Sample Solved Problems- Relevant Costing AND Incrremental Analysis PDF

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SAMPLE SOLVED PROBLEMS--RELEVANT COSTING AND INCREMENTALANALYSISMAKE OR BUY DECISIONS Kiu Co. produces a part that has the following costs per unit: Direct material P 8 Direct labor 3 Variable overhead 1 Fixed overhead 5 Total PChi Co. can provide the part to Kiu for P19 per unit. Kiu Co. has determ...

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SAMPLE SOLVED PROBLEMS--RELEVANT COSTING AND INCREMENTAL ANALYSIS

MAKE OR BUY DECISIONS 1.

Kiu Co. produces a part that has the following costs per unit: Direct material Direct labor Variable overhead Fixed overhead Total

P 8 3 1 5 P17

Chi Co. can provide the part to Kiu for P19 per unit. Kiu Co. has determined that 60 percent of its fixed overhead would continue if it purchased the part. However, if Kiu no longer produces the part, it can rent that portion of the plant facilities for P60,000 per year. Kiu Co. currently produces 10,000 parts per year. Which alternative is preferable and by what margin? a. b. c. d.

Make—P20,000 Make—P50,000 Buy—P10,000 Buy—P40,000

SOLUTIONS: MAKE Purchase price (10,000 x P19) Relevant VC (10,000 x P12) Avoidable Fixed OH (P5 x .40 x 10,000) Rental income TOTAL RELEVANT COSTS

BUY P190,000

P120,000 20,000 P140,000

(60,000) P130,000

DECISION: BUY, differential cost P10,000 2. Medioaford Corporation operates a plant with a productive capacity to manufacture 20,000 units of its product a year. The following information pertains to the production costs at capacity: Variable costs P160,000 Fixed costs 240,000 Total costs P400,000 A supplier has offered to sell 4,000 units to Medioaford annually. Assume no change in the fixed costs. What is the price per unit that makes Medioaford indifferent between the "make" and "buy" options? a. P8 b. P12 c. P20 d. P0 SOLUTIONS: Total relevant VC = P160,000  20,000 units = P8 Indifference point  Total Costs to Make = Total Costs to Buy (4,000)(P8) = (4,000)(X) X = P8 (A) NOTE WELL: The fixed cost of P240,000 is irrelevant since there will be no changes for either alternatives (make or buy).

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3. Deejay Company produces 1,000 units of Part X per month. The total manufacturing costs of the part are as follows: Direct materials P10,000 Direct labor 15,000 Variable overhead 5,000 Fixed overhead 30,000 Total manufacturing cost P60,000 An outside supplier has offered to supply the part at P40 per unit. It is estimated that 20% of the fixed overhead assigned to Part X will no longer be incurred if the company purchases the part from the outside supplier. If Deejay Company purchases 1,000 units of Part X from the outside supplier per month, then its monthly operating income will change by how much? a. decrease by P20,000. b. decrease by P4,000. c. not change. d. increase by P20,000. SOLUTIONS: TOTAL COST TO MAKE Direct Materials Direct Labor Variable OH Avoidable Fixed OH (P30,000 x .20) TOTAL RELEVANT COSTS

P10,000 15,000 5,000 6,000 P36,000

TOTAL COST TO BUY = 1,000 x P40 = P40,000 ANSWER: If Deejay chooses to buy from the outside supplier, operating income will decrease by P4,000 (B)

SCARCE RESOURCE DECISIONS 4.

P Co. has only 25,000 hours of machine time each month to manufacture its two products. Product X has a contribution margin of P50, and Product Y has a contribution margin of P64. Product X requires 5 hours of machine time, and Product Y requires 8 hours of machine time. If P wants to dedicate 80 percent of its machine time to the product that will provide the most income, P will have a total contribution margin of: a. P250,000. b. P240,000. c. P210,000. d. P200,000.

