MODULE 6

INCREMENTAL ANALYSIS
THEORIES:
1.

When discussing the pitfalls to be avoided in decision-making, four reminders

usually emerge. Which is NOT one of those reminders?
A. Ignore sunk costs.
B. Beware of allocated fixed costs; identify the avoidable costs.
C. Pay special attention to identifying and including opportunity costs.
D. Do not overlook the time value of money in short-run decisions.

2.

Predicted future cost and revenue data that will differ among alternative
courses of action are known as
A. relevant information
B. direct information
C. marginal costs
D. incremental costs

3.

Incremental analysis would not be appropriate for

A. a make or buy decision.
B. an allocation of limited resource decision.
C. elimination of an unprofitable segment.
D. analysis of manufacturing variances.

4.

Which of the following is described as data that are pertinent to a decision?

A. qualitative characteristics
B. accurate information
C. timely information
D. relevant information

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 analysis in which the relevant information is developed and
analyzed.
D. Compare the alternatives.

6.

Which of the following best describes relevant information?

A. Focused on the past and differs between the alternatives under
consideration.
B. Focused on the past and not related to the decision under consideration.
C. Focused on the future and differs between the alternatives under
consideration.
D. Focused on the future and not related to the decision under consideration.

7.

A major accounting contribution to the managerial decision-making process in

evaluating possible courses of action is to
A. assign responsibility for the decision.
B. provide relevant revenue and cost data about each course of action.
C. determine the amount of money that should be spent, on a project.
D. decide which actions that the management should consider.

8.

An analysis of relevant costs and relevant revenues

A. Will enable the decision maker to assess a decision's impact on profit
B. Is useful in assessing a variety of alternative decisions
C. Provides sufficient and complete evidence with which to make a decision
D. Answers a. and b. are correct

9.

The
A.
B.
C.
D.

10.

An important concept in decision making is described as "the contribution to

income that is forgone by not using a limited resource in its best alternative
use," This concept is called
A. Marginal cost
B. Cost outlay
C. Incremental cost
D. Opportunity cost

11.

An "opportunity cost" is
A. the difference in total costs that results from selecting one alternative
instead of another
B. the profit forgone by selecting one alternative instead of another
C. a cost that may be saved by not adopting an alternative
D. a cost that may be shifted to the future with little or no effect on current
operations

kind of cost that can be ignored in a short-term decision making is a (an)

differential cost
incremental cost
sunk cost
joint cost

12. The best characterization of an opportunity cost is that it is

A. relevant to decision making but is not usually reflected in accounting
records
B. not relevant to decision making and is not usually reflected in accounting
records
C. relevant to decision making and is usually reflected in accounting records
D. not relevant to decision making and is usually reflected in accounting
Records
13.

Which of the following is least likely to be a relevant item in deciding whether to

replace an old machine?
A. acquisition cost of the old machine
B. outlay to be made for the new machine
C. annual savings to be enjoyed on the new machine
D. life of the new machine

14.

The Health Care Division of Piedmont Insurance employs three claims

processors capable of processing 5,000 claims each. The division currently
processes 12,000 claims. The manager has recently been approached by two
sister divisions. Auto Division would like the Health Care Division to process
approximately 2,000 claims. Property Division would like the Health Care
'Division to process approximately 5,000 claims. The Health Care Division would
be compensated by Auto Division or Property Division for processing these
claims. Assume that these are mutually exclusive alternatives. Claims processor
salary cost is relevant for

A. Auto Division alternative only

B. Property Division alternative only
C. both Auto Division and Property Division alternatives
D. neither Auto Division nor Property Division alternatives
15.

A fixed cost is relevant if it is

A. future cost
B. sunk
C. avoidable
D. a product cost

16.

Relevant costs are

A. all fixed and variable costs
B. all costs that would be incurred within the relevant range of production
C. past costs that are expected to be different in the future
D. anticipated future costs that will differ among various alternatives

17.

Which of the following is (are) a true statement(s) about cost behaviors in

incremental analysis?
I.
II.
III.

