FAR EASTERN UNIVERSITY

INSTITUTE OF ACCOUNTS, BUSINESS AND FINANCE

Department of Accountancy & Internal Auditing

Management's decision-making process. (Short-term decision making)

Management's decision-making process consists of

(a) identifying the problem or opportunity
(b) assigning responsibility for the decision
(c) determining possible courses of action
(d) developing data relevant to each course of action
(e) making the decision
(f) reviewing the results of the decision

Concept of incremental analysis.

Incremental analysis is the process used to identify financial data that change under
alternative courses of action. These data are relevant to the decision because they will vary
in the future among the possible alternatives.

RELEVANT COST
Accepting an order at a special price.
The relevant information in accepting an order at a special price is the difference between
the variable manufacturing costs to produce the special order and expected revenues.
Make-or-buy decision.
In a make-or-buy decision, the relevant costs are
(a) the variable manufacturing costs that will be saved
(b) the purchase price
(c) opportunity costs
Determining whether to sell or process materials further.
The decision rule for whether to sell or process materials further is: Process further as long
as the incremental revenue from processing exceeds the incremental processing costs.
Retaining or replacing equipment.
The relevant costs to be considered in determining whether equipment should be retained
or replaced are the effects on variable costs and the cost of the new equipment. Also, any
disposal value of the existing asset must be considered.
Deciding whether to eliminate an unprofitable segment. In deciding whether to eliminate an
unprofitable segment, the relevant information is the contribution margin, if any, produced
by the segment and the disposition of the segment's fixed expenses.

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 FAR EASTERN UNIVERSITY

INSTITUTE OF ACCOUNTS, BUSINESS AND FINANCE

Department of Accountancy & Internal Auditing

Determining sales mix when a company has limited resources. When a company has
limited resources, it is necessary to find the contribution margin per unit of limited resource.
This amount is then multiplied by the units of limited resource to determine which product
maximizes net income.

ACCEPT or REJECT A SPECIAL ORDER

1 A Company has the following data:

Annual Plant Capacity (units) 12,500
Current Year Operations:
Sales Volume 10,000
Sales Revenue 2,000,000
Manufacturung Cost
Variable 120.00 per unit
Fixed 85,000
Selling and Administrative
Variable (commission on sales) 12.50
Fixed 12,500

There is a special order of 2,000.00 units at P 145.00 , special price

which is subject to half the usual commission rate per unit.
Req'd:
a) Assuming no effect on regular sales at regular prices, should the company accept the
special order?
b) What is the effect of the decision of the company on its operating profit?

2 B Company has
Plant Capacity 1,250,000 units
Current Production 1,000,000 units
Selling Price 45.00
Fixed cost and expenses 3,750,000 pesos
Variable cost and expenses 27.50 per unit

The company has an opportunity to sell additional units under its special marketing plan
which is not expected to affect regular selling price nor regular quantity of sales.
Units 150,000
Special price 35.00

Req'd:
a) Prepare an income statement for the present level of operations, income statement
expected from the additional business and the total statement of income if the additional
business is accepted.
b) Should the additional business be accepted? Give the reason for your answer.
c) What is the minimum price per unit that is acceptable to you?

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 FAR EASTERN UNIVERSITY

INSTITUTE OF ACCOUNTS, BUSINESS AND FINANCE

Department of Accountancy & Internal Auditing

MAKE or BUY

1 A company needs 30,000 units of part X to produce 15,000 Y goods. It is estimated that
each unit will take one-half machine hour for production and said company has idle capacity
of 35,000 hours. The following information is available.
Cost to make the part per unit:
Materials - - - - - - - - - - - - - - - - - - - - - - - P 75.00
Direct Labor - - - - - - - - - - - - - - - - - - - - - - 100.00
Factory Overhead (60% of which is variable) 75.00

Cost to buy the parts per unit from the supplier 235.00
Req'd:
a) Should A manufactures the parts or should it buy them from an outside supplier?
b) If the company buys the parts rather than producing them, they will save 40% of fixed
factory overhead per unit. Will you change your recommendation?

2 B Company needs 20,000 units of a certain part in its production. If B buys the part from
Z company instead of making it, B could not use the released facilities in another mfg.
activity. 60% of the fixed overhead will continue regardless of what decision is made.
The following information is available:
Cost to purchase the part from Z company 180.00
Cost to B Company to make the part:
Direct Materials 20.00
Direct Labor 80.00
Factory overhead is 450% of direct materials
cost per unit, variable factory overhead is
60% of factory overhead per unit
Req'd:
Which alternative is more desirable for B Company and by what amount is it more
desirable?

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 FAR EASTERN UNIVERSITY

INSTITUTE OF ACCOUNTS, BUSINESS AND FINANCE

Department of Accountancy & Internal Auditing

RETAIN or ELIMINATE a DEPARTMENT/SEGMENT/PRODUCT LINE

1 A management report of A Company, which maintains 3 products was presented to you

by the management for analysis and recommendation:

Ready-to- Powdered Carbonated

Drink Juice Softdrinks TOTAL
Sales 480,000 720,000 360,000 1,560,000
Variable Cost 288,000 446,400 252,000 986,400
Contribution Margin 192,000 273,600 108,000 573,600
Fixed Cost
Direct 70,000 80,000 60,000 210,000
Common 81,000 108,000 81,000 270,000
Total 151,000 188,000 141,000 480,000

NET INCOME (LOSS) 41,000 85,600 (33,000) 93,600

Will you recommend to drop the carbonated softdrinks to increase total profit of the company
by Php 33,000 ? Support your recommendation.