SOLUTIONS: For scarce resource decisions, to maximize profit, production and sales should be focused on the product with the highest CM per unit of the scarce resource Product X

P50 CM  5 hours = P10 CM per hour  concentrate production and sales for this product

Product Y

P64 CM  8 hours = P8 CM per hour Product X (25,000 hours x .80  5 hours x P50) Product Y (25,000 hours x .20  8 hours x P64) TOTAL CONTRIBUTION MARGIN

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P200,000 40,000 P240,000

(B)

SCARCE RESOURCE WITH MARKET DEMAND 5. Bear Valley produces three products: A, B, and C. One machine is used to produce the products. The contribution margins, sales demands, and time on the machine (in minutes) are as follows: Demand CM time on machine A 100 P25 10 B 80 18 5 C 150 30 10 There are 2400 minutes available on the machine during the week. How many units should be produced and sold to maximize the weekly contribution? A B C a. 100 80 150 b. 50 80 150 c. 90 0 150 d. 100 80 100 SOLUTIONS: PRODUCT A B C

P25  10 P18  5 P30  10

PRODUCT B C A

CM PER MINUTE P2.50 P3.60 P3.00

MARKET DEMAND 80 units x 5 minutes 150 units x 10 minutes 50 units*

TOTAL

RANK 3 1 2

TOTAL MINUTES 400 minutes 1,500 minutes 500 minutes 500 minutes  10 minutes 2,400 minutes

*WORK BACK DIFFERENCE

ANSWER: (B) PRODUCT LINE DECISIONS 6.

Dawn Co. has 3 divisions: R, S, and T. Division R’s income statement shows the following for the year ended December 31, 2001: Sales Cost of goods sold Gross profit Selling expenses Administrative expenses Net loss

P1,000,000 (800,000 ) P 200,000 P100,000 250,000

(350,000 ) P (150,000 )

Cost of goods sold is 75 percent variable and 25 percent fixed. Of the fixed costs, 60 percent are avoidable if the division is closed. All of the selling expenses relate to the division and would be eliminated if Division R were eliminated. Of the administrative expenses, 90 percent are applied from corporate costs. If Division R were eliminated, Dawn Co. income would change by how much? a. increase by P150,000. b. decrease by P 75,000. c. decrease by P155,000. d. decrease by P215,000. SOLUTIONS: For product line decisions, use segment margin as the basis for the decision.

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The segment margin refers to the operating income of the segment or product line containing all costs and revenues that are directly attributable to the specific segment alone (does not include unallocated portions) Sales Variable Costs (P800,000 x .75) Avoidable Fixed Costs (P800,000 x .25 x .60) Selling Expenses Administrative Expenses (P250,000 x .10) SEGMENT MARGIN

P1,000,000 (600,000) (120,000) (100,000) (25,000) P155,000

(C)

SELL OR PROCESS FURTHER 7. MyScooter Company produces three products from a joint process costing P100,000. The following information is available:

Units A 10,000 B 20,000 C 30,000

Costs to Selling Price Process at Split-off Further

Selling Price After Further Processing

P35 P40 P20

P40 P45 P25

P70,000 P30,000 P90,000

Which products should be processed further? a. A only. b. A and B. c. B and C. d. A, B, and C. SOLUTIONS:

Product A

SELL AT SPLIT OFF P350,000

PROCESS FURTHER P330,000

DECISION P400,000 – P70,000

Product B

P800,000

P870,000

P900,000 – P30,000

Product C

P600,000

P660,000

P750,000 – P90,000

SELL AT SPLIT OFF PROCESS FURTHER PROCESS FURTHER

ANSWER: (C) 8. Gen-Z Company produces three products from a joint process costing P100,000. The following information is available:

Units ----A 2,000 B 3,000 C 5,000

Selling Price at Split-off -----------P25 P30 P40

Costs to Selling Price Process After Further Further Processing --------------P60,000 P50 P60,000 P45 P80,000 P60

Which products should be sold without further processing? a. B only. b. A and B. c. B and C. d. A, B, and C.

