DECISION MAKING:SELL OR PROCESS FURTHER

AND SPECIAL ORDER

SELL OR PROCESS FURTHER

1. Management is studying whether to sell X-54 at the split-off point or to process X-54 further into Xylene. The
following data have been gathered:
I. Selling price of X-54
II. Variable cost of processing X-54 into Xylene.
III. The avoidable fixed costs of processing X-54 into Xylene.
IV. The selling price of Xylene.
V. The joint cost of the process from which X-54 is produced.
Which of the above items are relevant in a decision of whether to sell the X-54 as is or process it further into
Xylene?

2. Wenig Inc. has a joint product that was produced from a joint cost of P73,000. Of the joint cost, P25,000 was
assigned to this product. The product has a sales of P45,600 as is, but if processed further at a cost of P6,600, it
could be sold for P58,100. What would be the incremental effect on the company's overall profit of processing
further and selling the material rather than selling it as is?

3. The Carter Company makes products A and B in a joint process from a single input, R. During a typical
production run, 50,000 units of R yield 20,000 units of A and 30,000 units of B at the split-off point. Joint
production costs total P90,000 per production run. The unit selling price for A is P4 and for B is P3.80 at the
split-off point. However, B can be processed further at a total cost of P60,000 and then sold for P7.00 per unit.
Required:
a.) In a decision between selling B at the split-off point or processing B further, which of the items is not
relevant?
b.) If product B is processed beyond the split-off point, the change in operating income from a production run
(as compared to selling B at the split-off point) would be?

4. Dockham Company makes two products from a common input. Joint processing costs up to the split-off point
total P33,600 a year. The company allocates these costs to the joint products on the basis of their total sales
values at the split-off point. Each product may be sold at the split-off point or processed further. Data
concerning these products appear below:
Product X Product Y Total
Allocated joint processing costs P14,000 P19,600 P33,600
Sales value at split-off point P20,000 P28,000 P48,000
Costs of further processing P26,300 P24,500 P50,800
Sales value after further processing P50,200 P48,600 P98,800
a.) What is the net monetary advantage (disadvantage) of processing Product X beyond the split-off point?
b.) What is the net monetary advantage (disadvantage) of processing Product Y beyond the split-off point?
c.) What is the minimum amount the company should accept for Product X if it is to be sold at the split-off
point?

5. Two products, LB and NH, emerge from a joint process. Product LB has been allocated P30,800 of the total
joint costs of P44,000. A total of 2,000 units of product LB are produced from the joint process. Product LB can
be sold at the split-off point for P13 per unit, or it can be processed further for an additional total cost of
P14,000 and then sold for P15 per unit. If product LB is processed further and sold, what would be the effect
on the overall profit of the company compared with sale in its unprocessed form directly after the split-off
point?

6. 50,000 units of W and 60,000 units of P are available each month. Monthly joint production costs are
P290,000. Product W can be sold at the split-off point for P5.60 per unit. Product P either can be sold at the
split-off point for P4.75 per unit or it can be further processed and sold for P7.20 per unit. If P is processed
further, additional processing costs of P3.10 per unit will be incurred.
Required:
a.) If P is processed further and then sold, rather than being sold at the split-off point, the change in monthly
net operating income would be?
b.) What would the selling price per unit of Product P need to be after processing in orderfor Paulsen Company
to be economically indifferent between selling P at the split-off point or processing P further?

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7. Benjamin Company produces products C, J, and R from a joint production process.
Each product may be sold at the split-off point or processed further. Joint production costs of P95,000 per year
are allocated to the products based on the relative number of units produced. Data for Benjamin's operations
for last year follow:
Product Units Produced Sales values at split-off Sales values Added costs

C 6,000 P75,000 P100,000 P20,000

J 9,000 P70,000 P115,000 P36,000

R 4,000 P46,500 P55,000 P10,000

Which products should be processed beyond the split-off point?

