Since 1977

MANAGEMENT SERVICES TRINIDAD

Short-term Decisions OCTOBER 2022

LECTURE NOTES
Five steps in managerial decision-making process:
• Identify the decision problem.
• Determine the decision alternatives.
• Evaluate the costs and benefits of the alternatives.
• Make the decision.
• Review the results of the decision.

Relevant costs and benefits.

When making decisions, managers should focus only on costs and benefits that are relevant to the decision. To be
relevant, a cost or benefit must meet the following criteria:
• It must occur in the future, not the past. Sunk costs are never relevant.
• The total amount of the cost or benefit must change depending on which alternative is selected.
• Relevant costs are sometimes called differential costs, incremental costs, or avoidable costs. Costs that
will not change regardless of the alternative selected are irrelevant and should be ignored.
• Opportunity costs are the forgone (lost) benefits of choosing one alternative over another. Opportunity costs
occur when resources are limited or when capacity constraints are reached. They are always relevant for
decision-making.
• All sunk costs (i.e., costs already irrevocably incurred) are irrelevant since they will be the same for any
alternative. All future costs that do not differ between alternatives are irrelevant.

SHORT-TERM DECISION

Special-order decision
• A special order is outside the scope of normal sales. If the incremental revenue exceeds the incremental costs of
filling the special order, it will increase short-term profitability.
• If a company has excess capacity, only the variable costs of filling the special order are relevant.
• Fixed costs do not change in the short run and are therefore not included in the incremental analysis.
• If a company is operating at full capacity, the opportunity cost of lost sales is relevant and should be incorporated
into the incremental analysis.
• Other qualitative factors such as the effect on routine customers and the opportunity to capture new customers
must also be considered.

Make-or-buy decision.
• Make-or-buy decisions involve deciding whether to perform a particular function in-house versus buying it from
an outside supplier. They are also called in source versus outsource decisions.
• The relevant costs of making a product or providing a service internally include all variable costs plus any
incremental fixed costs.
• The opportunity costs of making something internally include alternative uses for the internal resources.
• Many qualitative considerations including quality, reliability and environmental concerns are also important in
make-or-buy decisions.

Drop-or-keep decision.
• Managers must often decide whether to eliminate a business segment that is not performing as well as expected.
• To decide whether to eliminate a segment, managers should focus on the segment margin, or the amount of
profit generated by the segment after variable costs and direct fixed costs have been deducted.
• Common fixed costs would be incurred even if the segment is eliminated and are not relevant to the decision.
• Managers must also consider how elimination of the segment would affect other segments or product lines and
whether alternative uses for the resources currently devoted to the business segment exist.

Sell-or-process further decision.

• A sell-or-process further decision determines whether to sell a product as is or continue to refine it.
• The incremental revenue should be compared to the incremental cost of continuing to enhance the product or
service.

Prioritize products to maximize short-term profit with constrained resources

• A constrained resource occurs when its capacity is insufficient to meet the demands placed on it.
• The most constrained resource is also called the bottleneck, which limits the system’s overall output.
• To maximize short-term profit, managers should prioritize products based on the amount of contribution margin
earned per unit of time for the most constrained (bottleneck) process.

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STRAIGHT PROBLEMS

PROBLEM NO. 1.
Case A
Gentle Chemical Co. recently received an order for a product it does not normally produce. Since the company has excess
production capacity, management is considering accepting the order. In analyzing the decision, the assistant controller is
compiling the relevant costs of producing the order. Production of the special order would require 8,000 kilograms of
theolite. Gentle does not use theolite for its regular product, but the firm has 8,000 kilograms of the chemical on hand
from the days when it used theolite regularly. The theolite could be sold to a chemical wholesaler for P21,750. The book
value of the theolite is P3 per kilogram. Gentle could buy theolite for P3.60 per kilogram.

Requirements:
1. What is the relevant cost of theolite for the purpose of analyzing the special order?
2. Discuss each of the numbers given in the exercise with regard to its relevance in making the decision.

Case B
Gentle’s special order also requires 1,000 kilograms of genatope, a solid chemical regularly used in the company’s
products. The current stock of genatope is 8,000 kilograms at a book value of P12.00 per kilogram. If the special order
is accepted, the firm will be forced to restock genatope earlier than expected, at a predicted cost of P13.00 per kilogram.
Without the special order, the purchasing manager predicts that the price will be P12.30 when normal restocking takes
place. Any order of genatope must be in 5,000 kilograms. What is the relevant cost of genatope?