Fixed costs will not change between alternatives.

Fixed costs may change between alternatives.
Variable costs will always change between alternatives.

A. I
B. II
C. Ill
D. II and III
18.

The potential benefit that may be obtained from following an alternative course
of action is called
A. Opportunity benefit
B. Opportunity cost
C. Relevant cost
D. sunk cost

19.

Which one of the following is not a common mistake in a decision-making

process?
A. Considering sunk costs as relevant.
B. Considering opportunity cost, an imputed cost, being relevant.
C. Considering fixed costs as avoidable fixed costs.
D. Unitizing fixed costs.

20.

Sensitivity analysis is useful in decision making when:

A. there is a degree of uncertainty about the relevant data.
B. there is an opportunity cost included in the analysis.
C. sunk cost is included in the analysis,
D. the analysis is subject to a review by the management.

21.

To determine the possible outcome in a decision analysis if a key prediction or

assumption proves to be wrong, managers will use:
A. sensitivity analysis.

B. total analysis.
C. incremental analysis.
D. regression analysis.
22.

Unit costs can mislead decision makers. Which of the following situations
dealing with unit costs are not expected to result in a faulty analysis?
A. Unit costs used in make-or-buy decisions might include costs such as
avoidable fixed costs.
B. Variable unit cost directly varies with the changes in production units.
C. Total fixed costs increase as more units are produced within the relevant
range.
D. Contribution margin on products that can be manufactured in using the
freed capacity is irrelevant in the decision.

23.

Which of the following is a cost that requires a future-outlay of cash that is

relevant for future decision-making?
A. Opportunity cost
B. Relevant benefits
C. Out-of-pocket cost
D. Incremental revenue

24.

One of the behavioral problems with relevant cost analysis is the overemphasis
on short-term goals, which can lead to neglect of:
A. sales promotion
B. expense control
C. quarterly net income results
D. long-term strategic goals

25.

Incremental analysis is the process of identifying the financial data that:

A. do not change under alternative courses of action
B. are mixed under alternative courses of action
C. change under alternative courses of action
D. no correct answer is given

26.

Opportunity cost is the

A. cash outlay required to implement an alternative.
B. difference in total costs between the alternatives.
C. maximum available contribution to profit that is given up when using
limited resources for another purpose.
D. fixed cost avoided when a product, department, or business unit is
abandoned.

27.

Using opportunity cost to analyze the income effects of a given alternative is

referred to as
A. engineering analysis
B. mixed-cost analysis
C. account analysis
D. differential analysis

28.

Opportunity costs are

A. Costs that increase due to a higher volume of activity or the performance of
an additional activity
B. Costs that a company must incur to perform an activity at a given level,

but will not be incurred if a company reduces or discontinues the activity

The profits that a company forgoes by following a particular course of
action
D. Costs that were incurred prior to making a decision
C.

29. Avoidable costs are

A. Costs that increase due to a higher volume of activity or the performance of
an additional activity
B. Costs that a company must incur to perform an activity at a given level, but
will not be incurred if a company reduces or discontinues the activity
C. The profits that a company forgoes by following a particular course of
action
D. Costs that were incurred prior to making a decision
30.

Sunk costs are

A. Costs that increase due to a higher volume of activity or the performance of
an additional activity
B. Costs that a company must incur to perform an activity at a given level, but
will not be incurred if a company reduces or discontinues the activity
C. The profits that a company forgoes by following a particular course of
action
D. Costs that were incurred prior to making a decision

31.

The difference in cost between or among various alternative courses of action

appropriately describes a (an):
A. differential cost
B. ad hoc discount
C. constraint
D. scarce resource

32.

Incremental revenue is:

A. a difference in costs between two decisions.
B. a concession based on competitive influences.
C. additional revenue across decision choices from potential sales.
D. the difference between selling price and variable costs.

33.

A sunk cost is:

A. a cost incurred in the past and not relevant to any future course of action.
B. an opportunity cost.
C. useful in analysis of alternative courses of action.
D. relevant to current decision making.

34.