SPECIAL ORDER
8. Jordan Company normally has variable manufacturing costs ofP16 per unit, and fixed manufacturing costs
ofP10 per unit (At the current level of production). Jordan normally sells its calculators for P30 each. A special
order for 40,000 calculators at P23 each was received by Jordan in March. Jordan has sufficient plant capacity
to manufacture the additional quantity without incurring any additional fixed manufacturing costs; however,
the production would have to be done on an overtime basis at an estimated additional variable cost of P3 per
calculator. Acceptance of the special order would not affect Jordan's normal sales and no selling expenses
would be incurred. What would be the effect on net operating income if the special order were accepted?

9. The Molis Company has the capacity to produce 15,000 haks each month. Current regular production and sales
are 10,000 haks per month at a selling price of P15 each. Based on this level of activity, the following unit costs
are incurred:
Direct materials P5.00
Direct labor P3.00
Variable manufacturing overhead P0.75
Fixed manufacturing overhead P1.50
Variable selling expense P0.25
Fixed administrative expense P1.00
The fixed costs, both manufacturing and administrative, are constant in total within the relevant range of
10,000 to 15,000 haks per month.
The Molis Company has received a special order from a customer who wants to pay a reduced price of P10 per
hak. There would be no selling expense in connection with this special order. And, this order would have no
effect on the company's other sales.
Required:
a.) Suppose the special order is for 4,000 haks this month. If this offer is accepted by Molis, the company's
operating income for the month will:
b.) Suppose the special order is for 6,000 haks this month and thus some regular sales would have to be given
up. If this offer is accepted by Molis, the company's operating income for the month will:

10. Dockwiller Inc. manufactures industrial components. One of its products, which is used in the construction of
industrial air conditioners, is known as D53. Data concerning this product are given below:
Per Unit Data
Selling price P150
Direct materials P26
Direct labor P3
Variable manufacturing overhead P1
Fixed manufacturing overhead P17
Variable selling expense P2
Fixed selling and administrative expense P18
The above per unit data are based on annual production of 8,000 units of the component. Direct labor can be
considered to be a variable cost. The company has received a special, one-time-only order for 500 units of
component D53 at P100 each. There would be no variable selling expense on this special order and the total
fixed manufacturing overhead and fixed selling and administrative expenses of the company would not be
affected by the order.
Required
a.) Assuming that Dockwiller has excess capacity to accommodate the order, what is the effect on its
operating income by accepting the order?
b.) What is the current contribution margin per unit for component D53 based on its regular selling price of
P150 and its annual production of 8,000 units?
c.) Refer to the original data. Assume that Dockwiller has limited capacity and will have to give up 200 units
of regular sales to accommodate the order. Should the company still accept the order?

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 d.) Refer to the original data. What is the minimum price per unit on the special order below which the
company should not go?

11. The following are the Jensen Company's unit costs of making and selling an item at a volume of 1,000 units per
month (which represents the company's capacity):
Manufacturing:
Direct materials P1.00
Direct labor P2.00
Variable overhead P0.50
Fixed overhead P0.40
Selling and Administrative:
Variable P2.00
Fixed P0.80
Present sales amount to 700 units per month. An order has been received from a customer in a foreign market
for 100 units. The order would not affect current sales. The variable selling and administrative expenses would
have to be incurred on this special order as well as for all other sales.
Required:
a.) How much will the company's profits be increased or (decreased) if it prices the 100 units at P7 each?
b.) Assume the company has 50 units left over from last year which have small defects and which will have to
be sold at a reduced price for scrap. The sale of these defective units will have no effect on the company's
other sales. What cost is relevant as a guide for setting a minimum price?