PROBLEM NO. 2.
“In my opinion, we ought to stop making our own drums and accept that outside supplier’s offer,” said Luz Valdez,
managing director of Gold Refining Co. “At a price of P18 per drum, we would be paying P5 less than it costs us to
manufacture the drums in our own plant. Since we use 60,000 drums a year, that would be an annual cost savings of
P300,000.” Gold Refining’s present cost to manufacture one drum is given below (based on 60,000 drums per year):
Direct material P10.35
Direct labor 6.00
Variable overhead 1.50
Fixed overhead (P2.80 general company overhead, P1.60 depreciation and,
P0.75 supervision) 5.15
Total cost per drum P23.00

A decision about whether to make or buy the drums is especially important at this time since the equipment being used
to make the drums is completely worn out and must be replaced. The choices facing the company are:

Alternative 1: Purchase new equipment and continue to make the drums. The equipment would cost P810,000; it would
have a six-year useful life and no salvage value. The company uses straight-line depreciation.

Alternative 2: Purchase the drums from an outside supplier at P18 per drum under a six-year contract.

The new equipment would be more efficient than the equipment that Antilles Refining has been using and, according to
the manufacturer, would reduce direct labor and variable overhead costs by 30%. The old equipment has no resale
value. Supervision cost (P45,000 per year) and direct materials cost per drum would not be affected by the new
equipment. The new equipment’s capacity would be 90,000 drums per year. The company has no other use for the
space being used to produce the drums.
The company’s total general company overhead would be unaffected by this decision.

Requirements:
1. To assist the managing director in making a decision, prepare an analysis showing what the total cost and the cost
per drum would be under each of the two alternatives given above. Assume that 60,000 drums are needed each
year. Which course of action would you recommend to the managing director?
2. Would your recommendation in (1) above be the same if the company’s needs were:
a. 75,000 drums per year
b. 90,000 drums per year
3. What other factors would you recommend that the company consider before making a decision?

PROBLEM NO. 3.
Alvarez Products makes outdoor shirts. Data relating to the coming year’s planned operations are as follows.
Sales (230,000 shirts) P4,140,000
Cost of goods sold 2,760,000
Gross profit P1,380,000
Selling and administrative expenses 805,000
Income P 575,000
The factory has capacity to make 250,000 shirts per year. Fixed costs included in cost of goods sold are P690,000. The
only variable selling, general, and administrative expenses are a 10% sales commission and a P1.50 per shirt licensing
fee paid to the designer.
A chain store manager has approached the sales manager of Alvarez Products offer ing to buy 15,000 shirts at P14
per shirt. These shirts would be sold in areas where Alvarez’s sh irts are not now sold. The sales manager believes
that accepting the offer would result in a loss because the average total cost of a shirt is P15.50 (2,760,00 0 +

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P805,000)/230,000). He feels that even though sales commissions would not be paid on the orde r, a loss would still
result.

Requirements:
1. Determine whether the company should accept the offer.
2. Suppose that the order was for 40,000 shirts instead of 15,000, what will be the company’s income if the
special order is accepted?
3. What is the lowest price that the company could accept and still earn P575,000 using the order size of 15,000
units and 40,000 units?
4. How many units of sales at the regular price could the company loss before it become unprofitable to accept the
order in requirement no. 2?

PROBLEM NO. 4.
Biologi Company produces chemicals for the swimming pool industry. In one joint process, 10,000 gallons of GSX are
processed in 7,000 gallons of Xenolite and 3,000 gallons of Banolide. The cost the joint process, including the GSX, is
P19,000. The firm allocates P13,300 of the joint cost the Xenolite and P5,700 of the cost to the Banolide. The 3,000
gallons of Banolide can be sold at the split-off point for P2,500, or be processed further into a product called Kitrocide.
The sales value of 3,000 gallons of Kitrocide is P10,000, and the additional processing cost is P8,100.

Requirement:
Should the company sell Banolide at split-off point or process it further?

PROBLEM NO. 5.
Maxinne Dental Clinic is considering the purchase of a new lens grinder to replace a machine that was purchased several
years ago. Selected information on the two machines is given below:
Old New
Original cost when new P80,000 P85,000
Accumulated depreciation to date 32,000
Current salvage value 26,000
Annual operating cost 40,000 30,000
Remaining useful life 4 years 4 years

Requirement:
Compute the total advantage or disadvantage of using the new machine instead of the old machin e over the next
four years.