Manufacturing parts internally by a company causes:

A. the company to be dependent upon suppliers for timely delivery of parts
B. the quality of the parts to be under the control of the company
C. lower parts costs to be assured
D. a company's operations to be more efficient than when the parts are
purchased from suppliers

35.

In any make or buy decision confronting a company, which of the following

factors should be considered?
A. Can the supplier provide a sufficient quantity to meet the company's
current and future needs?

B. Do the supplier's items meet product and quality specifications?

C. Is the supplier reliable?
D. All of the above should be considered.
36.

Within the context of the make or buy decision, when are fixed costs relevant?
A. Fixed costs are always relevant
B. Fixed costs are never relevant
C. Fixed costs are relevant when they differ among alternatives
D. It cannot be determined without closely examining each particular situation

37.

In a make or buy decision:

A. Only variable costs are relevant.
B. Fixed costs that can be avoided in the future are relevant.
C. Fixed costs that will continue regardless of the decision are relevant.
D. Only conversion costs are relevant.

38.

Which of the following elements of the value chain should be considered when
deciding whether to make or buy a component needed for production?
A. Marketing
B. Distribution
C. Manufacturing
D. all of these choices

39.

In a make-or-buy decision, which of the following is true?

A. Variable costs are the only relevant costs.
B. Allocated fixed costs are relevant.
C. Alternative uses of space and machinery are relevant.
D. Making the product is the correct decision when there is idle capacity.

40.

The opportunity cost of making a component part in a factory with excess

capacity for which there is no alternative use is
A. the total manufacturing cost of the component.
B. the total variable cost of the component.
C. the fixed manufacturing cost of the component.
D. zero.

41.

Which of the following qualitative factors favors the buy choice in a make or buy
decision for a part?
A. maintaining a long-term relationship with suppliers
B. quality control is critical
C. utilization of idle capacity
D. part is critical to product

42.

Haribon Company is faced with a make-or-buy decision. Haribon should agree

to buy the part from a supplier provided the price is less than Haribon's
A. total costs
B. variable production costs plus avoidable fixed production costs
C. total manufacturing costs
D. variable costs

43.

The concept of target pricing is employed when:

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 goals.
D. All of the above.
44.

A company should decide to make, rather than buy, a part required for their
product, if
A. The company's production facility is at full capacity
B. The relevant cost per-unit of making the part exceeds the per-unit relevant
costs of purchasing the part
C. The supplier of the part can produce a higher-quality part
D. The supplier of the part has questionable reliability

45.

A product life cycle includes the phases of

A. research and development and design
B. purchasing and production
C. marketing and distribution
D. all of the above

46.

The cost of not receiving rent from a space because you decide to make the
part rather than buying it from an outside supplier is considered a (an)
A. sunk cost
B. future cost
C. opportunity cost
D. fixed cost

47.

In a make-or-buy decision, an opportunity cost that should be considered is

the:
A. income that could be generated from idle production space,
B. total costs to produce the item
C. variable costs to produce the item
D. fixed costs to produce the item

48.

Incremental analysis is most useful

A. in evaluating the master budget.
B. in choosing between the net present value method and the internal rate of
return method.
C. in developing relevant information for management decisions,
D. as a replacement technique for variance analysis.

49.

In making a special order decision, management should:

A. compute a reasonable sales price for items not normally produced.
B. consider additional overhead cost.
C. consider normal and relevant costs,
D. All of the above.

50.

An
A.
B.
C.
D.

opportunity cost commonly associated with a special order is

the contribution margin on lost sales
the variable costs of the order
additional fixed cost that is related to the increased output
any of the above

51.

If the firm is operating under capacity, the minimum special order price should
be high enough to cover:
A. all variable costs and incremental fixed costs associated with the special
order minus foregone contribution margin on regular units not produced.
B. variable and incremental fixed costs associated with the special order and a
profit margin.
C. limited variable costs associated with the special order.
D. neither variable nor fixed costs associated with the special order.

52.

Which of the following factors should be considered in deciding whether to

accept a special order?
A. the sales price of the product or service
B. the production capacity of the company
C. the impact on, regular customers
D. all of these choices

53.

