5<
7

.he specia order re5uires *+<<< ki ograms of powdered ,itrocide+ a so id chemica regu ar y used in the company(s products. .he current stock of ,itrocide is '+<<< ki ograms at a book !a ue of P'.*< per ki ogram. )f the specia order is accepted+ the firm wi be forced to restock powdered ,itrocide ear ier than expected+ at a predicted cost of P'.$< per ki ogram. Without the specia order+ the purchasing manager predicts that the price wi be P'.9<+ when norma restocking takes p ace. Any order of the ,itrocide must be in 5+<<< ki ograms. What is the re e!ant cost of powdered ,itrocide to be inc uded in the specia order? A. P '+$<< C. P*<+9<< B. P '+9<< #. P39+5<< )ncrementa cost ' . Ba agtas J Company expects to incur the fo owing costs at the p anned production e!e of *<+<<< units4 #irect materia s P*<<+<<< #irect abor *2<+<<< =ariab e o!erhead 7<+<<< 8ixed o!erhead 9<+<<< .he se ing price is P5< per unit. .he company current y operates at fu capacity of *<+<<< units. Capacity can be increased to *9+<<< units by operating o!ertime. =ariab e costs increase by P*3 per unit for o!ertime production. 8ixed o!erhead costs remain unchanged when o!ertime operations occur. Ba agtas has recei!ed a specia order from 8 orante+ )nc. who has offered to buy 2+<<< units at P35 each. What is the incrementa cost associated with this specia order? A. P32+<<< C. P9*+<<< B. P'3+<<< #. P72+<<< Ainimum acceptab e price 0 . Brace Co. has considerab e excess manufacturing capacity. A specia %ob order(s cost sheet inc udes the fo owing app ied manufacturing o!erhead costs4 =ariab e costs P57+25< 8ixed costs 35+<<< .he fixed costs inc ude a norma P7+'<< a ocation for in&house design costs+ a though no in& house design wi be done. )nstead+ the specia %ob wi re5uire the use of externa designers costing P*9+$5<. What is the minimum acceptab e price for the %ob? A. P 79+<5< C. P*<*+25< B. P $<+<<< #. P*<'+2<<
*<

Wawa Interprises has the capacity to produce *<+<<< bearings+ but operates at 0<F of capacity. Bearings norma y se for P7< each+ and cost an a!erage of P5< to make+ inc uding a share of the month y fixed costs of P*'<+<<<. ) og Corp has offered to buy *+<<< bearings at P3< each. What is the re e!ant cost per unit? A. P 2< C. P 3< B. P 9< #. P 5<

.ota re e!ant cost $ . )nte ectua Co. recent y recei!ed an order for a product that it does not norma y produce. Since the company has excess production capacity+ management is considering accepting the order. )n ana y"ing the decision+ the assistant contro er is compi ing the re e!ant costs of producing the order.
19

. .he cost to produce 23+<<< units at $<F capacity consists of4

Incremental Analysis

#irect materia s #irect abor 8actory o!erhead+ a fixed Se ing expense :95F !ariab e+ 75F fixed; What unit price wou d the company ha!e to charge to make P22+5<< on a additiona units that wou d be shipped out of the norma market area? A. P 5* C. P 3* B. P 57 #. P 5<
**

P97<+<<< 53<+<<< 20<+<<< 23<+<<< sa e of *+5<<

*9

. Kai a Company(s unit cost of manufacturing and se ing a gi!en item at an acti!ity e!e of *<+<<< units per month are4 Aanufacturing costs #irect materia s P90 #irect abor 7 =ariab e o!erhead ' 8ixed o!erhead 0 Se ing expenses =ariab e 9< 8ixed ** .he company desires to seek an order for 5+<<< units from a foreign customer. .he !ariab e se ing expenses wi be reduced by 3<F+ but the fixed costs for obtaining the order wi be P2<+<<<. #omestic sa es wi not be affected by the order. .he minimum break&e!en price per unit to be considered on this specia sa e is A. P $* C. P 70 B. P $5 #. P '3 . Chrisy Company se s a product for P*' per unit and the standard cost card for the product shows the fo owing costs4 #irect materia s P *.<< #irect abor 2.<< -!erhead :'<F fixed; $.<< .ota P*<.<< Chrisy recei!ed a specia order for *+<<< units of the product. .he on y additiona cost to Chrisy wou d be foreign import taxes of P* per unit. )f Chrisy is ab e to se a of the current production domestica y+ what wou d be the minimum sa es price that Chrisy wou d consider for this specia order? A. P *' C. P *$ B. P *0 #. P **
20

. #e Si !a Co. is a manufacturer of industria components. -ne of their products that is used as a subcomponent in auto manufacturing is KB70. .his product has the fo owing financia structure per unit4 Se ing price P*5< #irect materia s P 2< #irect abor *5 =ariab e manufacturing o!erhead *2 8ixed manufacturing o!erhead 9< =ariab e shipping and hand ing 9 8ixed se ing and administrati!e *< .ota P 0< #e Si !a is operating at fu capacity. )t has recei!ed a specia + one&time+ order for *+<<< KB70 parts. .he next best a ternati!e use of the excess capacity is to produce DB37+ resu ting in a contribution margin of P*<+<<<. .he minimum price that is acceptab e for this one&time specia order is A. P 7< C. P $< B. P '$ #. P*<< . Sy !ania Company. is current y operating at a oss of P*5+<<<. .he sa es manager has recei!ed a specia order for 5+<<< units of product+ which norma y se s for P95 per unit. Costs associated with the product are4 direct materia + P7/ direct abor+ P*</ !ariab e o!erhead+ P9/ app ied fixed o!erhead+ P3/ and !ariab e se ing expenses+ P2. .he specia order wou d a ow the use of a s ight y ower grade of direct materia + thereby owering the price per unit by P*.5< and se ing expenses wou d be decreased by P*. )f Sy !ania wants this specia order to increase the tota net income for the firm to P25+<<<+ what sa es price must be 5uoted for each of the 5+<<< units? A. P*'.5< C. P20.<< B. P23.5< #. P27.5<

*3

*2

Aaximum ost regu ar sa es *5 . Chua Company se s a product for P2< with !ariab e cost of P' per unit. Chua cou d accept a specia order for *+<<< units at P*3. )f Chua accepted the order+ how many units cou d it ose at the regu ar price before the decision become unwise? A. *+<<< units C. 5<< units B. 2<< units #. < units
*7

. 8i amer Company current y se s *+<<< units of product A for P2 each. =ariab e costs are P*.5<. A discount store has offered P*.$< per unit for 3<< units of product A. .he managers be ie!e that if they accept the specia order+ they wi ose some sa es at the regu ar price.

Incremental Analysis

#etermine the number of units they cou d ose before the order become unprofitab e. A. 2<< units. C. 3<< units. B. *7< units. #. 5<< units Iffect on profit of accepting the order *$ . Lou ha!e been approached by a foreign customer who wants to p ace an order for *5+<<< units of Product C at P22.5< a unit. Lou current y se this item for P90 a unit+ and the item has a cost of P20 a unit. 8urther ana ysis re!ea s that you wi not be paying sa es commission of P2.5< a unit on this sa es and its packaging re5uirement wi sa!e you an additiona P*.5< per unit. >owe!er+ the additiona graphics re5uired on this %ob wi cost you P9<+<<<. ,ote a so that fixed costs amounting to P3<<+<<< for the production of 5<+<<< of such products by the firm wi not change. Lou decide to accept this order+ but another customer who buys an a!erage of 2+<<< units for the period wants to pay you P22.5< rather than the regu ar price of P90 a unit. Profit wi A. increase profit by P*0+5<< C. increase profit by P52+5<< B. increase profit by P*7+5<< #. decrease profit by P52+5<<
*'

production of 9<+<<< units. #irect materia s P 3 #irect abor *2 =ariab e manufacturing o!erhead 7 8ixed manufacturing o!erhead ' .he company has the capacity to produce 3<+<<< units. .he product regu ar y se s for P3<. A who esa er has offered to pay P92 a unit for 2+<<< units. )f the firm accepts the specia order the effect on its operating income wou d be a A. P2<+<<< increase C. P3+<<< increase B. P*7+<<< decrease #. P < effect
2*

. .he .hermo Company has recei!ed a specia order for 9<< units of product M for P7 a unit. )t usua y se s for P0.5< a unit with a cost of P$.5< a unit inc usi!e of $5 cents a unit as sa es commission that wi not be paid on this order. .he cost a so inc udes P9 in manufacturing o!erhead+ was two&third of which is for the fair share of depreciation+ rent+ uti ities and super!isorCs sa ary. .he atter(s :super!isorCs sa ary; accounts for one&ha f of this amount. Assuming that excess capacity is a!ai ab e+ and this order re5uires a mo d that costs P*5<+ accepting the order wi increase A. oss by P225 C. gain by P225 B. oss by P9$5 #. gain by P9$5 . A e%ar Company manufactures a product with a unit !ariab e cost of P5< and a unit sa es price of P''. 8ixed manufacturing costs were P23<+<<< when *<+<<< units were produced and so d. .he company has a one&time opportunity to se an additiona 9+<<< units at P$< each in a foreign market. .his specia sa e wou d not affect its present sa es. )f the company has sufficient capacity to produce the additiona units+ acceptance of the specia order wou d affect net income as fo ows4 A. )ncome wou d decrease by P *2+<<<. B. )ncome wou d increase by P *2+<<<. C. )ncome wou d increase by P2*<+<<<. #. )ncome wou d increase by P 7<+<<<. . KC )ndustries manufactures a product with the fo owing costs per unit at the expected
21

. Douderhead Company makes bu &repe ent scent according to a traditiona Western recipe+ which norma y se s at P0< per unit. ,orma production !o ume is *<+<<< ounces per month. A!erage cost is P5< per ounce+ of which P2< is direct materia and P*< is !ariab e con!ersion cost. .his product is seasona . After Gu y+ demand for this product drops to 7+<<< ounces month y. )n ,o!ember+ Earrison Co. offers to buy *+5<< ounces for P7<+<<<. )f Douderhead accepts the order+ it must design a specia abe for Earrison at a cost of P5+<<<. Iach abe wi cost P2.5< to make and app y. Douderhead shou d4 A. accept the order+ at a gain of P7+25< B. re%ect the order+ at a oss of P*'+$5< C. re%ect the order+ at a oss of P29+$5< #. accept the order+ at a gain of P**+25<

*0

Buestion ,os. 7' and 70 are based on the fo owing information4 .he #isk #i!ision of Systems Specia ist Company produces a high 5ua ity computer disks. 1nit production costs :based on capacity production of *<<+<<< units per year; fo ow4 #irect materia s P5< #irect abor 2< -!erhead :2<F !ariab e; *< -ther information4 Sa es price *<< SE J A costs :3<F !ariab e; *5 .he #isk #i!ision is operating at a e!e of $<+<<< chips per year.
22

. What is the minimum price that the di!ision wou d consider on a ?specia order@ of *+<<< disks to be distributed through norma channe s? A. P $2 C. P '* B. P $' #. P 7

2<

Incremental Analysis
29

. Assuming that that the #isk #i!ision is producing and se ing at capacity. What is the minimum se ing price that the di!ision wou d consider on a ?specia order@ of *+<<< chips on which no !ariab e period costs wou d be incurred? A. P*<< C. P 03 B. P $2 #. P 0<

Make or !"y #ecision 6e e!ant costs 23 . 8or the past *2 years+ the GD- Company has produced the sma e ectric motors that fit into its main product ine of denta dri ing e5uipment. As materia s costs ha!e steadi y increased+ the contro er of the GD- Company is re!iewing the decision to continue to make the sma motors and has identified the fo owing facts4 *; .he e5uipment which is used to manufacture the e ectric motors has a book !a ue of P*+5<<+<<<. 2; .he space being occupied now by the e ectric motor manufacturing department cou d be used to e iminate the need for storage space which is present y being rented. 9; Comparab e units can be purchased from an outside supp ier for P50$.5<. 3; 8our of the peop e who work in the e ectric motor manufacturing department wou d be terminated and gi!en eight weeks of separation pay. 5; A P$5<+<<< unsecured note is sti outstanding on the e5uipment that is being used in the manufacturing process. Which of the items abo!e are re e!ant to the decision that the contro er has to make? A. *+ 2+ 3+ and 5 C. *+ 9+ 3+ and 5 B. *+ 9+ and 3 #. 2+ 9+ and 3 6e e!ant cost to make 25 . IDA I ectronics has the fo owing standard costs and other data4 Part Beta Part Neta #irect materia s P 3.<< P'<.<< #irect abor *<.<< 3$.<< 8actory o!erhead 3<.<< 2<.<< 1nit standard cost P53.<< P*3$.<< 1nits needed per year 7+<<< '+<<< Aachine hours per unit 3 2 1nit cost if purchased P5<.<< P*5<.<< )n the past years+ IDA has manufactured a of its re5uired components/ howe!er+ this year on y 9<+<<< hours of otherwise id e machine time can be de!oted to the production of components. According y+ some of the parts must be purchased from outside supp iers. )n producing the parts+ factory o!erhead is app ied at P*< per standard machine hour. 8ixed
22

capacity costs that wi not be affected by any make&or&buy decision represent 7<F of the app ied o!erhead. .he a!ai ab e 9<+<<< machine hours are to be schedu ed so that IDA rea i"es maximum potentia cost sa!ings. .he re e!ant unit production costs that shou d be considered in the decision to schedu e machine time are4 A. P53.<< for Beta and P*3$.<< for Neta C. P*3.<< for Beta and P*2$.<< for Neta B. P5<.<< for Beta and P*5<.<< for Neta #. P9<.<< for Beta and P*95.<< for Neta Aaximum buy price 27 . .he fo owing are a company(s month y unit costs to manufacture and market a particu ar product. Aanufacturing Costs4 #irect materia s P2.<< #irect abor 2.3< =ariab e indirect *.7< 8ixed indirect *.<< Aarketing Costs4 =ariab e 2.5< 8ixed *.5< .he company must decide to continue making the product or buy it from an outside supp ier. .he supp ier has offered to make the product at a e!e of 5ua ity that the company prescribes. 8ixed marketing costs wou d be unaffected+ but !ariab e marketing costs wou d continue at 9<F if the company were to accept the proposa . What is the maximum amount per unit that the company can pay the supp ier without decreasing its operating income? A. P'.5< C. P$.$5 B. P7.$5 #. P5.25
2$

. Sinta Company can make *+<<< units of a necessary component with the fo owing costs4 #irect Aateria s P73+<<< #irect Dabor *7+<<< =ariab e -!erhead '+<<< 8ixed -!erhead ? .he company can purchase the *+<<< units externa y for P*<3+<<<. An ana ysis shows that at this externa price+ the company is indifferent between making or buying the part. Sinta Company cou d a!oid P7+<<< in fixed o!erhead costs if it ac5uires the components externa y. )f cost minimi"ation is the ma%or consideration and the company wou d prefer to buy the components+ what is the maximum externa price that Sinta Company wou d accept to ac5uire

Incremental Analysis

the *+<<< units externa y? A. P*<2+<<<. B. P 03+<<<.


