Dolor , Jhazzie Lindsay G.

A2B

True or False

FALSE 1. In making a short-run decision, all alternatives need to be considered.

TRUE 2. Irrelevant costs are costs that are the same for more than one alternative.
TRUE 3. Future costs that differ across alternatives are relevant costs.
FALSE 4. Typically in a special-order decision, a customer wants to pay more than the usual price.
FALSE 5. Bellair Company produces a product that has manufacturing cost of P1,500 per unit. Bellair's
policy is to charge a price equal to cost plus 30%. The 30% is pure profit to Bellair.

Multiple Choice

1. Abbott Company is considering purchasing a new machine to replace a machine purchased one year
ago that is not achieving the expected results. The following information is available:

Expected maintenance costs of new machine P600,000 per year

Purchase price of existing machine P7.5 M
Expected cost savings of new machine P1.2 M per year
Expected maintenance costs of existing machine P400,000 per year
Resale value of existing machine P1,750,000

Which of these items is irrelevant?

a. Expected maintenance costs of new machine
b. Purchase cost of existing machine
c. Expected maintenance costs of existing machine
d. Expected resale value of existing machine

2. A company is considering a special order for 1,000 units to be priced at P445 (the normal price would
be P575). The order would require specialized materials costing P200 per unit. Direct labor and variable
factory overhead would cost P107.50 per unit. Fixed factory overhead is P60 per unit. However, the
company has excess capacity and acceptance of the order would not raise total fixed factory overhead.

The warehouse, however, would have to add capacity costing P65,000. Which of the following is
relevant to the special order?
a. P575 normal selling price
b. P60 fixed factory overhead per unitc.
c. P367.50 spent on donuts and coffee
d. P445 selling price per unit of special order

3. In the sell or process-further decision,

a. joint costs are always relevant.
b. total costs of joint processing and further processing are relevant.
c. all costs incurred prior to the split-off point are relevant.
d. the most profitable outcome may be to further process some separately identifiable products
beyond the split-off point, but sell others at the split-off point.
4. Qualitative factors that should be considered when evaluating a make-or-buy decision are
a. the quality of the outside supplier's product.
b. whether the outside supplier can provide the needed quantities.
c. whether the outside supplier can provide the product when it is needed.
d. all of the above

5. ________________ are referred to as strictly variable costs.

a. Scarce resources
b. Implicit resources
c. Committed resources
d. Flexible resources

Problem 1 (10pts.)
Foster Industries manufactures 20,000 components per year. The manufacturing cost of the
components was determined as follows:
Direct materials P 7,500,000
Direct labor 12,000,000
Inspecting products 3,000,000
Providing power 1,500,000
Providing supervision 2,000,000
Setting up equipment 3,000,000
Moving materials 1,000,000

If the component is not produced by Foster, inspection of products and provision of power costs will
only be 10% of the current production costs; moving materials costs and setting up equipment costs will
only be 50% of the production costs; and supervision costs will amount to only 40% of the production
amount. An outside supplier has offered to sell the component for P1,275.

What is the effect on income if Foster Industries purchases the component from the outside supplier?

If Foster Industries purchases the component from the outside supplier, the income will increase by
P 1,250,000.
Problem 2 (5 pts.)
Calicanto’s Shop can make 1,000 units of a necessary component with the following costs:
Direct Materials P64,000
Direct Labor 16,000
Variable Overhead 8,000
Fixed Overhead ?
The company can purchase the 1,000 units externally for P104,000. None of Calicanto Company’s fixed
overhead costs can be reduced, but another product could be made that would increase profit
contribution by P16,000 if the components were acquired externally. If cost minimization is the major
consideration and the company would prefer to buy the components, what is the maximum external
price that Calicanto Company would be willing to accept to acquire the 1,000 units externally?

Beginning Price Externally

Final Price Externally

Computing the price unit

P 120,000 / 1,000 = P 120 per unit

The maximum external price that Calicanto Company would be willing to accept to acquire the 1,000
units externally is P 120 per unit because the cost minimization is the major consideration and the
company would prefer to buy the components.
Problem 3 (5 pts.)
The Sta. Clara Company uses 5,000 units of Part 501 each year. The cost of manufacturing one unit Part
501 at this volume is as follows:
Direct materials P2.50
Direct labor 3.50
Variable overhead 1.50
Fixed overhead 1.00
An outside supplier has offered to sell Sta. Clara unlimited quantities of Part 501 at a unit cost of
P7.75. If Sta. Clara accepts this offer, it can eliminate 50 percent of the fixed costs assigned to part
501. Furthermore, the space devoted to the manufacture of Part 501 would be rented to another
company for P6,000 per year. If Sta. Clara accepts the offer of the outside supplier, annual profits will
increase by how much?

By accepting the offer of the outside supplier, the annual profits of Sta. Clara will increase by P 7,250.