Operating at or near full capacity will require a firm considering a special order
to recognize the:
A. opportunity cost arising from lost sales
B. value of full employment
C. time value of money
D. need for good management

54.

Given the following list of costs, which one should be ignored in a decision to
produce additional units of product for a factory that is operating at less than
100% capacity, and the additional business will not use up the remainder of the
plant capacity?
A. Direct material cost per unit
B. Direct labor cost per hour
C. Fixed selling expenses
D. Variable selling expenses

55.

If there is excess capacity, the minimum acceptable price for a special order
must cover
A. variable costs associated with the special order.
B. variable and fixed manufacturing costs associated with the special order.
C. variable and incremental fixed costs associated with the special order.
D. variable costs and incremental fixed costs associated with the special order
plus the contribution, margin usually earned on regular units.

56.

If a
A.
B.
C.
D.

57.

Green Giant Foods has some excess manufacturing capacity that it can leave
idle, use to produce its own boxes for frozen foods, or use to process another
company's frozen foods. It will be more profitable for Green Giant to process
the competitor's frozen foods as long as the net cost is
A. greater than both the cost to buy the boxes and the cost to leave the plant
idle.

firm is at full capacity, the minimum special order price must cover
variable costs associated with the special order.
variable and fixed manufacturing costs associated with the special order.
variable and incremental fixed costs associated with the special order.
variable costs and incremental fixed costs associated with the special order
plus foregone contribution margin on regular units not produced.

B.

less than the cost to leave the plant idle and greater than the cost to buy
the boxes.
C. greater than the cost to leave the plant idle and lower than the cost to buy
boxes from a supplier.
D. less than both the cost to leave the plant idle and the cost to make or buy
the boxes.
58.

The sales price of a product, in the long run, must be enough to cover what
type of costs?
A. Designing costs
B. Marketing costs
C. Servicing costs
D. All of the above

59.

In using the variable cost concept of applying the cost-plus approach to product
pricing, what is included in the markup?
A. Total costs plus desired profit.
B. Desired profit.
C. Total selling and administrative expenses plus desired profit.
D. Total fixed manufacturing costs, total fixed selling and administrative
expenses, and desired profit.

60.

Managers who often make special pricing decisions are more likely to use which
of the following cost concepts in their work?
A. Total cost.
B. Product cost.
C. Variable cost.
D. Fixed cost.

61.

In contrast to the total product and variable cost concepts used in setting
seller's prices, the target cost approach assumes that:
A. a markup is added to total cost.
B. selling price is set by the marketplace.
C. a markup is added to variable cost.
D. a markup is added to product cost.

62.

Which of the following is NOT a cost concept commonly used in applying the
cost-plus approach to product pricing?
A. Total cost concept.
B. Product cost concept.
C. Variable cost concept.
D. Fixed cost concept.

63. The cost-plus pricing formula that takes into consideration all costs -- fixed,
variable, and manufacturing, as well as selling and administrative costs is called
the percentage of
A. full costs.
B. variable manufacturing costs.
C. total variable costs.
D. absorption costs.

64.

How does a company determine whether to sell a product "as is" or process it
further?
A. If the costs to process further exceed the costs of current production, the
product should be sold 'as is."
B. If the costs to process further exceed the costs of current production, the
product should be processed further.
C. If the increase in revenue from selling the product after further processing
is greater than the additional costs incurred in further processing, the
company should opt for further processing.
D. If the revenues generated by processing the product further exceed the
revenues from selling the product "as is," the company should process
further.

65.

Which of the following costs is relevant in deciding whether to sell joint

products at split-off or process them further?
A. The unavoidable costs of further processing.
B. The additional costs of further processing.
C. The variable costs of operating the joint process.
D. The cost of materials used to make the joint products.

66.