2'

C. P 07+<<<. #. P ''+<<<.

. A medaCs Shop can make *+<<< units of a necessary component with the fo owing costs4 #irect Aateria s P73+<<< #irect Dabor *7+<<< =ariab e -!erhead '+<<< 8ixed -!erhead ? .he company can purchase the *+<<< units externa y for P*<3+<<<. ,one of A meda CompanyCs fixed o!erhead costs can be reduced+ but another product cou d be made that wou d increase profit contribution by P*7+<<< if the components were ac5uired externa y. )f cost minimi"ation is the ma%or consideration and the company wou d prefer to buy the components+ what is the maximum externa price that A meda Company wou d be wi ing to accept to ac5uire the *+<<< units externa y? A. P '7+<<<. C. P 07+<<<. B. P**<+<<<. #. P*<3+<<<.

Iffect of buy decision On fixed overhead cost 9* . SisaCs Shop can make *+<<< units of a necessary component with the fo owing costs4 #irect Aateria s P73+<<< #irect Dabor *7+<<< =ariab e -!erhead '+<<< 8ixed -!erhead ? .he company can purchase the *+<<< units externa y for P*<3+<<<. .he una!oidab e fixed costs are P5+<<< if the units are purchased externa y. An ana ysis shows that at this externa price+ the company is indifferent between making or buying the part. What are the fixed o!erhead costs of making the component? A. P2*+<<<. C. P**+<<<. B. P*7+<<<. #. Cannot be determined. On income 92 . Sy !an Processing Company is considering whether to make 2+<<< units of product Whir which costs P*7 a unit or buy it from outside for P*5 a unit. A further ana ysis shows that if product Whir is outsourced+ fixed costs of P'+<<< attributab e to this product wi be reduced by 25F. )f the product is outsourced+ Sy !an wi A. #ecrease profit by P2+<<< C. )ncrease profit by P2+<<< B. #ecrease profit by P3+<<< #. )ncrease profit by P3+<<<
99

Iffect of make decision 20 . A business is operating at 0<F of capacity and is current y purchasing a part which is being used in its manufacturing operations for P*5 per unit. .he unit cost for the business to make the part is P2<+ inc uding fixed costs+ and P*2+ not inc uding fixed costs. )f 9<+<<< units of the part are norma y purchased during the year but cou d be manufactured using unused capacity+ what wou d be the amount of differentia cost+ increase or decrease+ from making the part rather than purchasing it? A. P*5<+<<< cost increase C. P*5<+<<< cost decrease B. P 0<+<<< cost decrease #. P 0<+<<< cost increase
9<

. A faroCs Aanufacturing Company can make *<< units of a necessary component part with the fo owing costs4 #irect Aateria s P'<+<<< #irect Dabor *9+<<< =ariab e -!erhead 3<+<<< 8ixed -!erhead 2$+<<< )f A faroCs Aanufacturing Company can purchase the component externa y for P*35+<<< and on y P3+<<< of the fixed costs can be a!oided+ what is the correct ?make or buy@ decision? A. Aake and sa!e P'+<<< C. Aake and sa!e P2<+<<< B. Buy and sa!e P'+<<< #. Buy and sa!e P2<+<<<
23

. Sy !an Processing Company is considering whether to make 2+<<< units of product Whir which costs P*7 a unit or buy it from outside for P*5 a unit. A further ana ysis shows that if product Whir is outsourced+ fixed costs of P'+<<< attributab e to this product wi be reduced by 25F. )f Sy !an Processing Company purchased the product Whir + the space cou d be rented out for P7+<<<. )f the product is outsourced+ profit wou d A. decrease+ P2+<<< C. increase+ P2+<<< B. decrease+ P3+<<< #. increase+ P3+<<< . )t costs P35<+<<< to make *5+<<< units of a part in this p ant. .his cost inc udes materia of P0<+<<<+ direct abor of P*2<+<<<+ !ariab e o!erhead of P*5+<<<+ and P225+<<< in fixed o!erhead inc usi!e of P35+<<< in depreciation and common o!erhead a ocation of P*5<+<<<. .he ba ance is for the section super!isorCs sa ary. .he part can be purchased for P2< a unit. )f the part is purchased+ the space re eased can be rented for P75+<<<. )f the part is purchased+ the company wi A. ose P2<+<<< C. gain P2<+<<< B. ose P35+<<< #. gain P35+<<<

93

Incremental Analysis

95

. Dane Co. manufactures ba point pens. Another manufacturer has offered to supp y Dane with the 5+<<< ink cartridges that it needs annua y. .he cost to buy the cartridges wou d be P*5 each. )n producing its own cartridges+ Dane has incurred P*< in fixed costs and P' in !ariab e costs. )f Dane buys the cartridges+ its net income wi 4 A. not change C. increase by P95+<<< B. decrease by P95+<<< #. increase by P25+<<< . .he 6ainbow Company manufactures Part ,o. 30' for use in its production cyc e. .he cost per unit if 2<+<<< units of Part ,o. 30' are manufactured are as fo ows4 #irect materia s P7 #irect abor 9< =ariab e o!erhead *2 8ixed o!erhead app ied *7 .ota unit cost P73 .he 6ee!es Company has offered to se 2<+<<< units of part ,o. 30' to 6ainbow for P7< per unit. 6ainbow wi make the decision to buy the part from 6ee!es if there is a sa!ings of P25+<<< for 6ainbow. )f 6ainbow accepts 6ee!es(s offer+ P0 per unit of the fixed o!erhead app ied wou d be tota y e iminated. 8urthermore+ 6ainbow has determined that the re eased faci ities cou d be used to sa!e re e!ant costs in the manufacture of part ,o. 5$5. )n order to ha!e a sa!ings of P25+<<<+ the amount of the re e!ant costs that wou d be sa!ed by using the re eased faci ities in the manufacture of Part ,o. 5$5 wou d ha!e to be A. P '<+<<< C. P*25+<<< B. P '5+<<< #. P*3<+<<< . Deis Aanufacturing Co. uses *< units of Part ,umber WS$9 each month in the production of computer printer. .he unit cost to manufacture one unit of WS$9 is presented be ow. #irect materia s P *+<<< Aateria s hand ing :2<F of direct materia cost; 2<< #irect abor '+<<< Aanufacturing o!erhead :*5<F of direct abor; *2+<<< .ota manufacturing cost P2*+2<< Aateria hand ing represents the direct !ariab e costs of the 6ecei!ing #epartment that are app ied to direct materia s and purchased components on the basis of their cost. .his is a separate charge in addition to manufacturing o!erhead. Deis( annua manufacturing o!erhead budget is one&third !ariab e and two&thirds fixed. Ear and Company+ one of Deis( re iab e !endors+ has offered to supp y part WS$9 at a unit price of P*5+<<<. )f Deis purchases the WS$9 units from Ear and+ the capacity being used by Deis to manufacture these parts wou d be id e. Shou d Deis decide to purchase the parts from
24

Ear and+ the unit cost of WS$9 wou d A. )ncrease by P3+'<< B. #ecrease by P9+2<<
9'

C. #ecrease by P7+2<< #. )ncrease by P*+'<<

97

. .he 6ura Cooperati!e+ )nc. produces *+<<< units of Part A per month. .he tota manufacturing costs of the part are as fo ows4 #irect materia s P*<+<<< #irect abor 5+<<< =ariab e o!erhead 5+<<< 8ixed o!erhead 9<+<<< .ota manufacturing cost P5<+<<< An outside supp ier has offered to supp y the part at P9< per unit. )t is estimated that 2<F of the fixed o!erhead being assigned to Part A wi no onger be incurred if the company purchases the part from the outside supp ier. )f 6ura Cooperati!e purchases *+<<< units of Part A from the outside supp ier+ its month y operating income wi A. decrease by P 3+<<< C. increase by P *+<<< B. decrease by P2<+<<< #. increase by P2<+<<< . Aigs Corporation current y manufactures a component parts used in the manufacture of !arious hand too s. A stee hand e is used in three different too s. .he budgeted costs per unit based on 2<+<<< units are4 #irect materia P7.<< #irect abor 3.<< =ariab e o!erhead *.<< 8ixed o!erhead 2.<< .ota unit cost P*9.<< Sans Stee + )nc. has offered to supp y 2<+<<< units of the hand e to Aigs for P*2.5< each de i!ered. )f Aigs current y has id e capacity that cannot be used+ accepting the offer wi A. #ecrease the hand e unit cost by P<.5<. B. )ncrease the hand e unit cost by P*.5<. C. #ecrease the hand e unit cost by P*.5<. #. )ncrease the hand e unit cost by P<.5<. . .he Aino ta+ )nc. produces *+<<< units of Part A per month. .he tota manufacturing costs of the part are as fo ows4 #irect materia s P*<+<<< #irect abor 5+<<< =ariab e o!erhead 5+<<<

90

9$

3<

Incremental Analysis

8ixed o!erhead 9<+<<< .ota manufacturing cost P5<+<<< An outside supp ier has offered to supp y the part at P9< per unit. )t is estimated that 2<F of the fixed o!erhead assigned to Part A wi no onger be incurred if the company purchases the part from the outside supp ier. )f Aino ta purchases *+<<< units of Part A from the outside supp ier per month+ then its month y operating income wi A. decrease by P 3+<<< C. increase by P *+<<< B. decrease by P2<+<<< #. increase by P2<+<<<
3*

B ade #i!ision cannot se any additiona products to outside customers. Shou d #ana a ow its Dawn Products #i!ision to purchase the b ades from the outside supp ier+ and why? A. Les+ because buying the b ades wou d sa!e #ana Company P5<<. B. ,o+ because making the b ades wou d sa!e #ana Company P*+5<<. C. Les+ because buying the b ades wou d sa!e #ana Company P2+5<<. #. ,o+ because making the b ades wou d sa!e #ana Company P2+5<<
39

. Bu acan Company manufactures part E for use in the production of its principa product. .he costs per unit for *<+<<< units of part E are as fo ows4 #irect materia s P 9 #irect abor *5 =ariab e o!erhead 7 8ixed o!erhead ' .ota P92 Pampanga Company has offered to se Bu acan *<+<<< units of part E for P9< per unit. )f Bu acan accepts Pampanga(s offer+ the re eased faci ities cou d be used to sa!e P35+<<< in re e!ant costs in the manufacture of part >. )n addition+ P5 per unit of the fixed o!erhead app ied to part E wou d continue. What a ternati!e is more desirab e and by what amount? A. B. C. #. A ternati!e Aanufacture Aanufacture Buy Buy Amount P*<+<<< P*5+<<< P*5+<<< P*<+<<< . B ade #i!ision of #ana Company produces hardened stee b ades. -ne&third of the B ades #i!ision(s output is so d to the Dawn Products #i!ision of #ana/ the remainder is so d to outside customers. .he B ade #i!ision(s estimated sa es and standard costs data for the fisca year ending Gune 9< are as fo ows4 Dawn Products -utsiders Sa es P*5+<<< P3<+<<< =ariab e costs :*<+<<<; :2<+<<<; 8ixed costs :9+<<<; :7+<<<; Eross margin P 2+<<< *3+<<< 1nit sa es *<+<<< 2<+<<< .he Dawn Products #i!ision has an opportunity to purchase *<+<<< identica 5ua ity b ades from an outside supp ier at a cost of P*.25 per unit on a continuing basis. Assume that the
25