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SOLUTIONS:

Product A

SELL AT SPLIT OFF P50,000

PROCESS FURTHER P40,000

DECISION P100,000 – 60,000

Product B

P90,000

P75,000

P135,000 – 60,000

Product C

P200,000

P220,000

P300,000 – 80,000

SELL AT SPLIT OFF SELL AT SPLIT OFF PROCESS FURTHER

ANSWER: (B) SPECIAL ORDER DECISIONS PRICING ON SPECIAL ORDER DECISIONS  the minimum SP on the special order WITH IDLE CAPACITY



NO IDLE CAPACITY 

REGULAR SELLING PRICE

SUM OF THE RELEVANT VC AND EXPENSES (IF ANY)

Use the following information for questions 9 and 10. 9.

R Corp. sells a product for P18 per unit, and the standard cost card for the product shows the following costs: Direct material Direct labor Overhead (80% fixed) Total

P 1 2 7 P10

R received a special order for 1,000 units of the product. The only additional cost to R would be foreign import taxes of P1 per unit. If R is able to sell all of the current production domestically, what would be the minimum sales price that R would consider for this special order? a. P18.00 b. P11.00 c. P5.40 d. P19.00 SOLUTIONS: NO IDLE CAPACITY  will have to produce again using current resources to accommodate special order MINIMUM SP = P18 regular SP + P1 import tax = P19 10.

Assume that R has sufficient idle capacity to produce the 1,000 units. If R wants to increase its operating profit by P5,600, what would it charge as a per-unit selling price? a. P18.00 b. P10.00 c. P11.00 d. P16.60

SOLUTIONS:

WITH IDLE CAPACITY

Sales

WORK BACK

Variable Costs Incremental Profit

(P1 + P2 + P1.40 + P1) x 1,000 units TARGETED – GIVEN IN PROBLEM

P11,00 0 (5,400) P5,600

 1,000 units = P11

ANSWER: (C) 5 |MAS 11

11.

Boston Shoe Cobblers has been asked to submit a bid on supplying 1,000 pairs of military dress boots to the Pentagon. The company’s costs per pair of boots are as follows: Direct material Direct labor Variable overhead Variable selling cost (commission) Fixed overhead (allocated) Fixed selling and administrative cost

P8 6 3 3 2 1

Assuming that there would be no commission on this potential sale, the lowest price the firm can bid is some price greater than a. b. c. d.

P23. P20. P17. P14.

SOLUTIONS: Minimum SP is equal to all relevant variable costs Direct Materials (P8) + Direct Labor (P6) + variable OH (P3) = P17 12. Buchanan Company currently sells 4,000 units of product Q for P1 each. Capacity is 5,000 units. Variable costs are P0.40 and avoidable fixed costs are P400. A chain store has offered P0.80 per unit for 400 units of Q. If Buchanan accepts the order, the change in income will be a a. P60 decrease. b. P80 decrease. c. P160 increase. d. P480 increase.

SOLUTIONS: WITH IDLE CAPACITY Incremental Profit on the Special Order = (400 units) (P.80 – P.40) = P160 13. Black Oak Company makes and sells oak boxes for a price of P60 each. Unit costs based on anticipated monthly sales of 1,000 boxes are as follows: Direct material cost Direct labor cost Variable manufacturing overhead Variable selling overhead Fixed costs

P15 12 3 5 2

A chain store has offered to buy 100 boxes per month at P58 each. To accept this special order, Black Oak will have to restrict its sales to regular customers to only 900 boxes per month because its production capacity cannot be expanded in the short run. However, no variable selling expenses will be incurred for this special order. If Black Oak accepts the chain store's offer, its profit will a. increase by P300. b. increase by P500. c. decrease by P200. d. decrease by P500. SOLUTIONS: Incremental profit from special order 100 units x (P58 – P15 – P12 – P3) Lost CM from regular sales 100 units x (P60 – P15 – P12 – P3 – P5) NET INCREMENTAL PROFIT 6 |MAS 11

P2,800 (2,500) P300...