The decision to keep or drop products or services involves strategic

consideration of the:
A. potential impact on remaining products or services
B. impact on employee morale
C. growth potential of the firm
D. All of the above answers are correct

67. Two
not
A.
B.
C.
D.

or more manufactured products that have significant sales values and are
uniquely identifiable as individual products until the split-off point are called
common products.
joint products.
co-mingled products.
cooperative products.

68.

What are the manufacturing costs incurred beyond the split-off point called?
A. Separable costs.
B. Joint costs.
C. Severance costs.
D. Common costs.

69.

When there is one scarce resource, the product that should be produced first is
the product with
A. the highest contribution margin per unit of the scarce resource.
B. the highest sales price per unit of scarce resource.
C. the highest demand.
D. the highest contribution margin per unit.

70.

Which of the following is an important factor affecting the sales mix of any
company?
A. organizational advertising expenditures
B. organizational sales force compensation plan
C. product selling price
D. All of the above

71.

A useful device for solving production problems involving multiple products and
limited resources is:
A. gross sales per unit of product
B. contribution per unit of scarce resource
C. net profit per unit of product
D. total benefit

72.

When there is only one production constraint and excess demand, it is generally
best to focus production and Sales on the product with the highest:
A. Contribution per unit of scarce resource
B. Margin of Safety
C. Contribution margin in pesos
D. Operating Leverage

73.

Which of the following will relax a constraint?

A. Outsourcing all or part of the bottleneck operation
B. Working overtime at the bottleneck operation
C. Retraining employees and shifting them from the bottleneck
D. A and B, only

74.

Uranus Company has 2 products that use the same manufacturing facilities and
cannot be subcontracted. Each product has sufficient orders to utilize the entire
manufacturing capacity. For short-run profit maximization, Uranus should
manufacture the product with the
A. Lower total -manufacturing costs for the manufacturing capacity,
B. Lower total variable manufacturing costs for the manufacturing capacity.
C. Greater gross profit per hour of manufacturing capacity.
D. Greater contribution margin per hour of manufacturing capacity.

75.

Profit can be maximized by producing products with

A. the highest selling price
B. the highest contribution margin
C. the highest contribution margin per unit of items that are best sellers
D. the highest contribution per unit of the constraining resource

76.

A product mix decision involves

A. Influencing the sales volume mix of the products to minimize cost.
B. Influencing the sales volume mix of the products to maximize revenue.
C. Producing the maximum amount of items that provide the highest
contribution margin.
D. Producing the maximum amount of items that carry the lowest per-unit
cost.

77.

A company should advertise those products that

A. Require the lowest commitment of resources to produce
B. Have the largest total contribution margin
C. Can be outsourced
D. Have the largest total contribution margin after deducting the cost of the
ad campaign

78.

The goal in deciding whether to add or drop products, services, or departments

is to obtain the greatest
A. reduction in total costs.

B. contribution possible to cover unavoidable costs.

C. increase in sales revenues.
D. decrease in direct fixed costs.
79.

As long as its marginal cost is lower than its marginal revenue, a company
should
A. suspend additional production and sales activities.
B. perform a cost-benefit balance analysis before producing and selling
additional products.
C. engage in additional production and sales activities.
D. examine cost behaviors and develop a cost function to measure the cost of
future production.

80.

Which of the following should not enter into decision of whether to drop
product?
A. Unavoidable costs
B. Avoidable costs
C. Revenue that would be lost
D. Non financial impacts of the decision

81. The
A.
B.
C.
D.

major pitfall in the contribution margin approach to pricing is

its failure to recognize fixed costs.
its failure to recognize depreciation expense.
its inability' to control waste.
its inability to recognize financing costs of the production in question.

82.

Production of a special order will increase gross profit when the additional
revenue from the special order is greater than
A. The non variable costs incurred in producing the order.
B. The direct material and labor costs in producing the order.
C. The fixed costs incurred in producing the order.
D. The marginal cost of producing the order.

83.

In considering a special order that will enable a company to make a use of

presently idle capacity, which of the following costs would be irrelevant.
A. Materials
B. Depreciation
C. Direct labor
D. Variable OH

84.