. .he Conne Company uses 5+<<< units of Part 5<* each year. .he cost of manufacturing one unit Part 5<* at this !o ume is as fo ows4 #irect materia s P2.5< #irect abor 9.5< =ariab e o!erhead *.5< 8ixed o!erhead *.<< .ota P'.5< An outside supp ier has offered to se Conne un imited 5uantities of Part 5<* at a unit cost of P$.$5. )f Conne accepts this offer+ it can e iminate 5< percent of the fixed costs assigned to part 5<*. 8urthermore+ the space de!oted to the manufacture of Part 5<* wou d be rented to another company for P7+<<< per year. )f Conne accepts the offer of the outside supp ier+ annua profits wi A. )ncrease by P*9+5<< C. )ncrease by P $+25< B. )ncrease by P**+<<< #. )ncrease by P *+25<

32

Point of indifference & 1nits 33 . Aars )ndustries is a mu ti&product company that current y manufactures 9<+<<< units of Part BS32 each month for use in the production of its main product. .he faci ities now being used to produce Part BS32 ha!e fixed month y cost of P*5<+<<< and a capacity to produce '3+<<< units per month. )f Aars were to buy Part BS32 from an outside supp ier+ the faci ities wou d be id e+ but 7< percent of its fixed costs wou d not continue. .he !ariab e production costs of Part BS32 are P** per unit. )f Aars )ndustries is ab e to obtain Part BS32 from an outside supp ier at a unit purchase price of P*2.'$5+ the month y usage at which it wi be indifferent between purchasing and making Part BS32 is A. 9<+<<< units C. '<+<<< units B. 92+<<< units #. 3'+<<< units Point of indifference & price 35 . Ca ero Aanufacturing Company can make *<< units of a necessary component part with the fo owing costs4

Incremental Analysis

#irect Aateria s P'<+<<< #irect Dabor *9+<<< =ariab e -!erhead 3<+<<< 8ixed -!erhead 2$+<<< )f Ca ero Aanufacturing Company purchases the component externa y+ P2<+<<< of the fixed costs can be a!oided. At what externa price for the *<< units is the company indifferent between making or buying? A. P*7<+<<<. C. P*59+<<<. B. P**9+<<<. #. P*99+<<<. $ro%it )a*i)i+ation Point of indifference 37 . #ipsum Soft #rinks makes three products4 iced tea+ soda+ and emonade. .he fo owing data are a!ai ab e4 )ced .ea Soda Demonade Sa es price per unit P0.<< P7.<< P5.<< =ariab e cost per unit 9.<< *.5< *.<< Contribution margin per unit P7.<< P3.5< P3.<< #ipsum is experiencing a bott eneck in one of its processes that affects each product as fo ows4 )ced .ea Soda Demonade Bott eneck process hours per unit 9 9 3 What price for emonade wou d e5uate its profitabi ity to that of soda? A. P'.<<. C. P7.<<. B. P$.<<. #. P5.5<. -ptima mix 3$ . Product A se s for P*2 per unit and its !ariab e cost per unit is P*<. Product B se s for P*5 per unit and its !ariab e cost per unit is P*2. .he p ant capacity is 95<+<<< machine hours and both products re5uire one machine hour to manufacturer. Which of the fo owing wi pro!ide the best sa es mix of Product A and Product B assuming the market imitation of Product A is 2<<+<<< units and the market imitation of Product B is 25<+<<< units? A. 25<+<<< units of Product A+ *<<+<<< units of Product B B. 5<+<<< units of Product A+ 9<<+<<< units of Product B C. *<<+<<< units of Product A+ 25<+<<< units of Product B #. *5<+<<< units of Product A+ 2<<+<<< units of Product B
3'

determined as fo ows4 Product M Product L 6e!enue P*9< P'< =ariab e costs $< P9' Contribution margin P 7< P32 .ota demand for M is *7+<<< units and for L is '+<<< units. Aachine hour is a scarce resource. 32+<<< machine hours are a!ai ab e during the year. Product M re5uires 7 machine hours per unit whi e product L re5uires 9 machine hours per unit. >ow many units of M and L shou d >ingis Corporation produce? A. B. C. #. Product M *7+<<< '+<<< $+<<< 9+<<< Product L "ero 3+<<< "ero '+<<<
30

. Aary Aanufacturing has assemb ed the fo owing data pertaining to two popu ar products. B ender I ectric mixer #irect materia s P 7 P** #irect abor 3 0 8actory o!erhead O P*7 per hour *7 92 Cost if purchased from an outside supp ier 2< 9' Annua demand :units; 2<+<<< 2'+<<< Past experience has shown that the fixed manufacturing o!erhead component inc uded in the cost per machine hour a!erages P*<. Aary has a po icy of fi ing a sa es orders+ e!en if it means purchasing units from outside supp iers. )f 5<+<<< machine hours are a!ai ab e+ and Aary Aanufacturing desires to fo ow an optima strategy+ it shou d A. produce 25+<<< e ectric mixers+ and purchase a other units as needed B. produce 2<+<<< b enders and *5+<<< e ectric mixers+ and purchase a other units as needed C. produce 2<+<<< b enders and purchase a other units as needed #. produce 2'+<<< e ectric mixers and purchase a other units as needed

. .he >ingis Corporation manufactures two products4 M and L. Contribution margin per unit is
26

#ecision 5< . A company can se a the units it can produce of either Product A or Product B but not both. Product A has a unit contribution margin of P97 and takes two machine hours to make and Product B has a unit contribution margin of P35 and takes three machine hours to make. )f there are *+<<< machine hours a!ai ab e to manufacture a product+ income wi be A. P9+<<< more if Product A is made. C. P9+<<< ess if Product A is made. B. P9+<<< ess if Product B is made. #. the same if either product is made.

Incremental Analysis

51

. The Baco Company produces three products with the o!!owin" costs and se!!in" prices#
A B C Se ing price per unit P*7 P2* P2* =ariab e cost per unit $ ** *9 Contribution margin per unit P 0 P*< P ' #irect abor hours per unit *.< *.5 2.< Aachine hours per unit 3.5 2.< 2.5 )n what order shou d the three products be produced if either the direct abor&hours or the machine hours are the company(s production constraint? A. B. C. #. #irect abor hours A+ B+ C B+ C+ A B+ C+ A A+ B+ C Aachine hours B+ C+ A B. C. A A+ C+ B A+ C+ B

C. 7+<<< units of P astic and manufacturing the remaining bearings. #. 5+<<< units of Aeta and manufacturing the remaining bearings.
59

52

. Scarce Company has been producing two types of bearings+ P astic and Aeta + for its own use in the production of main products. .he data regarding these two bearings fo ow4 P astic Aeta Aachine hours re5uired per unit 9.< 3.5 Standard cost per unit Prime costs P '.<< P 0.<< =ariab e o!erheadP 9.<< 3.<< 8ixed o!erheadPP 3.5< 7.$5 .ota P*5.5< P*0.$5 P=ariab e manufacturing o!erhead is app ied on the basis of direct abor hours. PP8ixed manufacturing o!erhead is app ied on the basis of machine hours. Scarce(s annua re5uirements for these bearings is $+<<< units of P astic and **+<<< units of Aeta . 6ecent y+ Scarce(s management decided to de!ote additiona machine hours to other product ines resu ting to on y 3'+<<< machine hours per year that can be dedicated to the production of the bearings. An outside company has offered to se Scarce the annua supp y of the bearings at prices of P*5.5< for P astic and P*$.5< for Aeta . Scarce wants to schedu e the otherwise id e 3'+<<< machine hours to produce bearings so that the company can minimi"e its costs :maximi"e its net benefits;. Scarce Company wi maximi"e its net benefits by purchasisng A. $+<<< units of P astic and manufacturing the remaining bearings. B. **+<<< units of Aeta and manufacturing $+<<< units of P astic.
27

. >)D- Company manufactures e ectric carpentry too s. .he production department had met a production re5uirements for the current month and has an opportunity to produce additiona units of product with its excess capacity. 1nit se ing prices and unit costs for three different dri mode s are as fo ows4 >ome Aode #e uxe Aode Pro Aode Se ing price P5' P75 P'< #irect materia *7 2< *0 #irect abor :P*< per hour; *< *5 2< =ariab e o!erhead ' *2 *7 8ixed o!erhead *7 5 *5 =ariab e o!erhead is app ied on the basis of direct& abor pesos+ whi e fixed o!erhead is app ied on the basis of machine hours. .here is sufficient demand for the additiona production of any mode in the product ine. )f it has excess machine capacity but a imited amount of abor time+ to which product or products shou d >)D- Company de!ote its excess production? A. >ome mode C. #e uxe mode B. Pro Aode #. I5ua y . Product A se s for P*2 per unit and its !ariab e cost per unit is P*<. Product B se s for P*5 per unit and its !ariab e cost per unit is P*2. .he p ant capacity is 95<+<<< machine hours and Product A re5uires 3' minutes to comp ete whi e Product B re5uires $5 minutes. Which of the fo owing wi pro!ide the best sa es mix of Product A and Product B assuming the market imitation of Product A is 2<<+<<< units and the market imitation of Product B is 25<+<<< units? A. 37+'$5 units of Product A+ 25<+<<< units of Product B B. 2<<+<<< units of Product A+ *52+<<< units of Product B C. *52+<<< units of Product A+ 2<<+<<< units of Product B #. *<<+<<< units of Product A+ 25<+<<< units of Product B . #imasa ang Company has on y 25+<<< hours of machine time each month to manufacture its two products. Product M has a contribution margin of P5< and Product L has a contribution margin of P73. Product M re5uires 5 machine hours and Product L+ ' hours. )f #imasa ang wants to dedicate '<F of its machine time to the product that wi pro!ide the most income+ it wi ha!e a tota contribution margin of A. P25<+<<< C. P2*<+<<< B. P23<+<<< #. P2<<+<<<

53

55

Sell as is or process %"rt'er

Incremental Analysis

Ainimum sa es 57 . Snow C ean Corporation produces c eaning compounds and so utions for industria and househo d use. Whi e most of its products are processed independent y+ a few are re ated. Erit 99$+ a coarse c eaning powder with many industria uses+ costs P*7 a pound to make and se s for P2< a pound. A sma portion of the annua production of this product is retained for further processing in the Aixing #epartment+ where it is combined with se!era other ingredients to form a paste+ which is marketed as a si !er po ish se ing for P3< per %ar. .his further processing re5uires Q pound of Erit 99$ per %ar. Costs of other ingredients+ abor+ and !ariab e o!erhead associated with this further processing amount to P25 per %ar. =ariab e se ing costs are P9 per %ar. )f the decision were made to cease production of the si !er po ish+ P57+<<< of Aixing #epartment fixed costs cou d be a!oided. Snow C ean has imited production capacity for Erit 99$+ but un imited demand for the c eaning powder. What is the minimum number of %ars of si !er po ish that wou d ha!e to be so d to %ustify further processing of Erit 99$. A. '+<<< C. $+<<< B. 5+7<< #. 3+77$ #ecision 5$ . Bea Company is starting business and is unsure of whether to se its product assemb ed or unassemb ed. .he unit cost of the unassemb ed product is P3< and Bea Company wou d se it for P0<. .he cost to assemb e the product is estimated at P*' per unit and Bea Company be ie!es the market wou d support a price of P**7 on the assemb ed unit. What is the correct decision using the se or process further decision ru e? A. Se before assemb y+ the company wi be better off by P*' per unit. B. Se before assemb y+ the company wi be better off by P27 per unit. C. Process further+ the company wi be better off by P27 per unit. #. Process further+ the company wi be better off by P' per unit.
5'

P95<+<<<. Which of the fo owing answers is correct? A. Se now B. 8inish the product because profits wi increase by P25+<<< C. 8inish the product because profits wi increase by P*2+5<< #. 8inish the product because profits wi increase by P*<+<<< Iffect of decision 7< . -ttawa Corporation produces two products from a %oint process. )nformation about the two %oint products fo ows4 Product M Product L Anticipated production 2+<<< bs 3+<<< bs Se ing price per pound at sp it&off P9< P*7 Additiona processing costsRpound after sp it&off P*5 P9< :a !ariab e; Se ing priceRpound after further processing P3< P5< .he %oint cost is P'5+<<<. -ttawa current y se s both products at the sp it&off point. )f -ttawa makes decision which maximi"es profit+ its profit wi increase by A. P*7+<<< C. P 3+<<< B. P5<+<<< #. P*<+<<<
7*

. .he cost to manufacture an unfinished unit is P3< :P9< !ariab e and P*< fixed;. .he se ing price per unit is P5<. .he company has unused production capacity and has determined that units cou d be finished and so d for P75 with an increase in !ariab e costs of 3<F. What is the additiona net income per unit to be gained by finishing the unit? A. P 9 C. P*< B. P*5 #. P*2