12. Elferts Company produces a single product. The cost of producing and selling a single unit of this product at
the company's normal activity level of 70,000 units per month is as follows:
Direct materials P41.40
Direct labor P7.10
Variable manufacturing overhead P2.40
Fixed manufacturing overhead P18.30
Variable selling & administrative expense P1.00
Fixed selling & administrative expense P6.10
The normal selling price of the product is P85.80 per unit. An order has been received from an overseas
customer for 4,000 units to be delivered this month at a special discounted price. This order would have no
effect on the company's normal sales and would not change the total amount of the company's fixed costs. The
variable selling and administrative expense would be P0.60 less per unit on this order than on normal sales.
Direct labor is a variable cost in this company.
a.) Suppose there is ample idle capacity to produce the units required by the overseas customer and the
special discounted price on the special order is P80.60 per unit. By how much would this special order
increase (decrease) the company's net operating income for the month?
b.) Suppose the company is already operating at capacity when the special order is received from the
overseas customer. What would be the opportunity cost of each unit delivered to the overseas customer?
c.) Suppose there is not enough idle capacity to produce all of the units for the overseas customer and
accepting the special order would require cutting back on production of100 units for regular customers.
The minimum acceptable price per unit for the special order is closest to:

13. The Melrose Company produces a single product, Product C. Melrose has the capacity to produce 70,000 units
of Product C each year. If Melrose produces at capacity, the per unit costs to produce and sell one unit of
Product C are as follows:
Direct materials P20
Direct labor P17
Variable manufacturing overhead P13
Fixed manufacturing overhead P14
Variable selling expense P12
Fixed selling expense P8
The regular selling price of one unit of Product C is P100. A special order has been received by Melrose from
Moore Company to purchase 7,000 units of Product C during the upcoming year. If this special order is
accepted, the variable selling expense will be reduced by 75%.
Total fixed manufacturing overhead and fixed selling expenses would be unaffected except that Melrose will
need to purchase a specialized machine to engrave the Moore name on each unit of product C in the special
order. The machine will cost P10,500 and will have no use after the special order is filled.
a.) Assume that Melrose expects to sell 60,000 units of Product C to regular customers next year. At what
selling price for the 7,000 units would Melrose be economically indifferent between accepting and
rejecting the special order from Moore?
b.) Assume Melrose expects to sell 60,000 units of Product C to regular customers next year. If Moore
company offers to buy the 7,000 special units at P90 per unit, the effect of accepting the special order on
Melrose's net operating income for next year will be:

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 c.) Suppose Melrose can sell 68,000 units of Product C to regular customers next year. If Moore Company
offers to buy the special order units at P95 per unit, the effect of accepting the special order for 7,000 units
on Melrose's net operating income for next year will be:

ADD/DROP PRODUCTS/SEGMENTS
14. The following information relates to next year's projected operating results of the Aluminum Division of
Wroclaw Corporation:
Contribution margin P1,500,000
Fixed expenses 1,700,000
Net operating loss P (200,000)
If Aluminum Division is dropped, P1,000,000 of the above fixed costs would be eliminated. What will be the
effect on Wroclaw's profit next year if Aluminum Division is dropped instead of being kept?

15. Bayshore Company manufactures and sells Product K. Results for last year are as follows:
Sales (10,000 units at P150 each) P1,500,000
Less expenses:
Variable production costs P900,000
Sales commissions (15% of sales) 225,000
Salary of product line manager 190,000
Traceable fixed advertising expense 175,000
Fixed manufacturing overhead 160,000
Total expenses 1,650,000
Net operating loss P (150,000)
Required:
a.) Bayshore is reexamining all of its product lines and is trying to decide whether to discontinue Product K.
Dropping the product would have no effect on the total fixed manufacturing overhead incurred by the
company. Assume that dropping Product K will have no effect on the sale of other product lines. If the
company drops Product K, the change in annual net operating income due to this decision will be a:
b.) Assume that dropping Product K would result in a P15,000 increase in the contribution margin of other
product lines. If Bayshore chooses to drop Product K, then the change in net operating income next year
due to this action will be a:

16. The Wimby General Store is currently divided into three departments. Over the past several months, sales and
profit have declined, although the situation is now considered stable. Department 2 has begun to show a loss;
and the owner is thinking of discontinuing it. The space could be rented to a chain shoe store which would pay
a flat fee of P 12,000 a month.
Below is last month's income statement, considered to be typical. Sales salaries are fixed but traceable to each
department and could be avoided if the department were eliminated. Total fixed administrative costs
(allocated equally to all departments) are common costs.