A company owns equipment that is used to manufacture important parts for its
production process. The company plans to sell the equipment for P10.000 and
to select one of the following alternatives:
(1)
(2)

A.
B.
C.
D.

acquire new equipment for P80,000

purchase the important parts from an outside company at P4 per part.

The company should quantitatively analyze the alternatives by comparing

the cost of manufacture the parts
Plus P80,000 to the cost of buying the parts less P10,000.
To the cost of buying the parts less P10,000.
Less P10,000 to the cost of buying the parts,
To the cost of buying the parts.

PROBLEMS:
2.

Sieney & Company has 24,000 defective units of a product that cost P8 per unit
to manufacture, and can be sold for P4 per unit. These units can be reworked
for P2 per unit and sold at their full price of P12 each. If Sieney reworks the
defective units, how much incremental net income will result?
A. P144,000
B. P 96,000
C. P 72,000
D. P 48,000

3.

Venus Company, a manufacturer of lamps, budgeted sales of 400,000 lamps at

P20 per unit for the year. Variable manufacturing costs were budgeted at P8 per
unit, and fixed manufacturing costs at P 5 per unit. A special order offering to
buy 40,000 lamps for PI 1.50 each was received by Venus in April. Venus has
sufficient plant capacity to manufacture the additional quantity of lamps;
however, the production would have to be done by the present work force on an
overtime-basis at an estimated additional cost of PI.50 per lamp. Venus will not
incur any selling expenses as a result of the special order. Venus Company
would have a unit relevant cost of
A. P 8.00
B. P13.00
C. P 9.50
D. P14.50

3.

For the year ended April 30, 2007, Salmo Company incurred direct costs
of P800,000 based on a particular course of action. Had a different course of
action been taken, direct costs would have been P650,000. In addition, Salmo's
fixed costs during the fiscal year were P110,000.
The incremental (decremental) cost was:
A. P 40,000
B. P ( 40,000)
C. P 150,000
D. P (150,000)

4.

Brace Co. has considerable excess manufacturing capacity. A special job

order's cost sheet includes the following applied manufacturing overhead costs:
Variable costs
Fixed costs

P56,250
45,000

The fixed costs include a normal P6,800 allocation for in-house design costs,
although no in-house design will be done. Instead, the special job will require
the use of external designers costing P13,750.
What is the minimum acceptable price for the job?
A. P 63,050
B. P 70,000
C. P101,250
D. P108,200

5.

For the past 12 years, the JLO Company has produced the small electric motors
that fit into its main product line of dental drilling equipment. As materials
costs have steadily increased, the controller of the JLO Company is reviewing
the decision to continue to make the small motors and has identified the
following facts:
1) The equipment which is used to manufacture the electric motors has a
book value of P1,500,000.
2) The space being occupied now by the electric motor manufacturing
department could be used to eliminate the need for storage space
which is presently being rented.
3) Comparable units can be purchased from an outside supplier for
P597.50.
4) Four of the people who work in the electric motor manufacturing
department would be terminated and given eight weeks of separation
pay.
5) A P750.000 unsecured note is still outstanding on the equipment that
is being -used in the manufacturing process.
Which of the items above are relevant to the decision that the controller has to
make?
A. 1, 2, 4, and 5
B. 1, 3, and 4
C. 1, 3, 4, and 5
D. 2, 3, and 4

7.

A business is operating at 90% of capacity and is currently purchasing a part

which is being used in its manufacturing operations for P15 per unit. The unit
cost for the business to make the part is P20, including fixed costs, and P12,
not including fixed costs. If 30,000 units of the part are normally purchased
during the year but could be manufactured using unused capacity, what would
be the amount of differential cost, increase or decrease, from making the part
rather than purchasing it?
A. P150.000 cost increase
B. P 90,000 cost decrease
C. P150,000 cost decrease
D. P 90,000 cost increase

8.

Sylvan Processing Company is considering whether to make 2,000 units of

product Whirl which costs P16 a unit or buy it from outside for P15 a unit. A
further analysis shows that if product Whirl is outsourced, fixed costs of P8,000
attributable to this product will be reduced by 25%. If the product is
outsourced, Sylvan will
A. Decrease profit by P2,000
B. Decrease profit by P4.000
C. Increase profit by P2,000
D. Increase profit by P4,000

8.