. Sa es of 25+<<< units at P$.2< per unit are made month y. .he unit cost is P5.0<. )ncrementa costs of P*.95 per unit to further process the units wi resu t in the 25+<<< units being so d for P'.$5 each. Which course of action shou d the company take? A. Commit its resources to a different product B. Se the units at the current stage of comp etion C. #o further processing and se the units at P'.$5 #. #o further processing on on y one&ha f of the units . Aaron Company produces a product that can be so d for P25<+<<< at an intermediate stage. )f Aaron finishes the product+ they wi incur P$5+<<< of additiona materia costs and another P*5+<<< in abor and o!erhead costs. When finished+ Aaron wi be ab e to se the product for
28

.ota processing cost


62

. $atador $anu acturin" schedu!es a wee%!y production o 15&000 units o 'roduct $ and 30&000 units o ( or which '800&000 common )aria*!e costs are incurred. These two products can *e so!d as is or processed urther. +urther processin" o either product does not de!ay the production o su*se,uent *atches o the -oint products. Be!ow are some o the in ormation#
1nit se ing price without further processing 1nit se ing price with further processing .ota separate week y !ariab e costs of further processing A , P25 P*0 P9* P29 P*<<+<<< P**<+<<<

50

Incremental Analysis

.o maximi"e Aatador(s manufacturing contribution margin+ the tota separate !ariab e costs of further processing that shou d be incurred each week are A. P*<5+<<< C. P**<+<<< B. P*<<+<<< #. P2*<+<<< (eep or #rop #ecision Ana ysis 79 . A company is deciding whether or not to e iminate a segment of its business. .he segment generates tota sa es of P*<3+<<<+ its direct expenses are P22+<<<+ and its indirect expenses are P27+<<<. )ts cost of goods so d is P73+<<<. Six thousand pesos of the direct expenses and P'+<<< of its indirect expenses are a!oidab e expenses. Which of the fo owing is not true? A. .his segment has a net oss of P'+<<<. B. .his segmentCs re!enue is greater than its a!oidab e costs. C. .his segment is a good candidate for e imination. #. .his segmentCs a!oidab e costs are greater than una!oidab e costs. Iffect of drop decision 73 . Banahaw Company p ans to discontinue a department that has a contribution margin of P23<+<<< and P3'<+<<< in fixed costs. -f the fixed costs+ P2*<+<<< can be a!oided. .he effect of this discontinuance on Banahaw(s o!era net operating income wou d be a:an; A. decrease of P9<+<<< C. increase of P9<+<<< B. decrease of P*<+<<< #. increase of P*<+<<<
75

S'"t#o0n point 7$ . Bu usan Company norma y produces and se s 9<+<<< units of I*3 each month. I*3 is a sma e ectrica re ay used in the automoti!e industry as a component part in !arious products. .he se ing price is P22 per unit+ !ariab e costs are P*3 per unit+ fixed manufacturing o!erhead costs tota P*5<+<<< per month+ and fixed se ing costs tota P9<+<<< per month. Imp oyment&contract strikes in the companies that purchase the bu k of the I*3 ha!e caused Bu usan Company(s sa es to temporari y drop to on y 0+<<< units per month. Bu usan Company estimates that the strikes wi ast for about two months+ after which time sa es of I*3 shou d return to norma . #ue to the current ow e!e of sa es+ howe!er+ Bu usan Company is thinking about c osing down its own p ant during the two months that the strikes are on. )f Bu usan Company does c ose down its p ant+ it is estimated that fixed manufacturing o!erhead costs can be reduced to P*<5+<<< per month and that fixed se ing costs can be reduced by *<F. Start&up costs at the end of the shutdown period wou d tota P'+<<<. Since Bu usan Company uses %ust&in&time production method+ no in!entories are on hand. At what e!e of unit sa es for the two&month period shou d Bu usan Company be indifferent between temporari y c osing the p ant or keeping it open? A. **+<<< C. *<+<<< B. 23+*25 #. '+<<< E1"ip)ent replace)ent 7' . A,D Company has an opportunity to ac5uire a new machine to rep ace one of its present machines. .he new machine wou d cost P0<+<<<+ ha!e a 5&year ife and no estimated sa !age !a ue. =ariab e operating costs wou d be P*<<+<<< per year. .he present machine has a book !a ue of P5<+<<< and a remaining ife of 5 years. )ts disposa !a ue now is P5+<<<+ but it wou d be "ero after 5 years. =ariab e operating costs wou d be P*25+<<< per year. )gnore income taxes. Considering the 5 years in tota + what wou d be the difference in profit before income taxes by ac5uiring the new machine as opposed to retaining the present one? A. P*<+<<< decrease C. P95+<<< increase B. P*5+<<< decrease #. P3<+<<< increase Lease 70 . #arren Co. is considering disposing an e5uipment that costs P5<+<<< and has P3<+<<< of accumu ated depreciation to date. #arren Co. can se the e5uipment through a broker for P25+<<< ess 5F commission. A ternati!e y+ Ainton Co. has offered to ease the e5uipment for fi!e years for a tota of P3'+$5<. #arren wi incur repair+ insurance+ and property tax expenses estimated at P*<+<<<. At ease&end+ the e5uipment is expected to ha!e no residua !a ue. .he net differentia income from the ease a ternati!e is4
29

. Aina Co. mines three products. Eo d -re se s for P*+<<<+<<< per ton+ !ariab e costs are P7<<+<<< per ton+ and fixed mining costs are P7+<<<+<<<. .he segment margin for 2<<$ was P*+2<<+<<<. .he management of Aina Co. was considering dropping the mining of Eo d -re. -n y one&ha f of the fixed expenses are direct and wou d be e iminated if the segment was dropped. )f Eo d -re were dropped+ net income for Aina Co. wou d A. )ncrease by P2+<<<+<<< C. #ecrease by P2+<<<+<<< B. )ncrease by P*+2<<+<<< #. #ecrease by P*+2<<+<<< . Agimat Company p ans to discontinue a segment with a P92+<<< segment margin. Common expenses a ocated to the segment amounted to P35+<<<+ of which P2<+<<< cannot be e iminated if the segment were c osed. .he effect of c osing down the segment on Agimat Company(s before tax profit wou d be A. P*2+<<< decrease C. P*2+<<< increase B. P $+<<< decrease #. P $+<<< increase

77

Incremental Analysis

A. P*5+<<<. B. P 5+<<<.

C. P25+<<<. #. P*2+5<<.

$9

Co)pre'ensive Buestions $< through $3 are based on the fo owing information4 Adrena Company has a sing e product ca ed a CA#. .he company norma y produces and se s 7<+<<< CA#S each year at a se ing price of P92 per unit. .he company(s unit costs at this e!e of acti!ity are gi!en be ow4 #irect materia s P*<.<< #irect abor 3.5< =ariab e manufacturing o!erhead 2.9< 8ixed manufacturing o!erhead 5.<< =ariab e se ing expenses *.2< 8ixed se ing expenses 9.5< .ota cost per unit P27.5<
$<

. #ue to a strike in its supp ier(s p ant+ Adrena Company is unab e to purchase more materia for the production of CA#S. .he strike is expected to ast for two months. Adrena Company has enough materia on hand to continue to operate at 9<F of norma e!e s for the two months. )f the p ant were c osed+ fixed o!erhead costs wou d continue at 7<F of their norma e!e during the two&month period/ the fixed se ing costs wou d be reduced by 2<F whi e the p ant was c osed. >ow much is the ad!antage or disad!antage of c osing the p ant for the two&month period? A. #isad!antage+ P*33+<<< C. #isad!antage+ P*5+<<< B. Ad!antage+ P*33+<<< #. Ad!antage+ P*5+<<< . An outside manufacturer has offered to produce CA#S for Adrena Company and to ship them direct y to Adrena (s customers. )f Adrena Company accepts this offer+ the faci ities that it uses to produce CA#S wou d be id e/ howe!er+ fixed o!erhead costs wou d be reduced by $5F of their present e!e . Since the outside manufacturer wou d pay for a the costs of shipping+ the !ariab e se ing costs wou d be on y two&thirds of their present amount. What is the unit cost figure that is re e!ant for comparison to whate!er 5uoted price is recei!ed from the outside manufacturer? A. P2<.05 C. P2<.55 B. P2*.95 #. P*7.'<

$3

. Assume that Adrena Company has sufficient capacity to produce 0<+<<< CA#S each year without any increase in fixed manufacturing o!erhead costs. .he company cou d increase its sa es by 25F abo!e the present 7<+<<< units each year if it were wi ing to increase the fixed se ing expenses by P'<+<<<. .he increase in income if the production is increased by 25F is A. P*9<+<<< C. P 25+<<< B. P*<'+999 #. P 2<+'<< . Assume again that Adrena Company has sufficient capacity to produce 0<+<<< CA#S each year. A customer in a foreign market wants to purchase 2<+<<< CA#S. )mport duties on the CA#S wou d be P*.$< per unit+ and costs for permits and icenses wou d be P0+<<<. .he on y se ing costs that wou d be associated with the order wou d be P9.2< per unit shipping cost. What is the break&e!en price on this order? A. P29.95 C. P22.*5 B. P2'.75 #. P2*.$< . .he company has *+<<< CA#S on hand that ha!e some deformities and are therefore considered to be ?seconds.@ #ue to the deformities+ it wi be impossib e to se these units at the norma price through regu ar distribution channe s. What unit cost figure is re e!ant for setting a minimum se ing price? A. P*7.'< C. P 3.$< B. P*'.<< #. P *.2<
30

$*

$2

Buestion ,umbers $5 though $$ are based on the fo owing4 >enderson I5uipment Company has produced a pi ot run of 5< units of a recent y de!e oped cy inder used in its finished products. .he company expects to produce and se '<< units. .he pi ot run re5uired *3.25 direct& abor hours for the 5< cy inders+ a!eraging <.2'5 direct& abor hours per cy inder. >enderson has experienced a significant earning cur!e on the direct& abor hours needed to produce new cy inders. As cumu ati!e output doub es+ say from 25 to 5< units for examp e+ the a!erage abor time per unit dec ines by 2< percent. Past experience indicates that earning tends to cease by the time '<< parts are produced. >enderson(s manufacturing costs for cy inders are as fo ows4 #irect abor P*2<.<< per hour =ariab e o!erhead *<<.<< per direct abor hour 8ixed o!erhead *77.<< per direct abor hour #irect materia 3<.5< per unit >enderson has recei!ed a 5uote of P$5 per unit from the Deyte Aachine Company for the additiona $5< cy inders needed. >enderson fre5uent y subcontracts this type of work and has a ways been satisfied with the 5ua ity of the units produced by Deyte. 6ecent y+ >enderson I5uipment Company has been operating at considerab y ess than fu capacity.

Incremental Analysis

$5

. >ow many direct& abor hours are expected to be used for the production of '<< cy inders :inc uding the pi ot run;? A. 09.3 hours C. $0.* hours B. $3.$ hours #. 7$.7 hours . .he production of '<< cy inders+ inc uding the pi ot run+ re5uires tota incrementa costs of4 A. P3'+'93 C. P7'+352 B. P30+'<2 #. P52+03' . .he effect on profit of producing $5< units instead of buying them from Deyte Aachine Company a:an;? A. )ncrease of P '+3$<. C. )ncrease of P*2+7$7. B. )ncrease of P $+<52. #. #ecrease of P22+57<.

A second a ternati!e a!ai ab e to CDASP is to con!ert the specia machinery to the standard mode + which se s for P72+5<<. .he additiona identifiab e costs for this con!ersion are as fo ows4 #irect materia s #irect abor .ota P2+'5< 9+9<< P7+*5<

$7

$$

A third a ternati!e for CDASP is to se the machine as is for a price of P52+<<<. >owe!er+ the potentia buyer of the unmodified machine does not want it for 7< days. .his buyer has offered a P$+<<< down payment+ with the remainder due upon de i!ery. .he fo owing additiona information is a!ai ab e regarding CDASP(s operations4 *. .he sa es commission rate on sa es of standard mode s is 2 percent+ whi e the rate on specia orders is 9 percent. 2. ,orma credit terms for sa es of standard mode s are 2R*<+ netR9<. .his means that a customer recei!es a 2 percent discount if payment is made within *< days+ and payment is due no ater than 9< days after bi ing. Aost customers take the 2 percent discount. Credit terms for a specia order are negotiated with the customer. 9. .he a ocation rates for manufacturing o!erhead and fixed se ing and administrati!e costs are as fo ows4 Aanufacturing costs4 =ariab e 5<F of direct& abor costs 8ixed 25F of direct& abor costs 8ixed se ing and administrati!e costs *<F of the tota manufacturing costs 3. ,orma time re5uired for rework is one month.
$'

Buestions $' through '* are based on the fo owing4 CDASP )ndustries recei!ed an order for a piece of specia machinery from .igok Company. Gust as CDASP comp eted the machine+ .igok dec ared backruptcy+ defau ted on the order+ and forfeited the *< percent deposit paid on the se ing price of P$2+5<<. CDASP(s manufacturing manager identified the costs a ready incurred in the production of the specia machinery for .igok as fo ows4 #irect materia #irect abor Aanufacturing o!erhead4 =ariab e 8ixed 8ixed se ing and administrati!e costs .ota P*7+7<< 2*+3<< P*<+$<< 5+95< *7+<5< 5+3<5 P50+355