PROBLEM NO. 6.
Del Mundo Company expects the following results for the year (in thousand pesos). Fixed costs, all unavoidable, are
allocated based on relative peso sales.

Prod A Prod B Total

Sales P450 P400 P850
Variable Costs 200 100 300
Contribution margin P250 P300 P550
Fixed costs 110 180 290
Profit P140 P120 P260

Requirements:
Answer each of the following questions independently, unless otherwise instructed.
1. The managers are considering increasing advertising for product A by P30,000. They expect to achieve a 40%
increase in volume for product A with no change in selling price, but some of that increase will be at the expense of
product B. Sales of B are expected to decline by 15%. What will be the increase in total profit if the managers
approve the proposed action?
2. What is the maximum percentage decline in volume of product B that would leave the action in requirement 1 just
barely desirable?
3. The managers are considering dropping product A and replacing it with product C. Introducing product C would
increase total fixed costs by P75,000. C’s contribution margin percentage is 40%. What peso sales of product C are
needed to maintain the original profit of P260,000?

MULTIPLE CHOICE QUESTIONS

1. Costs that cannot be changed by any decision made now or in the future are:
a. fixed costs
b. indirect costs
c. avoidable costs
d. sunk costs

2. Discontinuing unprofitable products will increase profitability:

a. if the resources no longer required by the discontinued product can be eliminated
b. if capacity constraints are adjusted
c. automatically
d. when a large portion of the fixed costs are unavoidable

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3. When there is excess capacity, it makes sense to accept a one-time-only special order for less than the current
selling price when:
a. incremental revenues exceed incremental costs
b. additional fixed costs must be incurred to accommodate the order
c. the company placing the order is in the same market segment as your current customers
d. it never makes sense

4. When deciding to accept a one-time-only special order from a wholesaler, management should do all of the
following, except
a. to analyze product costs
b. to consider the special order’s impact on future prices of t heir products
c. to determine whether excess capacity is available
d. to verify past design costs for the product

5. An opportunity cost commonly associated with a special order is

a. the contribution margin on lost sales.
b. the variable costs of the order.
c. additional fixed costs related to the increased output.
d. any of the above.

6. If a firm is at full capacity, the minimum price for special order must cover
a. variable costs associated with the special order
b. variable and fixed manufacturing costs associated with the special order
c. variable and incremental fixed costs associated with the special order
d. variable costs and incremental fixed costs associated with the special order plus foregone contribution
margin on regular sales

7. In a joint manufacturing process, joint costs incurred prior to a decision as to whether to process the products
after the split-off point should be viewed as:
a. relevant costs. c. sunk costs.
b. standard costs. d. differential costs.

8. In a management decision process, the cost measurement of the benefits sacrificed due t o selecting an
alternative use of resources is most often referred to as a(n):
a. opportunity cost. c. sunk cost.
b. differential cost. d. relevant cost.

9. The loss of a key customer has temporarily caused Bedford Machining to have some excess manufacturing
capacity. Bedford is considering the acceptance of a special order, one that involves Bedford's most popular
product. Consider the following types of costs.
I. Variable costs of the product
II. Fixed costs of the product
III. Direct fixed costs associated with the order
IV. Opportunity cost of the temporarily idle capacity
Which one of the following combinations of cost types should be considered in the special -order acceptance
decision?
a. I and II. d. I, III, and IV.
b. I and IV. e. II and III.
c. I and III

10. Which of the following is true for a make-or-buy decision?

a. The reliability of the outside supplier of the component is important to the decision.
b. Depreciation on equipment used in making the component and having no other use is the critical factor in
the decision.
c. Opportunity costs are irrelevant.
d. The company should make the component if the purchase price is less than the per -unit variable cost to
make the component.

11. Which of the following costs is relevant in deciding whether to sell joint products at split-off or process them
further?
a. The unavoidable costs of further processing.
b. The avoidable costs of further processing.
c. The variable cost of operating the joint process.
d. The cost of materials used to make the joint products.

