494408241 Chapter 11 Relevant Costing Exercises PDF

Preview

Summary

Problem 1. Calla Company produces skateboards that sell for P50 per unit. The company currently has the capacity to produce 90,000 skateboards per year, but is selling 80, skateboards per year. Annual costs for 80,000 skateboards follow.Direct Materials P 800, Direct Labor 640, Overhead 960, Selling...

Description

Problem 1. Calla Company produces skateboards that sell for P50 per unit. The company currently has the capacity to produce 90,000 skateboards per year, but is selling 80,000 skateboards per year. Annual costs for 80,000 skateboards follow. Direct Materials Direct Labor Overhead Selling expenses Administrative expenses Total costs and expenses

P 800,000 640,000 960,000 560,000 480,000 P3,440,000

A new retail store has offered to buy 10,000 of its skateboards for P45 per unit. The store is in a different market from Calla's regular customers and it would not affect regular sales. A study of its costs in anticipation of this additional business reveals the following:     

Direct materials and direct labor are 100% variable. Thirty percent of overhead is fixed at any production level from 80,000 units to 90,000 units; the remaining 70% of annual overhead costs are variable with respect to volume. Selling expenses are 60% variable with respect to number of units sold, and the other 40% of selling expenses are fixed. There will be an additional P2 per unit selling expense for this order. Administrative expenses would increase by a P1,000 fixed amount.

REQUIRED: 1. Should the company accept this special order? (Yes. 12.3 cm/unit if accepted) 2. Assume that the new customer wants to buy 15,000 units instead of 10,000 units-it will only buy 15,000 units or none and will not take a partial order. How does this change your answer for part 2? (Yes, P88,000 incremental profit) Problem 2. (Outsourcing) Fiber Technologies manufactures fiberglass housings for portable generators. One part of a housing is a metal latch. Currently, the company produces the 120,000 metal latch units required annually. Company management is considering purchasing the latch from an external vendor. The following data are available for making the decision: Cost per Unit to Manufacture Direct material Direct labor Variable overhead Fixed overhead-applied Total cost Cost per Unit to Purchase Purchase price Freight charges Total cost

P1.60 1.36 0.72 1.12 P4.80 P3.92 0.08 P4.00

REQUIRED: 1. Assuming that all of Fibre Technologies' internal production costs are avoidable if the company purchases rather than makes the latch, what would be the net annual cost advantage to purchasing the latches? (96,000) 2. Assume that some of Fibre Technologies' fixed overhead costs could not be avoided if it purchases rather than makes the latches. How much of the fixed overhead must be avoidable for the company to be indifferent as to making or buying the latches? (Avoidable FOH = P.32) Problem 3. Sherwood Company is currently manufacturing part Z911, producing 40,000 units annually. The part is used in the production of several products made by Sherwood. The cost per

unit for Z911 is as follows: Direct materials Direct labor Variable overhead

P 9.00 3.00 2.50

Fixed overhead Total

4.00 P18.50

Of the total fixed overhead assigned to Z911, P88,000 is direct fixed overhead (the lease of production machinery and salary of a production line supervisor-neither of which will be needed if the line is dropped). The remaining fixed overhead is common fixed overhead. An outside supplier has offered to sell the part to Sherwood for P16. There is no alternative use for the facilities currently used to produce the part. REQUIRED: 1. Should Sherwood Company make or buy part Z911? (Buy 16 vs 16.7) 2. What is the most Sherwood would be willing to pay an outside supplier? (16.7) 3. If Sherwood bought the part, by how much would income increase or decrease? (28,000 increase)

4. Now suppose that all of the fixed overhead is common fixed overhead. – not avoidable a. Should Sherwood Company make or buy part Z911? (Make 16 vs 14.5) b. What is the most Sherwood would be willing to pay an outside supplier? (14.5) c. If Sherwood bought the part, by how much would income increase or decrease? (60,000 decrease)

Problem 4. Operations of Borderland Oil Drilling Services are separated into two geographical divisions: United States and Mexico. The operating results of each division for 2016 are as follows: United States Sales P7,200,000 Variable costs (4,740,000) Contribution margin P2,460,000 Direct fixed costs (800,000) Segment margin P1,660,000 Corporate fixed costs (1,900,000) Operating income (loss) P (240,000)

Mexico P3,600,000 (2,088,000) P1,512,000 (490,000) P1,022,000 (890,000) P 132,000

Total P10,800,000 (6,828,000) P 3,972,000 (1,290,000) P 2,682,000 (2,790,000) P (108,000)

Corporate fixed costs are allocated to the divisions based on relative sales. Assume that all of a division's direct fixed costs could be avoided by eliminating that division. Because the U.S. division is operating at a loss, Borderland's president is considering eliminating it. REQUIRED: 1. If the U.S. division had been eliminated at the beginning of the year, what would have been Borderland's pre-tax income? (P1,768,000 loss) 2. Recast the income statements into a more meaningful format than the one given. Why would total corporate operating results change from the P108,000 loss to the results determined in part (a)? Problem 5. AB Manufacturing can produce either of two products, Product A and Product B, with its existing machinery. Making either product requires the use of grinding machines. AB has 10 grinding machines, each of which can be operated 200 hours per month. Following are the comparative per-unit data for the two products: Product A Selling price Variable cost Grinding time, hours REQUIRED:

Product B P11.00 P 7.00 2

P17.50 P10.00 2.5...