Another company+ Kay Corporation+ wi buy the specia machinery if it is reworked to Kay(s specifications. CDASP offered to se the reworked machinery to Kay as a specia order for P7'+3<<. Kay agreed to pay the price when it takes de i!ery in two months. .he additiona identifiab e costs to rework the machinery to Kay(s specifications are as fo ows4 #irect materia s #irect abor .ota P 7+2<< 3+2<< P*<+3<<
31

. >ow much peso contribution wou d the sa e to Kay Corporation add to CDASP( before&tax profit? A. P59+'3' C. P55+0<< B. P55+03' #. P 0+9<< . >ow much peso contribution wou d the a ternati!e of con!erting the specia machinery to standard mode add to CDASP(s before&tax profit? A. P52+2<< C. P52+'25

$0

Incremental Analysis

B. P53+3$5
'<

#. P $+75<

3<9 3<5

. )f Kay makes CDASP a counteroffer+ what is the owest price CDASP shou d accept for the reworked machinery from Kay? A. P*<+3<< C. P*<+$22 B. P*2+5<< #. P*2+''$ . >ow much wou d the a ternati!e of se ing unmodified machinery to the potentia buyer contribute to CDASP(s before&tax profit? A. P5<+33< C. P30+02< B. P *+$3< #. P30+3<<

#irect abor hours Aachine hours #irect abor hours Aachine hours

* * 2 2

2 * 2 2

& & 2 *

2 2 * *

.he sa es department be ie!es that the month y demand for the next six months wi be as fo ows4 Product 3<* 3<9 3<5 Aonth y 1nit Sa es 5<< 3<< *+<<<

'*

Buestion ,os. '2 and '5 are based on the fo owing4 Constraint Company manufactures and se s three products+ which are manufactured in a factory with four departments. Both abor and machine time are app ied to the products as they pass through each department. .he machines and abor ski s re5uired in each department are so specia i"ed that neither machines nor abor can be switched from one department to another. Constraint Company(s management is p anning its production schedu e for the next few months. .he p anning is comp icated+ because there are abor shortages in the community and some machines wi be down se!era months for repairs. Aanagement has assemb ed the fo owing information regarding a!ai ab e machine and abor time by department and the machine hours and direct& abors re5uired per unit of product. .hese data shou d be !a id for the next six months. #IPA6.AI,. * 2 9+5<< 9+5<< : 5<<; 9+<<< 9+$<< : 3<<; 9+*<< 3+5<<

)n!entory e!e s are satisfactory and need not be increased or decreased during the next six months. 1nit price and cost data that wi be !a id for the next six months are as fo ows4 P 6 - # 1 C . S 3<* 3<9 1nit costs4 #irect materia #irect abor #epartment * #epartment 2 #epartment 9 #epartment 3 =ariab e o!erhead 8ixed o!erhead =ariab e se ing expenses 1nit se ing price
'2

3<5 P *$ *2 *3 *7 0 25 92 3 P*7$

P $ *2 2* 23 0 2$ *5 9 P*07

P *9 7 *3 && *' 2< *< 2 P*29

Aonth y Capacity A!ai ab e ,orman machine capacity in A> Capacity of machines being repaired in machine hours A!ai ab e machine capacity in A> A!ai ab e direct abor hours :#D>; Dabor and Aachine Specifications per 1nit of Product Product Dabor and Aachine .ime 3<* #irect abor hours Aachine hours

9 9+<<< : 9<<; 2+$<< 2+$5<

3 9+5<< : 2<<; 9+9<< 2+7<<

. Which department has capacity constraint in abor hours? A. #epartment * C. #epartment 9 B. #epartment 2 #. #epartment 3 . .he tota Aachine >ours re5uired by estimated month y unit sa es are4 A. *<+7<< C. **+7<< B. *2+*<< #. *9+5<<

'9

2 *

9 *

9 2

* 2
32

Incremental Analysis
'3

. .he tota number of abor hours as constraint for a month is4 A. 5< C. 9<< B. $5< #. ,o constraint . )n order to maximi"e its month y profit+ Constraint Company shou d produce4 A. B. C. 3<* 25< 25< 5<< 3<9 < 3<< 3<< 3<5 *+<<< *+<<< 725 #. 5<< < 725

P3< per unit and the abor wi be P$2 per unit. Ar. Sy%uco wi ha!e to spend P3<+<<< for a specia de!ice which wi be discarded when the %ob is done.
'7

'5

. What is the incrementa cost of the specia order of 5+<<< units? A. P7<<+<<< C. P$$0+<<< B. P32*+<<< #. P9$*+<<< . What is the fu cost of the specia order? A. P$$0+<<< B. P302+3<< C. P32*+<<< #. P75*+<<<

'$

Buestion ,os. '7 through '0 are based on the fo owing/ Arno d Sy%uco operates a sma machine shops. >e manufactures one standard product a!ai ab e from many other simi ar businesses and he a so manufactures products to customer order. >i accountant prepared the annua income statement shown be ow4 Custom Sa es P*+<<<+<<< P 2<<+<<< 3<<+<<< *27+<<< *3+<<< *2<+<<< *2+<<< '+<<< P ''<+<<< P *2<+<<< Standard Sa es P5<<+<<< P*7<+<<< *'<+<<< $2+<<< '+<<< 2<+<<< 2+<<< *'+<<< P37<+<<< P 3<+<<< .ota P*+5<<+<<< P 97<+<<< 5'<+<<< *0'+<<< 22+<<< *3<+<<< *3+<<< 27+<<< P*+93<+<<< P *7<+<<<

''

. .he amount of opportunity cost of taking the specia order is4 A. P*'9+<<< C. P25<+<<< B. P $*+<<< #. P*23+7<< . What is the effect on the o!era profit if the specia order is accepted? A. P35<+<<< C. P: 25+<<<; B. P: '5+<<<; #. P 20+<<<

'0

Sa es Aateria Dabor #epreciation Power 6ent >eat and ight -ther .ota )ncome

Buestion ,os. 0< through 03 are based on the fo owing4 .he =erbatim Corporation+ which produces and se s to who esa ers a high y successfu ine of summer otions and insect repe ents+ has decided to di!ersify in order to stabi i"e sa es o!er the year. A natura area for the company to consider is the production of specia otion and cream to pre!ent dry and chapped skin. After considerab e research+ a specia product ine has been de!e oped. >owe!er+ because of the conser!atism of the company management+ =erbatim(s president has decided to introduce on y one of the new products for this coming rainy season. )f the product is a success+ further expansion wi be initiated in future years. .he product se ected :ca ed Chaps; is a ip ba m that wi be so d in a ipstick&type tube. .he product wi be so d to who esa ers in boxes of 23 tubes for P'<< per box. Because of a!ai ab e capacity+ no additiona fixed charges wi be incurred to produce the product. >owe!er+ a P*<+<<<+<<< fixed charge wi be absorbed by the new product to a ocate a fair share of the company(s present fixed costs to it. 1sing the estimated sa es and production of *<<+<<< boxes of Chaps as the standard !o ume+ the accounting department has de!e oped the fo owing costs4
33

.he depreciation charges are for machines used in the respecti!e product ines. .he power charge is apportioned on the estimate of power consumed. .he rent is for the bui ding space which has been eased for *< years at P*3<+<<< per year. .he rent and heat and ight are apportioned to the product ines based on amount of f oor space occupied. A other costs are current expenses identified with the product ine incurring them. A !a ued custom parts customer has asked Ar. Sy%uco to manufacture 5+<<< specia units for him. Ar. Sy%uco is working at capacity and wou d ha!e to gi!e up some other business to take this business. >e cannot renege on custom orders a ready agreed to but he cou d reduce the output of his standard product by about one&ha f for one year whi e producing the specia y re5uested custom part. .he customer is wi ing to pay P*3< for each part. .he materia cost wi be about

Incremental Analysis

#irect abor #irect materia s .ota o!erhead .ota

P2<< per box 9<< per box *5< per box P75< per box

=erbatim has approached a cosmetics manufacturer to discuss the possibi ity of purchasing the tubes for Chaps. .he purchase price of the empty tubes from the cosmetics manufacturer wou d be P0< per 23 tubes. )f the =erbatim Corporation accepts the purchase proposa + it is estimated that direct abor and !ariab e o!erhead costs wou d be reduced by *<F and direct materia costs wou d be reduced by 2<F.
0<

1nit manufacturing costs4 #irect materia s #irect abor =ariab e o!erhead 8ixed o!erhead 1nit marketing costs4 =ariab e 8ixed .ota unit costs

P*+<<< *+5<< 5<< *+2<< 5<< *+3<<

P3+2<< *+0<< P7+*<<

. What is the !ariab e o!erhead rate per box of Chaps? A. P*<< C. P 5< B. P*5< #. P2<< . What is the materia cost per box of Chaps sa!ed by purchasing them? A. P9<< C. P 7< B. P23< #. P 9< . >ow much wou d it cost =erbatim to produce the tubes per box? A. P 7< C. P 0< B. P '5 #. P*2< . >ow much wou d =erbatim incur by making *25+<<< boxes+ assuming that additiona e5uipment+ at an annua renta of P*+<<<+<<<+ must be ac5uired to produce this !o ume? A. P*<+725+<<< C. P**+25<+<<< B. P**+725+<<< #. P*2+5<<+<<< . 6eferring to Buestion ,o. 09+ what is the impact on its profit if =erbatim were to buy *25+<<< boxes? A. Additiona profit of P*+<<<+<<<. C. Additiona profit of P9$5+<<<. B. Additiona profit of P*+25<+<<<. #. #ecrease in profit of P725+<<<.

1n ess otherwise stated+ assume there is no connection between the situations described in the 5uestions/ each is to be treated independent y. 1n ess otherwise stated+ a regu ar se ing price of P$+3<< per unit shou d be assumed. )gnore income taxes and other costs that are not mentioned in the cost schedu e or in a 5uestion itse f.
05

0*

. What is the month y breake!en units for Aedica Supp y Company? A. 2+<<< C. *+05< B. 2+7'0 #. 2+7*3 . Aarket research estimates that !o ume cou d be increased to 9+5<< units+ which is we within hoist production capacity imitations+ if the price were ct from P$+3<< to P7+5<< per unit. Assuming the cost beha!ior patterns imp ied by the data in the cost schedu e is correct+ wou d you recommend this action be taken? A. Les+ because the profit wi increase by P*+5<<+<<<. B. Les+ because the profit wi increase by P 2<<+<<<. C. ,o+ because the profit wi decrease by P*+2<<+<<<. #. ,o+ because the profit wi decrease by P2+3<<+<<<. . -n Aarch *+ a contract offer is made to Aedica Supp y Company by the =eterans( >ospita to supp y 5<< units for de i!ery by Aarch 9*. Because of an unusua y arge number of rush orders form their regu ar customers. Aedica Supp y p ans to produce 3+<<< units during Aarch+ which wi use a a!ai ab e capacity. )f the =eterans( >ospita (s order is accepted+ 5<< units norma y so d to regu ar customers wou d be ost to a competitor. .he contract gi!en by the hospita wou d reimburse the =eterans( >ospita (s share of Aarch manufacturing costs+ p us pay a fixed fee :profit; of P5<<+<<<. :.here wou d be no !ariab e marketing costs incurred on the hospita (s unit.; What impact wou d accepting the =eterans( >ospita contract ha!e on Aarch income? A. P *+*<<+<<< C. P:*+95<+<<<; B. P: '5<+<<<; #. P 5<<+<<<

07 02

09

0$ 03

Buestion ,os. 05 through *<* are based on the fo owing4 Aedica Supp y Company produced hydrau ic hoists that were used by hospita s to mo!e bedridden patients. .he costs of manufacturing and marketing hydrau ic hoists at the company(s norma !o ume of 9+<<< units per month are show be ow4
34

Incremental Analysis

0'

. Aedica Supp y Company has an opportunity to enter a foreign market in which price competition is keen. An attraction of the foreign market is that demand there is greatest when demand in the domestic market is 5uite ow/ thus id e production faci ities cou d be used without affecting domestic business. An order for *+<<< units is being sought at a be ow&norma price in order to enter this market. Shipping costs for this order wi amount to P$5< per unit+ whi e tota costs of obtaining the contract :marketing costs; wi be P3<+<<<. ,o other !ariab e marketing costs wou d be re5uired on this order. #omestic business wou d be unaffected by this order. What is the minimum unit price shou d Aedica Supp y Company consider for this order of *+<<< units? A. P9+$5< C. P9+$0< B. P9+<<< #. P3+20< . An in!entory of 29< units of an obso ete mode of the hoist remains in the stockroom. .hese must be so d through regu ar channe s at reduced prices+ or the in!entory wi soon be !a ue ess. What is the minimum price that wou d be acceptab e in se ing these units? A. P9+5<< C. P9+<<< B. P3+2<< #. P 5<< . A proposa is recei!ed from an outside contractor who wi make and ship *+<<< hydrau ic hoist units per month direct y to Aedica Supp y(s customers as orders are recei!ed from Aedica Supp y(s sa es staff. Aedica Supp y(s fixed marketing costs wou d be unaffected+ but its !ariab e marketing costs wou d be cut by 2< percent for these *+<<< units produced by the contractor. Aedica Supp y(s p ant wou d operate at two thirds of its norma e!e + and tota a ocated fixed manufacturing costs for these *+<<< units wou d be cut by 9< percent. What in& house unit cost shou d be used to compare with the 5uotation recei!ed from the supp ier? A. P 9+$7< C. P 3+23< B. P 9+<<< #. P 9+37< . Assume the same facts as in re5uirement ,o. *<* except that the id e faci ities wou d be used to produce '<< modified hydrau ic hoists per month for us in hospita operating rooms. .hese modified hoists cou d be so d for P0+<<< each+ whi e the costs of production wou d be P5+5<< per unit !ariab e manufacturing expense. =ariab e marketing costs wou d be P*+<<< per unit. 8ixed marketing and manufacturing costs wou d be unchanged whether the origina 9+<<< regu ar units hoists were manufactured or the mix of 2+<<< regu ar hoists p us '<< modified hoists were produced. What is the maximum purchase price per unit that Aedica Supp y shou d be wi ing to pay the outside contractor? A. P 5+*<< C. P 5+5<< B. P 9+*<< #. P 5+7<<
35