Referring to the original data, if Sylvan Processing Company purchased the

product Whirl, the space could be rented out for P6,000. If the product is
outsourced, profit would
A. decrease, P2,000
B. decrease, P4,000

C. increase, P2,000
D. increase, P4,000
9.

It costs P450,000 to make 15,000 units of a part in this plant. This cost
includes material of P90,000, direct labor of P12Q,000, variable overhead of
P15,000, and P225.000 in fixed overhead inclusive of P45.000 in depreciation
and common overhead allocation of P150,000. The balance is for the section
supervisor's salary. The part can be purchased for P20 a unit. If the part is
purchased, the space released can be rented for P65.000. If the part is
purchased, the company will
A. lose P20,000
B. lose P45,000
C. gain P20,000
D. gainP45,000

10.

Lane Co. manufactures ballpoint pens. Another manufacturer has offered to

supply Lane with the 5,000 ink cartridges that it needs annually. The cost to
buy the cartridges would be P15 each. In producing its own cartridges, Lane
has incurred P10 in fixed costs and P8 in variable costs. If Lane buys the
cartridges, its net income will:
A. not change
B. decrease by P35,000
C. increase by P35,000
D. increase by P25,000

11.

The Rainbow Company manufactures Part No. 498 for use in its production
cycle. The cost per unit if 20,000 units of Part No. 498 are manufactured are as
follows:
Direct materials
Direct labor
Variable overhead
Fixed overhead applied
Total unit cost

P6
30
12
16
P64

The Reeves Company has offered to sell 20,000 units of part No. 498 to
Rainbow for P60 per unit. Rainbow will make the decision to buy the part from
Reeves if there is a savings of P25,000 for Rainbow. If Rainbow accepts
Reeves's offer, P9 per unit of the fixed overhead applied would be totally
eliminated. Furthermore, Rainbow has determined that the released facilities
could be used to save relevant costs in the manufacture of part No. 575. In
order to have a savings of P25.000, the amount of the relevant costs that would
be saved by using the released facilities in the manufacture of Part No. 575
would have to be
A. P 80,000
B. P 85,000
C. P125,000
D. P140.000
12.

Leis Manufacturing Co. uses 10 units of Part Number WS73 each month in the
production of computer printer. The unit cost to manufacture one unit of WS73
is presented below.

Direct materials
Materials handling
(20% of direct material cost)
Direct labor
Manufacturing overhead
(150% of direct labor)
Total manufacturing cost

1,000
200
8,000

12,000
P21,200

Material handling represents the direct variable costs of the Receiving

Department that are applied to direct materials and purchased components on
the basis of their cost. This is a separate charge in addition to manufacturing
overhead. Leis' annual manufacturing overhead budget is one-third variable and
two-thirds fixed. Garland Company, one of Leis' reliable vendors, has offered to
supply part WS73 at a unit price of P15,000.
If Leis purchases the WS73 units from Garland, the capacity being used by Leis
to manufacture these parts would be idle. Should Leis decide to purchase the
parts from Garland, the unit cost of WS73 would
A. Increase by P4,800
B. Decrease by P3,200
C. Decrease by P6,200
D. Increase by P1,800
13.

Balagtas & Company expects to incur the following costs at the planned
production level of 10,000 units:
Direct materials
P100,000
Direct labor
120,000
Variable overhead
60,000
Fixed overhead
30,000
The selling price is P50 per unit. The company currently operates at full
capacity of 10,000 units. Capacity can be increased to 13,000 units by
operating overtime. Variable costs increase by P14 per unit for overtime
production. Fixed overhead costs remain unchanged when overtime operations
occur. Balagtas has received a special order from Florante, Inc. who has offered
to buy 2,000 units at P45 each.
What is the incremental cost associated with this special order?
A. P42,000
B. P84,000
C. P31,000
D. P62,000

14.