2 DAR Company is considering to close Division A, one of its three operating divisions.
The following information has been gathered:

DIVISION
D A R
Sales 60,000 50,000 80,000
Cost of Goods Sold 40,000 42,000 60,000
Operating expenses
Salaries 8,000 6,400 12,000
Rent 2,000 2,000 2,000
Utilities 1,000 2,700 2,000
Total Costs 51,000 53,100 76,000

Net Income (Loss) 9,000 (3,100) 4,000

Except for the 70% of the salaries of Division A which can be avoided if dropped, all operating
cost were just allocated by DAR Company.

The Company is contemplating to drop Division A in order to increase the over all net income
when the loss sustained by such Division is eliminated. Though one official of the company
disagreed and arguing that dropping Division A would further decrease the over all profit of
the company, hence your expertise has been sought.

Req'd:
a) Prepare an income statement of DAR Company if Division A has been dropped. Give
your recommendation

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 FAR EASTERN UNIVERSITY

INSTITUTE OF ACCOUNTS, BUSINESS AND FINANCE

Department of Accountancy & Internal Auditing

SELL AS IS or PROCESS FURTHER

1 DEF Company uses a joint process to produce its 3 products. Joint production costs are allocated
based on cycle time on the joint process. Each product may be sold at split-off point or processed
further. Additional processing cost are entirely variable. The following information were provided:

PRODUCT
A B C
Units 10,000 7,500 5,000
Cycle time (sec) 50 80 20
Joint Production cost (total pesos) 250,000 300,000 50,000
Selling price per unit @ split-off point 250 500 100
Additional processing cost per unit 100 125 150
Selling price after further processing 500 600 200

Operating expenses amounted to 250,000 pesos

Req'd:
a) To maximize profit, which product should be sold at spilt-off point and which should
be processed further.
b) If the alternative are either to sell all at split-off or to process further all the products,
which alternative would you recommend? Determine the total differential income?

2 The Darius Company manufactures PET preforms which it sells to other manufacturing companies
for blowing for the ultimate bottle needed by beverage companies. The unit selling price and unit
costs under the current level of 250,000 unit sales are:
Selling price P 32.50
Cost:
Direct Materials 6.00
Direct Labor 8.75
Variable Factory Overhead 5.50
Fixed Factory Overhead 4.25
Variable Selling & Admin 4.50
Fixed Selling & Admin 1.50 30.50
Profit 2.00

The company's management is contemplating on the possibility of performing the blowing process
for the company itself to sell directly to beverage co. at P 40.00 . The additional cost
of this process are:
Direct Labor 3.25 per unit
Variable Factory Overhead 1.25 per unit
Variable Selling & Admin 0.50 per unit
Fixed Factory Overhead 62,500.00
Fixed Selling & Admin 37,500.00

Req'd:
a) Should the company blow the preforms or not? How much is the advantage or
disadvantage if the management decides to process further the product?
Page 5 of 7 What if the sales for next period will drop
b) to 80% from the current level, will dodie ramos
your recommendation change assuming all cost will be maintained
 FAR EASTERN UNIVERSITY

INSTITUTE OF ACCOUNTS, BUSINESS AND FINANCE

Department of Accountancy & Internal Auditing

CONTINUE OPERATING AT A LOSS or TEMPORARY SHUTDOWN

1 A prep school has a very low enrolment turnout during summer and is considering
closing during this term. By closing the school, additional shutdown and start-up costs of
12,500 pesos will have to be incurred, however, total fixed cost can be reduced to
20,000 pesos. Below is the income statement of the school.

Regular Summer
Semester Term TOTAL
Fees Earned 987,500 75,000 1,062,500
Variable Cost 592,500 45,000 637,500
Contribution Margin 395,000 30,000 425,000
Fixed Cost 250,000 50,000 300,000
NET INCOME (LOSS) 145,000 (20,000) 125,000

Req'd: Prepare an analysis to determine whether the school should close during summer.

2 At normal capacity of 250,000 units per annum, the unit cost of manufacturing a product
of Q Company is shown below:
Direct Materials 11.00
Direct Labor 14.00
Variable Factory Overhead 6.00
Fixed Factory Overhead 10.00
Total production cost per unit 41.00

Other cost include:

Variable selling and admin expenses 4.00 per unit
Total Fixed selling and admin expenses 200,000 pesos annually

Due to increasing competition,the company expects to be able to sell total units of 100,000
at a reduced selling price of P 50.00 per unit. Therefore with this prospective
situation, the company is planning reorganize its operations to be able to regain a compe-
titive position.

Management is now in a dilemma if during the reorganization, the company will shutdown
completely or continue limited operations at a loss. In the event of a shutdown, it is ex-
pected that all fixed cost can be reduced by about one fourth. Additional costs of shutting
down the operations for one year is estimated at P 76,250.00 and another
51,250 will be incurred to resume operations.

Req'd:
a. Compute for the total shutdown cost
b. Determine the shutdown point in units.
c. What is your recommendation?

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 FAR EASTERN UNIVERSITY

INSTITUTE OF ACCOUNTS, BUSINESS AND FINANCE

Department of Accountancy & Internal Auditing

BEST PRODUCT COMBINATION

I Multipol Company is in dilemma of which products are to be produced given its

current limited capacity of 90,000 hours. The following data are available:
Prod A Prod B Prod C
Sales 3,600,000 1,200,000 360,000
Variable Cost 2,160,000 600,000 288,000
Contribution Margin 1,440,000 600,000 72,000
Fixed Cost (allocated based on
revenue) 697,674.42 232,558.14 69,767.44
Net Income 742,325.58 367,441.86 2,232.56

Sales volume 40,000 20,000 12,000

Hours to process per unit 8 4 1

To maximize profit, how many units will the company produce for
1 Product A 2 Product B 3 Product C

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