Buestion ,os. *<2 and *<9 are based on the fo owing4 Aarcus 8ibers+ )nc.+ specia i"es in the manufacturing of synthetic fibers that the company uses in many products such as b ankets+ coats+ and uniforms for po ice and firefighters. Aarcus has been in business since *0$5 and has been profitab e e!ery year since *0'9. .he company uses a standard cost system and app ies o!erhead on the basis of direct abor hours. Aarcus has recent y recei!ed a re5uest to bid on the manufacture of '<<+<<< b ankets schedu ed for de i!ery to se!era mi itary bases. .he bid must be started at fu cost per unit p us a return on fu cost of no more than 0 percent after income taxes. 8u cost has been defined as inc uding a !ariab e costs of manufacturing the product+ a reasonab e amount of fixed o!erhead+ and reasonab e incrementa administrati!e costs associated with the manufacture and sa e of the product. .he contractor has indicated that bids in excess of P25 per b ankets are not ike y to be considered. )n order to prepare the bid for the '<<+<<< b ankets+ Andrea Dighter+ cost accountant+ has gathered the fo owing information about the cost associated with the production of the b ankets. #irect materia #irect abor #irect machine costsP =ariab e o!erhead 8ixed o!erhead )ncrementa administrati!e costs Specia feePP Aateria usage Production rate Iffecti!e tax rate
*<2

00

*<<

P *.5< per pound of fibers P $.<< per hour P*<+<< per b anket P 9.<< per direct abor hour P '.<< per direct abor hour P2+5<< per *+<<< b ankets P <.5< per b anket 7 pounds per b anket 3 b ankets per #D> 3<F

*<*

. .he minimum price per b anket that Aarcus 8ibers+ )nc.+ cou d bid without reducing the company(s net income is A. P23.<< C. P5<.25 B. P2*.5< #. P3<.25 . 1sing the fu &cost criteria and the maximum a owab e return specified+ Aarcus 8ibers( bid price per b anket wou d be4 A. P23.<< C. P27.<< B. P20.0< #. P2$.0<

*<9

Incremental Analysis

ANS2ER E3$LANATIONS

36

Answer4 C Cost of a ternati!e se ected Cost of a ternati!e re%ected )ncrementa cost

P'<<+<<< 75<+<<< P*5<+<<<

. Answer4 A .he company needs to purchase 55+<<< units ear ier than their schedu ed 5+<<<&unit month y purchase. >ence+ the a!erage in!estment for the in!entory is :55+<<< x P7< S 2; or P*+75<+<<<. .he opportunity cost is P*92+<<< or :P*+75<+<<< x <.<';. . Answer4 A Additiona re!enue after rework :23+<<<:*2 T 3; Dess Additiona cost :23+<<< x 2; Additiona profit P*02+<<< 3'+<<< P*33+<<<

. Answer4 B .he on y re e!ant out&of pocket cost is the !ariab e se ing expense which is P3<. .he sa e thru the regu ar channe s in!o !es an opportunity cost of P*3<. =ariab e se ing expense :3<F x *<<; 3< -pportunity cost *3< .ota *'< . Answer4 C 6egu ar !ariab e cost -!ertime premium 6e e!ant cost per unit Answer4 B 8u cost 8ixed o!erhead 6e e!ant unit cost P'.<< *.5< P0.5< 5<.<< 2<.<< 9<.<< '+$<< *+7<< *<+9<< 2<+<<< 23+<<< *2+<<< 2'+<<< '3+<<< P57+25< *9+$5< P$<+<<< :97<+<<< S 23+<<<; :53<+<<< S 23+<<<; :'3+<<< S 23+<<<; P*5.<< 22.5< 9.5<

:*'<+<<<R0+<<<;

Answer4 C Cost of *+<<< kg at atest price :*+<<< x '.$<; Add excess price inc ude on the remaining 3+<<< kg. 3+<<< x :'.$< T '.9<; 6e e!ant cost Answer4 B #irect materia s :2+<<< O *<; #irect abor :2+<<< O *2; =ariab e o!erhead :2+<<< O 7; )ncrease in !ariab e cost due to o!ertime :2+<<< O *3; )ncrementa cost Answer4 B =ariab e costs Additiona fixed costs Ainimum bid price Answer4 B #irect materia #irect abor =ariab e se ing expenses

10

.ota Add Profit per unit Se ing price


11

:22+5<< S *+5<<;

P3*.<< *5.<< P57.<<

Answer4 B 6e e!ant cost to make and se 4 #irect materia s #irect abor =ariab e -> 6educed se ing expenses :9< x <.<7; Add( fixed cost :2<+<<< S 5+<<<; Ainimum se ing price

90 7 ' *' 3 $5

12

. Answer4 B .he company has no existing capacity. .he minimum se ing price for this specia sa es shou d e5ua the regu ar se ing price p us additiona expenses. 6egu ar se ing price P*' Additiona expenses * Ainimum se ing price P*0 . Answer4 A #irect materia s 2<.<< #irect abor *5.<< =ariab e o!erhead *2.<< =ariab e shipping and hand ing 9.<< Dost contribution margin T DB37 :*<+<<< S *+<<<; *<.<< Ainimum price 7<.<< .he ost contribution margin on regu ar sa e is re e!ant because the company is operating at capacity. )n a specia sa e wherein the company has to gi!e up some of its regu ar units+ the re e!ant costs consist of incrementa costs p us any opportunity costs. . Answer4 # #irect materia s #irect abor =ariab e o!erhead =ariab e se ing expense Additiona profit :3<+<<<R5+<<<; 6e5uired se ing price 3.5< *<.<< 9.<< *.<< '.<< 27.5<

13

14

15

. Answer4 C .he maximum number of units in regu ar sa es that Ben%ing cou d afford to ose e5ua s the 5uantity that pro!ides regu ar contribution margin that matches the contribution margin pro!ided by specia sa e. Contribution margin from specia sa e *+<<< :*3 T '; 7+<<< #i!ided by regu arCA :2< T '; S *2 Aaximum ,umber of units 5<< .o i ustrate the so ution4 Contribution margin from specia sa e Dess #ecrease in regu ar sa es( contribution margin :5<< x *2; Iffect on profit 7+<<< 7+<<< ,)D

16

Answer4 B .he maximum decrease in regu ar sa e U Contribution margin from specia sa eR1nit contribution margin on regu ar

sa e :3<< x <.2<; S :2.<< &*.5<; U *7<


17

Answer4 A .ota contribution margin from specia sa e:*5+<<< x P5.5<; P'2+5<< Dess Additiona fixed costs 9<+<<< Profit from specia sa e P52+5<< Dess #ecrease in contribution margin on regu ar Sa e 2+<<<:P90 T P22.5<; 99+<<< Additiona profit P*0+5<< P ease refer to So ution for ,umber regarding detai s of contribution margin per unit. . Answer4 C Se ing price 6e e!ant cost per unit4 6egu ar cost per unit Dess4 Commission 8ixed o!erhead :P9 x 2R9; ,et amount )ncrementa fixed cost :P*5< /9<<; Ad!antage per unit+ Buy ,umber of units )ncrease in profit P7.<< P$.5< P<.$5 2.<< :2.$5; P3.$5 <.5<

18

5.25 P<.$5 9<< P 225

19

. Answer4 # Additiona profit4 9+<<< x :$< T 5<; U 7<+<<< . Answer4 A Specia price 6e e!ant cost4 #irect materia s #irect abor =ariab e o!erhead 1nit contribution margin 1nits ordered Additiona profit Answer4 A Sa es Dess4 =ariab e production cost Additiona 8ixed cost Dabe ing cost Profit 92 3 *2 7

20

22 *< 2+<<< 2<+<<< 7<+<<<

21

:*+5<< x 9<; :*+5<< x 2.5<;

35+<<< 5+<<< 9+$5<

59+$5< 7.25<

22

. Answer4 B .he minimum se ing price shou d e5ua the re e!ant cost to produce and se a unit of product. #irect materia s P5< #irect abor 2< =ariab e o!erhead :P*< x <.2; 2 Se ing expense :P*5 x <.3; 7 Ainimum se ing price P$' . Answer4 C

23

.he company has no excess capacity to be de!oted to the production of additiona units for specia sa e. )n a specia sa e decision where there is no excess capacity+ the minimum se ing price must be e5ua to the market price ess any a!oidab e expenses. Se ing price P*<< Dess A!oidab e se ing expense :P*5 x <.3; 7 Ainimum se ing price P 03
24

. Answer4 # .he book !a ue of the o d e5uipment is a sunk cost and therefore not a re e!ant one. A so+ the re ated cost on outstanding note are irre e!ant. .hey are not affected by a decision. . Answer4 # 6e e!ant Costs BetaNeta#irect materia s 3.<< '<.<<#irect abor*<.<< 3$.<<8actory o!erhead 3<F *7.<< '.<<6e e!ant 1nit costP9<.<<*95.<< . Answer4 C #irect materia 2.<< #irect abor 2.3< =ariab e o!erhead *.7< A!oidab e marketing cost :<.$ x 2.5<; *.$5 6e e!ant cost Aake $.$5 .he maximum purchase price+ if e!er the company has to decide buying the product+ is P7.$5. Any amount higher than P7.$5 wi necessari y increase the unit cost of the product. . Answer4 B #irect materia s #irect abor =ariab e o!erhead A!oidab e fixed o!erhead .ota re e!ant cost to make Answer4 # #irect materia s #irect abor =ariab e o!erhead Additiona contribution margin .ota re e!ant cost to make Answer4 B =ariab e cost to make parts Cost buy Cost sa!ings T ?Aake@ decision Answer4 A #irect materia s #irect abor =ariab e o!erhead A!oidab e fixed o!erhead 6e e!ant cost T make Purchase price Ad!antage T Aake Answer4 A :9<+<<< x *2; :9<+<<< x *5; 73+<<< *7+<<< '+<<< 7+<<< 03+<<< 73+<<< *7+<<< '+<<< *7+<<< *<3+<<< 97<+<<< 35<+<<< 0<+<<< '<+<<< *9+<<< 3<+<<< 3+<<< *9$+<<< *35+<<< '+<<<

25

26

27

28

29

30

31

#irect materia s #irect abor =ariab e o!erhead .ota !ariab e cost Dess Purchase cost A!oidab e fixed cost Add una!oidab e 8C .ota fixed o!erhead
32

73+<<< *7+<<< '+<<< ''+<<< *<3+<<< *7+<<< 5+<<< 2*+<<< P9<+<<< P23+<<< 2+<<< 27+<<< P 3+<<< P92+<<< 7+<<< P27+<<< P9<+<<< P23+<<< 2+<<< 7+<<<

Answer4 B Purchase cost :2+<<< x P*5; 6e e!ant cost to make4 =ariab e cost :2+<<< x P*7; T '+<<< A!oidab e fixed cost :'+<<< x <.25; Additiona cost T Buy :#ecrease in profit; A ternati!e computation for re e!ant cost to make4 .ota cost :2+<<< x P*7; Dess una!oidab e fixed cost :'+<<< x <.$5; 6e e!ant cost to make

33

Answer4 C Cost of purchase :2+<<< x P*5; 6e e!ant cost T make4 =ariab e cost :2+<<< x P*7; T P'+<<< A!oidab e fixed cost :P'+<<< x <.25; -pportunity cost T rent Cost sa!ings T Buy :increase in profit;

92+<<< P: 2+<<<;

34

Answer4 C 6e e!ant costs to make #irect materia s #irect abor =ariab e o!erhead Super!isor(s sa ary -pportunity costs+ rent .ota 6e e!ant cost to buy :*5+<<< x P2<; Ad!antage & Buy )f the company wou d purchase the units+ it wou d sa!e P2<+<<<. Answer4 B Cost of ink cartridges :5+<<< x P*5; Dess4 6e e!ant cost to produce :5+<<< x P'; Additiona cost if ink cartridges are purchased Answer4 B #irect materia #irect abor =ariab e o!erhead A!oidab e fixed cost .ota re e!ant costs & Aake :2<+<<< O 7; :2<+<<< O9<; :2<+<<< O *2< :2<+<<< O 0;