Dept. 1 Dept. 2 Dept. 3 Total

Sales P 185,000 P 80,000 P 135,000 P 400,000
Costs:
Cost of goods sold P 96,000 P 44,000 P 70,000 P 210,000
Sales salaries 28,000 8,000 24,000 60,000
Admin. Expenses 30,000 30,000 30,000 90,000
Total costs P 154,000 P 82,000 P 124,000 P 360,000
Net income before taxes P 31,000 P (2,000) P 11,000 P 40,000

Prepare an analysis to show whether Department 2 should be discontinued and the space rented.

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17. Lakeshore Tours Inc., operates a large number of tours throughout the Philippines. A study has indicated that
some of the tours are not profitable, and consideration is being given to dropping these tours in order to
improve the company's overall operating performance. One such tour is a two-day History of Ateneo bus tour.
An income statement from one of these tours is given below:
Ticket revenue (100 seats × 45% occupancy × P80 ticket price) P3,600 100%
Less variable expenses (P24 per person) 1,080 30%
Contribution margin 2,520 70%
Less fixed tour expenses:
Tour promotion P620
Salary of bus driver 400
Fee, tour guide 825
Fuel for bus 100
Depreciation of bus 400
Liability insurance, bus 250
Overnight parking fee, bus 50
Room and meals, bus driver and tour guide 75
Bus maintenance and preparation 325
Total fixed tour expenses 3,045
Net operating loss P (525)
Dropping this tour would not affect the number of buses in the company's fleet or the number of bus drivers
on the company's payroll. Buses do not wear out through use; rather, they eventually become obsolete. Bus
drivers are paid fixed annual salaries; tour guides are paid for each tour conducted. The “Bus maintenance and
preparation” cost above is an allocation of the salaries of mechanics and other service personnel who are
responsible for keeping the company's fleet of buses in good operating condition. There would be no change in
the number of mechanics and other service personnel as a result of dropping this tour. The liability insurance
depends upon the number of buses in the company's fleet and not upon how much they are used.
Required
a.) Prepare an analysis showing what the impact will be on company profits if this tour is discontinued.

18. Problem 19. Key Company is considering the addition of a new product to its current product lines. The
expected cost and revenue data for the new product are as follows:
Annual sales 2,500 units
Selling price per unit P304
Variable costs per unit:
Production P125
Selling P49
Avoidable fixed costs per year:
Production P50,000
Selling P75,000
Allocated common corporate costs per year P55,000
If the new product is added, the combined contribution margin of the other, existing product lines is expected
to drop P65,000 per year.
a.) If the new product line is added next year, the increase in net operating income resulting from this
decision would be:
b.) What is the lowest selling price per unit that could be charged for the new product line and still make it
economically desirable to add the new product line?

19. The Flint Fan Company is considering the addition of a new model fan, the F-27, to its current product lines.
The expected cost and revenue data for the F-27 fan are as follows:
Annual sales .............................................. 4,000 units
Unit selling price ....................................... P58
Unit variable costs:
Production .............................................. P34
Selling .................................................... P4
Avoidable fixed costs per year:
Production .............................................. P20,000
Selling .................................................... P30,000
If the F-27 model is added as a new product line, it is expected that the contribution margin of other product
lines at Flint will drop by P7,000 per year.
Required:
a.) If the F-27 product line is added next year, the change in operating income should be:
b.) What is the lowest unit selling price that could be charged for the F-27 model and still make it
economically desirable for Flint to add the new product line?

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