You have been approached by a foreign customer who wants to place an order
for 15,000 units of Product C at P22.50 a unit. You currently sell this item for
P39 a unit, and the item has a cost of P29 a unit. Further analysis reveals that
you will not be paying sales commission of P2.50 a unit on this sales and its
packaging requirement will save you an additional P1.50 per unit.
However, the additional graphics required on this job will cost you P30.000.
Note also that fixed costs amounting to P400.000 for the production of 50,000
of such products by the firm will not change. You decide to accept this order,

but another customer who buys an average of 2,000 units for the period wants
to pay you P22.50 rather than the regular price of P39 a unit. Profit will
A. increase profit by P19,500
B. increase profit by P16,500
C. increase profit by P52.500
D. decrease profit by P52.500
15.

The Thermo Company has received a special order for 300 units of product X
for P6 a unit. It usually sells for P9.50 a unit with a cost of P7.50 a unit
inclusive of 75 cents a unit as sales commission that will not be paid on this
order. The cost also includes P3 in manufacturing overhead, was two-third of
which is for the fair share of depreciation, rent, utilities and supervisor's salary.
The latter's (supervisor's salary) accounts for one-half of this amount.
Assuming that excess capacity is available, and this order requires a mold that
costs P150, accepting the order will increase
A. loss byP225
B. loss by P375
C. gain byP225
D. gain by P375

16. The cost to produce 24,000 units at 70% capacity consists of:
Direct materials
P360,000
Direct labor
540,000
Factory - overhead, all fixed
290,000
Selling expense (35% variable, 65% fixed)
240,000
What unit price would the company have to charge to make P22,500 on a sale
of 1,500 additional units that would be shipped out of the normal market area?
A. P 51
B. P 56
C. P 41
D. P 50
17.

The following are a company's monthly unit costs to manufacture and market a
particular product.
Manufacturing Costs:
Direct materials
Direct labor
Variable indirect
Fixed indirect
Marketing Costs:
Variable
Fixed

P2.00
2.40
1.60
1.00
2.50
1.50

The company must decide to continue making the product or buy it from an
outside supplier. The supplier has offered to make the product at a level of
quality that the company prescribes. Fixed marketing costs would be
unaffected, but variable marketing costs would continue at 30% if the company
were to accept the proposal.

What is the maximum amount per unit, that the company can pay the supplier
without decreasing its operating income?
A. P8.50
B. P6.75
C. P7.75
D. P5.25
18.

The Rural Cooperative, Inc. produces 1,000 units of Part M per month. The
total manufacturing costs of the part are as follows:
Direct materials
Direct labor
Variable overhead
Fixed overhead
Total manufacturing cost

P10,000
5,000
5,000
30,000
P50,000

An outside supplier has offered to supply the part at P30 per unit. It is
estimated that 20% of the fixed overhead being assigned to Part M will no
longer be incurred if the company purchases the part from the outside supplier.
If Rural Cooperative purchases 1,000 units of Part M from the outside supplier,
its monthly operating income will
A. decrease by P 4,000
B. decrease by P20,000
C. increase by P 1,000
D. increase by P20,000
19.

Migs Corporation currently manufactures all component parts used in the

manufacture of various hand tools. A steel handle is used in three different
tools. The budgeted costs per unit based on 20,000 units are:
Direct material
Direct labor
Variable overhead
Fixed overhead
Total unit cost

P6.00
4.00
1.00
2.00
P13.00

Sans Steel, Inc. has offered to supply 20,000 units of the handle to Migs for
PI2.50 each delivered. If Migs currently has idle capacity that cannot be used,
accepting the offer will
A. Decrease the handle unit cost by P0.50.
B. Increase the handle unit cost by P1.50.
C. Decrease the handle unit cost by P1.50.
D. Increase the handle unit cost by P0.50.
20.

Bulacan Company manufactures part G for use in the production of its principal
product. The costs per unit for 10,000 units of part G are as follows:
Direct materials
Direct labor
Variable overhead
Fixed overhead
Total

P3
15
6
8
P32