P 0<+<<< *2<+<<< *5+<<< 9<+<<< 75+<<< 92<+<<< 9<<.<<< P 2<+<<<

35

P$5+<<< 3<+<<< P95+<<< *2<+<<< 7<<+<<< 23<+<<< *'<+<<< *+*3<+<<<

36

Purchase cost Add net sa!ings .ota Dess4 Cost to make -pportunity cost
37

:2<+<<< O 7<;

*+2<<+<<< 25+<<< *+225+<<< *+*3<+<<< '5+<<< *5+<<< 9+<<< *'+<<< *9+2<< 3+'<<

Answer4 A Purchase price >and ing cost :2<F x P*5+<<<; .ota Cost to make :2*+2<< T '+<<<;P )ncrease in unit cost if goods are purchased P8ixed -> :*2+<<< x 2 S 9; U '+<<<

38

Answer4 A Cost to make4 #irect materia s #irect abor =ariab e o!erhead A!oidab e fixed -> 6e e!ant cost Purchase costs #ecrease in profit in profit

:2<F x 9<+<<<; :*+<<< O 9<;

P*<+<<< 5+<<< 5+<<< 7+<<< P27+<<< 9<+<<< P 3+<<<

39

Answer4 B 6e e!ant costs to make per unit4 #irect materia s #irect abor =ariab e o!erhead 6e e!ant cost T ?to make@ Purchase price per unit )ncrease in per unit cost if purchased Answer4 A #irect materia s #irect abor =ariab e o!erhead A!oidab e fixed o!erhead :9<+<<< x <.2; .ota re e!ant cost Purchase cost Additiona cost if purchased Answer4 C #irect materia s #irect abor =ariab e o!erhead A!oidab e fixed cost .ota per unit ,umber of unit .ota Add sa!ings from the manufacture of other product .ota re e!ant cost T make

7.<< 3.<< *.<< **.<< *2.5< *.5< *<+<<< 5+<<< 5+<<< 7+<<< 27+<<< 9<+<<< 3+<<< 9.<< *5.<< 7.<< 9.<< 2$.<< x*<+<<< 2$<+<<< 35+<<< 9*5+<<<

40

41

.ota purchase cost :*<+<<< x 9<; Ad!antage ?Buy@


42

9<<+<<< *5+<<<

. Answer4 # .hough the prob em dea s with transfer of goods from one di!ision to another di!ision+ the so ution focuses on make on buy decision approach. Purchase price+ outside supp ier *.25 =ariab e cost to make :*<+<<< S *<+<<<; *.<< Additiona unit cost to the company <.25 1nits to be purchased *<+<<< #ecrease in #ana(s profit if goods are purchased 2+5<< . Answer4 C .ota purchase cost :5+<<< x $.$5; Dess 6e e!ant cost to make #irect materia s O 2.5 #irect abor O 9.5 =ariab e o!erhead O *.5 A!oidab e fixed cost O <.5 -pportunity cost ,et sa!ing T purchase 9'+$5< *2+5<< *$+5<< $+5<< 2+5<< 7+<<<

43

37+<<< :$+25<;

44

. Answer4 # .he so ution is made in e5uation form+ using y U a V bx for 2 a ternati!es4 Det x U indifference point in units Aake4 y U *5<+<<< V **x Buy4 y U 7<+<<< V *2.'$5x *5<+<<< V **x U 7<+<<< V *2.'$5x *.'$5x U 7<+<<< x U 3'+<<< . Answer4 C #irect materia s #irect abor =ariab e o!erhead A!oidab e fixed o!erhead .ota re e!ant cost Answer4 B '<+<<< *9+<<< 3<+<<< 2<+<<< *59+<<<

45

46

SodaDemomadeSe ing

price7.<<5.<<=ariab e cost *.5<*.<<Contribution margin3.5<3.<<Processing hours93CAR>r*.5<*.<<8or the Demonade to be as profitab e as Soda+ its contribution margin per hour shou d be P*.5<. .herefore the re5uired se ing price for Demonade is P$+ ca cu ated as4 Contribution margin per unit :3 hours x P*.5<; =ariab e cost per unit Se ing price
47

P7.<< *.<< P$.<<

. Answer4 C Product B has a greater contribution margin per unit :P*5 & P*2 U P9; than Product A :P*2 & P*< U P2;. .he company shou d produce the maximum units it can se of Product B :25<+<<<; and use the rest of the machine hour capacity to produce *<<+<<< units of Product A. . Answer4 #

48

Production order4 L+ M Product M4 Product L4 .ota capacity T A> Aachine hours de!oted to Product L :'+<<< x 9; >ours a!ai ab e to M Production of M4 *'+<<< S 7 U 9+<<<
49

7< S 7 U *< 32 S 9 U *3 32+<<< 23+<<< *'+<<<

Answer4 B Production order4 B enderI ectric AixerPurchase price 2< 9'=ariab e cost to make4 #irect materia s 7 ** #irect materia s 3 0 -!erhead P:*7 T *<; O 7 *2 .ota : *7; :92;Additiona cost if purchased 3 7Additiona cost per hour :B ender+ * hr/ Aixer 2 hours; 3 9 Since it wi cost Aary P3 per hour to buy B ender and on y P9 if I ectric Aixer is purchased+ it wi produce a of B ender(s re5uirement and %ust purchase units of e ectric mixer that cannot be accommodated by the remaining capacity. Product4 B ender I ectric Aixer W5<+<<< T :2<+<<< O *;X S 2 Purchase4 I ectric Aixer :2'+<<< T *5+<<<;
50

2<+<<< *5+<<< *9+<<< *'+<<< *5+<<< 9+<<<

Answer4 A CA T Product A CA T Product B #ifference in contribution margin Answer4 A Based on #D>

97R2 x *+<<< 35R9 x *+<<<

51

52

53

54

Products1CA#D>RunitCAR#D>PriorityA0*.<0.<*S.B*<*.57.7$2ndC'2.<3.<<9rd Based on A> Products1CAA>RunitCARA>PriorityA03.52.<9rdB*<25.<*stC'2.59.22nd . Answer4 # P asticAeta 6C T make **.<< *9.<<6C T Buy *5.5< *$.5<Additiona Cost&Buy 3.5< 3.5<>ours re5uiredRunitS 9 S 3.5Additiona cost Rhr. *.5< *.<Priority *st 2ndCapacity :machine hours; 3'+<<<A> used & P astic :$+<<< x 9; 2*+<<<A!ai ab e A> to Aeta 2$+<<<A> used & Aeta :7+<<< x 3.5<; :2$+<<<;Purchase of Aeta :**+<<< T 7+<<<; 5+<<< . Answer4 A >ome#e uxeProSe ing price5'75'<#irect materia s:*7;:2<;:*0;#irect abor:*<;:*5;:2<;=ariab e o!erhead: ';:*2; :*7;CARunit23*'25Processing hour:s; S * S *.5 S 2CAR#D>23*2 *2.5<Profitabi ity rank*st9rd2nd . Answer4 B 1nit contribution margin4 Product A P*2 T P*< P2 Product B P*5 T P*2 P9 Contribution margin per hour4 Product A Product B P2 S <.' P9 S *.25 P2.5< P2.3< 95<+<<< :*7<+<<<; *0<+<<<

.ota capacity in hours Dess hours used by Product A 2<<+<<< x <.' A!ai ab e hours for production of Product B

Dess hours by Product B *52+<<< x *.25 ,umber of units to be produced4 Product A Product B

:*0<.<<<; 2<<+<<< *52+<<<

Product A has higher contribution margin per hour. .he company shou d produce the maximum units it can se of Product A and use the rest of the machine hour capacity to produce units of Product A in order to maximi"e its profit.
55

Answer4 B CA per hour4 Product M4 5<R5 Product L4 73R' .he 2<+<<< hours :<.' x 25+<<<; wi be de!oted to the production of M. .ota contribution margin4 :2<+<<< x *<; V :5+<<< x '; Answer4 A Se ing price per unit T si !er po ish Dess !ariab e costs4 Erit 99$ :P2< S 3; )ngredients+ direct abor and !ariab e -> =ariab e se ing costs Contribution margin per unit

*< ' 23<+<<< P3<

56

P 5 25 9

99 P $ '+<<<

Ainimum number of %ars of si !er po ish to be produced4 A!oidab e fixed costs S Contribution margin per %ar P57+<<< S P$

.he so ution used the se ing price of P2< as cost of Erit99$ because there was un imited demand for the c eaning powder. )f+ howe!er+ the demand for the c eaning powder is imited+ the recommended so ution wou d use P*7 as the cost of Erit 99$.
57

Answer4 # )ncrease in se ing price Additiona processing cost Addition profit per unit

**7 T 0<

27 *' '

58

Answer4 C Se ing price after further processing P'.$5 Se ing price if not processed further $.2< Additiona sa es per unit *.55 ,umber of units 25+<<< Additiona tota sa es P9'+$5< Dess additiona processing costs 99+$5< )ncrease in profit if the product is processed P 5+<<< Because further processing wi pro!ide more profit per unit+ the company shou d process further. . Answer4 # Additiona sa es Additiona costs Additiona profit :95<+<<< T 25<+<<<; :$5+<<< V *5+<<<; P*<<+<<< 0<+<<< P *<+<<<

59

60

Answer4 A MLAdditiona sa es !a ue*<93Additiona processing costs*59<)ncrementa :decrementa ; profit per unit:5; 3)f Product L is processed further+ profit wi increase by P*7+<<< :3+<<< x 3;.

61

Answer4 A Additiona Sa es Price Additiona Cost Additiona profit

:75 T 5<; :9< x 3<F;

*5.<< *2.<< 9.<<

62

63

. Answer4 C Product to be processed further4Prod AProd ,8ina se ing price9*29Se ing price at sp it&off point25*0)ncrease in se ing price731nits*5+<<<9<+<<<.ota increase in sa es0<+<<<*2<+<<<Additiona processing costs*<<+<<<**<+<<<)ncrease :decrease; in profit:*<+<<<;*<+<<< . Answer4 C 6e!enues P*<3+<<< A!oidab e costs4 Cost of goods so d P 73+<<< A!oidab e expenses :P7+<<< V P'+<<<; *3+<<< $'+<<< Segment margin P 27+<<< A segment is a potentia candidate for e imination if its re!enues are ess than its a!oidab e costs. .his is not the case for this segment. .he company wi ose P27+<<< of income if this segment is e iminated. . Answer4 A A!oidab e fixed cost :benefit; Dost contribution margin #ecrease in profit 2*<+<<< 23<+<<< 9<+<<<

64

65

. Answer4 # .he 5uestion did not re5uire any computation. )f Aina Co. drops the Eo d -re+ it wi ose the segment margin of P*+2<<+<<<+ a decrease in Aina Co.(s income. .he amount of direct fixed expenses that wou d be e iminated were pre!ious y deducted from contribution margin+ and therefore+ not considered in the determination of the effect on income. . Answer4 B A!oidab e common expenses :35+<<< T 2<+<<<; Segment margin ost #ecrease in profit P 25+<<< 92+<<< P :$+<<<;

66

67

Answer4 A A!oidab e fixed expenses4 Aanufacturing :*5<+<<< T *<5+<<<; 2 0<+<<< Se ing :9<+<<< x <.*< x 2; 7+<<< Start up cost :additiona fixed expense : '+<<<; ,et a!oidab e costs ''+<<< )ndifference point ''+<<< S :22&*3; **+<<< units At **+<<< unit e!e :2 months;+ the contribution margin e5ua s the a!oidab e costs. . Answer4 # .ota Sa!ings 5 year :*25+<<< T *<<+<<< ; 5 Dess4 Additiona depreciation :0<+<<< T 5<+<<<; Doss on sa e of o d machine :5+<<< T 5<+<<<; )ncrease in profit Answer4 A Dease arrangement4 *25+<<< :3<+<<<; :35+<<<; 3<+<<<

68

69

6enta income :5 years; Cost of repairs+ insurance and property taxes ,et income Sa e arrangement4 ,et proceeds :25+<<< x <.05; #ifferentia income T ease
70

3'+<<< *<+<<< 9'+$5< 29+$5< *5+<<< 2*<+<<< '<+<<< *9<+<<< 92.<< *<.<< 3.5< 2.9< *.2<

Answer4 A Additiona contribution :7<+<<< x <.25 x *3; Additiona fixed se ing costs Additiona profit Se ing price =ariab e expenses4 Aateria s #irect abor =ariab e o!erhead =ariab e se ing costs 1nit contribution margin

*'.<< *3.<< *<.<< 3.5< 2.9< 9.2< *.$< <.35 22.*5

71

Answer4 C #irect materia s #irect abor =ariab e -> =ariab e se ing cost )mport duties Permits and icenses :0+<<< S 2<+<<<; Ainimum se ing price

)mport duties are assumed to be paid by Adrena Company because of the nature of the sa e.
72

. Answer4 # .he re e!ant cost in se ing the units on hand :inferior 5ua ity; is P*.2<+ the !ariab e se ing costs the production costs+ though !ariab e+ are considered irre e!ant because they are historica :sunk; costs. . Answer4 C A!oidab e fixed costs4 Aanufacturing :<.3< x 5<+<<<; Se ing :95+<<< x <.2<; .ota Contribution margin if the company has to operate :7<+<<< S 7 x <.9< x *3; #isad!antage+ c osing the p ant

73

2<+<<< $+<<< 2$+<<< 32+<<< :*5+<<<; *<.<< 3.5< 2.9< 9.$5 <.3< 2<.05

74

Answer4 A #irect materia s #irect abor =ariab e o!erhead A!oidab e fixed o!erhead :<.$5 x 5; A!oidab e !ariab e expense :*.2< x * S 9; 6e e!ant cost T Aake

75

Answer4 A Batch :each 5< units;Cum A!e. >rs**3.252**.3<30.*2'$.207*75.'97' .ota >ours re5uired4 *7 x 5.'97' U 09.3

76

Answer4 # Aateria s :'<< x 3<.5<; #irect abor :09.3< x *2<; =ariab e -> :09.3< x *<<; .ota Answer4 A Production cost T $5< units4 Aateria s :$5< x 3<.<<; #irect abor :09.3< T *3.25; *2< =-> :09.3< T *3.25; *<< .ota Purchase cost :$5< x $5; Ad!antage T make Answer4 A Sa es price to Kay Corp. 6ework costs4 #irect materia s #irect abor =ariab e -> :32<< x 5<F; Commission :7'+3<< x <.<9; Before T tax peso contribution Answer4 A 6egu ar price #educt4 2F commission :72+5<< x <.<2; Sa es discount :72+5<< x <.<2; ,et price Dess additiona con!ersion costs4 #irect materia s #irect abor =ariab e -> & 5<F ,et before T tax contribution Answer4 # Cost of rework #irect abor =ariab e -> :3+2<< x <.5<; .ota Commission W<.<9 :*2+5<< <.0$;X .ota Answer4 A Sa es price Dess4 Commission :52+2<< x <.<9; ,et contribution

92+3<< **+2<' 0+93< 52+03'

77

9<+9$5 0+30' $+0*5 3$+$'< 57+25< '+3$< 7'+3<< 7+2<< 3+2<< 2+*<<

78

:*2+5<<; : 2+<52; 59.'3' 72+5<<

79

*+25< *+25< 2+'5< 9+9<< *+75<

2+5<< 7<+<<<

$+'<< 52+2<< 7+2<< 3+2<< 2+*<< *2+5<< 9'$ *2+''$ 52+<<< *+57< 5<+33<

80

81

82

. Answer4 C #epartment 9 has constraint in abor hours of $5<. #ept. *#ept. 2#ept. 9#ept. 3A!ai ab e #D>9+$<<3+5<<2+$5<2+7<<#D> re5uired3<**+<<<*+5<<*+5<< 5<<3<2 3<< '<< && '<<3<92+<<<2+<<<2+<<<*+<<< .ota 9+3<<3+9<<9+5<<2+9<<Ixcess :Constraint; 9<< 2<<: $5<; 9<< 83 . Answer4 A .he a!ai ab e machine hours are sufficient to produce the estimated month y sa es. .he schedu e for month y production shou d consider maximi"ing the use of a!ai ab e direct abor hours in #epartment 9 because it is the on y one with constraint. #ept. *#ept. 2#ept. 9#ept. 3A!ai ab e A>9+<<<9+*<<2+$<<9+9<<A> re5uired3<* 5<< 5<<*+<<<*+<<<3<2 3<< 3<< && '<<3<92+<<<2+<<< *+<<<*+<<< .ota 2+0<<2+0<<2+<<<2+'<<Ixcess :Constraint; *<< 2<< $<< 5<< .ota machine hours re5uired by month y unit sa es4 :2+0<< V 2+0<< V 2+<<< V 2+'<<; *<+7<<
84

. Answer4 B .he tab e showing the comparison of a!ai ab e hours and re5uired hours to produce a the re5uired units in number '2 indicated that #epartment 9 is short by $5< hours. Any excess direct abor hours in the other departments cannot be switched to #epartment 9. . Answer4 B .he production p an that wi maximi"e month y profit shou d be based on the profitabi ity of the three products in terms of the use of direct abor hours in #epartment 9. P 6 - # 1 C . S3<*3<93<5Se ing price per unitP*07P*29P*7$=ariab e unit costs#irect materia $*9*$#irect abor779'5*=ariab e o!erhead2$2<25Se ing expenses923 .ota !ariab e cost*<9$90$1nit contribution marginP 09P 5<P $<,o. of #D> re5uired T #ept 99&2Contribution margin per #D>P 9*&P 95Based on the abo!e schedu e+ Product 3<5 is more profitab e per hour than Product 3<*(s and+ therefore+ a of the units re5uired for Product 3<5 shou d be produced. Product 3<9 wou d not use any direct abor hours in #epartment 9 and so a of the re5uired units for Product 3<9 can be produced. A!ai ab e direct abor hours T #epartment 9 >ours used by Product 3<5 A!ai ab e hours for Product 3<* Production units T Product 3<* Production4 Product 3<* Product 3<9 Product 3<5 A ternati!e So ution4 Since Product 3<* is the ess profitab e per #D>+ Product 3<9 and 3<5 wi be produced in fu and Product 3<* wi be partia y produced. .ota re5uired units+ Product 3<* I5ui!a ent units based on constraint $5< S 9 Production of Product 3<* 5<< 25< 25< *+<<< x 2 25< x 9 2+$5< 2+<<< $5< $5< 25< 3<< *+<<<

85

A ternati!e 5uestion4 What is the maximum month y contribution margin that Constraint Company can earn? Product 3<* 25< O P09 P 29+25< Product 3<9 3<< O P5< 2<+<<< Product 3<5 *+<<< O P$< $<+<<<

.ota contribution margin


86

P**9+25<

Answer4 B Costs incurred to make the order4 Aateria :5+<<< x 3<; Dabor :5+<<< x $2; )ncrementa fixed cost :specia de!ice; Costs to be incurred #ecrease in costs for standard products4 Aateria :<.5 x *7<+<<<; Dabor :<.5 x P*'<+<<<; -ther :<.5 x P*'+<<< #ecrease in costs ,et incrementa costs

P2<<+<<< 97<+<<< 3<+<<< P7<<+<<< P '<+<<< 0<+<<< 0+<<< P*$0+<<< P32*+<<<

.he amounts for depreciation+ rent+ and heat and ight are assumed to be not affected by the specia order. .here is no information pro!ided as to how power cost was exact y incurred.
87

Answer4 # Costs to be incurred for specia order P7<<+<<< 8ixed costs4 #epreciation :<.5 x $2+<<<; P97+<<< Power :<.5 x '+<<<; 3+<<< 6ent :<.5 x 2<+<<<; *<+<<< >eat and Dight :<.5 x 2+<<<; *+<<< 5*+<<< .ota cost P75*+<<< .he amount of fixed costs a ocated to specia order wou d be the costs that shou d ha!e been assigned to the standard sa es that wou d be cance ed. Answer4 B #ecrease in sa es of standard products<.5< x 5<<+<<< Dess !ariab e costs4 Aateria :*7<+<<< x <.5; Dabor :*'<+<<< x <.5; -ther :*'+<<< x <.5; -pportunity costs Answer4 # Specia sa es :5+<<< x *3<; =ariab e costs Contribution margin from specia sa e Dess opportunity costs )ncrease in profit Answer4 C .ota o!erhead rate per box Dess fixed o!erhead a ocated per boxP*<+<<<+<<< S *<<+<<< boxes =ariab e o!erhead rate per box P25<+<<< P'<+<<< 0<+<<< 0+<<<

88

*$0+<<< P $*+<<< P$<<+<<< 7<<+<<< *<<+<<< $*+<<< P 20+<<< P*5< *<< P 5<

89

90

91

. Answer4 C .he cost of materia s sa!ed by a decision of purchasing the tubes4 is P9<< x <.2< U P 7<

92

. Answer4 B .he re e!ant cost to make the tubes by =erbatim shou d e5ua the amount of cost sa!ings as fo ows4 Sa!ings on materia s <.2 x P9<< P 7< Dabor <.* x P2<< 2< -!erhead <.* x P 5< 5 .ota sa!ings :re e!ant cost; P '5 .he maximum amount that =erbatim is wi ing to pay per box of 23 tubes must be P'5. . Answer4 B Cost of making *25+<<< boxes4 =ariab e costs *25+<<< x '5 Additiona fixed costs .ota Answer4 C .ota purchase cost *25+<<< x 0<< .ota cost to make *25+<<< x '5 Sa!ings if purchased Answer4 A 8ixed costs4 Aanufacturing Aarketing .ota Se ing Price Dess =ariab e costs4 #irect materia s #irect abor =ariab e o!erhead Aarketing costs .ota 1nit contribution margin Breake!en units $+'<<+<<< S 9+0<<

93

*<+725+<<< *+<<<+<<< **+725+<<< **+25<+<<< **+725+<<< 9$5+<<<

94

95

9+<<< x *+2<< 9+<<< x *+3<<

P9+7<<+<<< 3+2<<+<<< P$+'<<+<<< P $+3<< P*+<<< *+5<< 5<< 5<< 9+5<< P 9+0<< 2+<<< units

96

. Answer4 C )n as much that there wou d be no change in the amount of fixed costs+ the recommended so ution was made by %ust comparing the amounts of contribution margin based on the re!ised data and the origina information4 Contribution margin based on new estimates 9+5<< x :7+5<< T 9+5<<; Contribution margin based on current estimates #ecrease 9+<<< x :$+3<< T 9+5<<; #ecrease in profit A ternati!e So ution4 .ota contribution margin 9+<<< x :$+3<< T 9+5<<; Dess 8ixed costs Current profit .ota contribution margin at reduced price 9+5<< x :7+5<< T 9+5<<; Dess 8ixed costs 6e!ised profit *<+5<<+<<< **+$<<+<<< : *+2<<+<<<; **+$<<+<<< $+'<<+<<< 9+0<<+<<< *<+5<<+<<< $+'<<+<<< 2+$<<+<<<

Current profit #ecrease in profit


97

9+0<<+<<< : *+2<<+<<<;

Answer4 B 8ixed fee P 5<<+<<< 8ixed o!erhead reimbursement 5<< x *+2<< 7<<+<<< .ota *+*<<+<<< Dess ost contribution margin on regu ar customers :5<< x 9+0<<; *.05<+<<< #ecrease in profit P: '5<+<<<; .he reimbursement for fixed o!erhead is an income for Aedica >ospita Company because the specia order does not entai additiona fixed o!erhead. . Answer4 C #irect materia s #irect abor =ariab e o!erhead Shipping cost Cost of obtaining the order 3<+<<< S *+<<< Ainimum se ing price *+<<< *+5<< 5<< $5< 3< 9+$0<

98

99

. Answer4 # A the production costs+ both !ariab e and fixed+ are no onger re e!ant because they are sunk costs. .o be re e!ant to a decision+ the cost must be both !a id and re e!ant. .herefore+ the on y re e!ant cost is the !ariab e marketing cost+ because if the units wi be so d through regu ar channe + P5<< wi be incurred. . Answer4 # .he maximum price at which the price charged by the contractor wou d indifferent to the cost to make the hoist is the tota differentia cost or a!oidab e cost. #irect materia s *+<<< #irect abor *+5<< =ariab e o!erhead 5<< A!oidab e fixed o!erhead *+2<< x <.9< 97< A!oidab e !ariab e marketing cost 5<< x <.2 *<< Aaximum purchase price 9+37< . Answer4 A #irect materia s #irect abor =ariab e o!erhead A!oidab e marketing costs -pportunity cost W'<< x :0+<<< T 5+5<< T *+<<<;X S *+<<< Aaximum purchase price *+<<< *+5<< 5<< *<< 2+<<< 5+*<<

100

101

A better understanding of the so ution can be made by drawing a schedu e to compute income for this a ternati!e and compare it with the income shown in so ution for Buestion ,o. 0$ as fo ows4 Aodified6egu arSa es$+2<<+<<<22+2<<+<<<=ariab e production costs4 )n house production :2+<<< x 9+<<<; 7+<<<+<<< :'<< x 5+5<<;3+3<<+<<< Contractor(s cost *+<<< x 5+*<< 5+*<<+<<<=ariab e marketing costs 6egu ar :2+<<< x 5<<; V :*+<<< x 3<<; *+3<<+<<< Aodified :'<< x *+<<<; '<<+<<<8ixed costs. . $+'<<+<<<Profit2+<<<+<<<*+0<<+<<< .ota profit :2+<<<+<<< V *+0<<+<<<; 9+0<<+<<<
102

Answer4 A

#irect materia :7 bs. P*.5<; #irect abor :<.25 hr. P$; #irect machine cost :P*<Rb anket; =ariab e o!erhead :<.25 hr. P9; Administrati!e costs :P2+5<<R*+<<<; Ainimum bid price
103

P0.<< *.$5 *<.<< <.$5 2.5< P23.<<

. Answer4 B 1sing the fu &cost criteria and the maximum a owab e return specified+ Aarcus 8ibers( bid price per b anket wou d be4 6e e!ant costs :from 6e5uirement *; P23.<< 8ixed o!erhead :<.25 hr. P'; 2.<< Subtota P27.<< A owab e return :<.*5P P27; 9.0< Bid price P20.0< P<.<0R:* T <.3<; U <.*5