12. Statement 1: In general, all variable costs are relevant to decisions, but all fixed costs are not.
Statement 2: Fixed costs need not be considered in making a decision unless they are expected to be altered by that
decision, either immediately or in the future.
Statement 3: Costs that is relevant to management decision making usually include all expected future costs.
A. B. C. D. E.
Statement 1 True False True False False

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Statement 2 True True False False False

Statement 3 True False True True False

13. Which one of the following costs would be relevant in short-term decision making?
A. Incremental fixed costs.
B. All costs of inventory.
C. Total variable costs that are the same in the considered alternatives.
D. Costs of fixed assets to be used in the alternatives.

14. Which cost is most likely to be avoidable in deciding whether to shut down one of the four assembly lines in a
factory?
A. Depreciation on the factory building.
B. Salaries of maintenance workers who service all assembly lines.
C. Power used to operate equipment on the assembly line.
D. Heat and light for the building.

15. Copeland Inc. produces X-547 in a joint manufacturing process. The company is studying whether to sell X-547
at the split-off point or upgrade the product to become Xylene. The following information has been gathered:
I. Selling price per pound of X-547
II. Variable manufacturing costs of upgrade process
III. Avoidable fixed costs of upgrade process
IV. Selling price per pound of Xylene
V. Joint manufacturing costs to produce X-547
Which items should be reviewed when making the upgrade decision?
A. I, II, and IV. C. All items.
B. I, II, III, and IV. D. I, II, IV, and V.

16. Relevant costs for pricing a special order include

A. existing fixed manufacturing overhead.
B non-manufacturing costs that will not change even if the special order is accepted
C additional setup costs for the special order.
D all of the above costs

17. Quantitative factors:

a. include financial information, but not nonfinancial information
b. can be expressed in monetary terms
c. are always relevant when making decisions
d. include employee morale

18. Factors used to decide whether to outsource a part include:

a. the supplier’s cost of direct materials
b. if the supplier is reliable
c. the original cost of equipment currently used for production of that part
d. past design costs used to develop the current composition of the part
e. none of the above.

19. Relevant costs of a make-or-buy decision include all of the following except:
a. fixed salaries that will not be incurred if the part is outsourced
b. current direct material costs of the part
c. special machinery for the part that has no resale value
d. material-handling costs that can be eliminated
e. none of the above

20. In a make-or-buy decision, which of the following is true?

a. Variable costs are the only relevant costs.
b. Allocated fixed costs are relevant.
c. Alternative uses of space and machinery are relevant.
d. Making is the correct decision when there is idle capacity.
e. None of the above statements is true.

21. 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 ava ilable:
Expected annual maintenance costs of new machine P 12,000
Purchase price of existing machine 150,000
Expected annual cost savings of new machine 20,000
Expected annual maintenance costs of existing machine 8,000
Resale value of existing machine 35,000
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

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22. Spray Company manufactures several different products, including a premium lawn fertilizer and weed killer
that is popular in hot, dry climates. Spray is currently operating at less than full capacity because of market
saturation for lawn fertilizer. Sales and cost data for a 40 -pound bag of Spray lawn fertilizer is as follows.
Selling price P18.50
Production cost
Prime cost P12.25
Variable OH 3.75
Allocated fixed OH 4.00 20.00
Income (loss)/bag P(1.50)
On the basis of this information, which one of the following alternatives should be recommended to Spray
management?
a. Continue to produce and market this product.
b. Drop this product from its product line.
c. Select a different cost driver to allocate its overhead.
d. Increase output and spread fixed overhead over a larger volume base.

23. Techno Resource manufactures two products: Regular and Super. The results of operations for the year follow.
Regular Super Total
Units 10,000 3,700 13,700
Sales P240,000 P740,000 P980,000
Cost of goods sold 180,000 481,000 661,000
Gross margin 60,000 259,000 319,000
Selling expenses 60,000 134,000 194,000
Operating income P 0 P125,000 P125,000
Fixed manufacturing costs included in cost of goods sold amount to P3 per unit for Regular and P20 per unit for
Super. Variable selling expenses are P4 per unit for Regular and P20 per unit for Super; remaining selling
amounts are fixed. Techno wants to drop the Regular product line. If the line is dropped, company -wide fixed
manufacturing costs would fall by 10% because there is no alternative use of the facilities. What would be the
impact on operating income if Regular is discontinued?
a. P0
b. P10,400 increase
c. P20,000 increase
d. P39,600 decrease

24. Darren Industries operates a cafeteria for its employees. The operation of the cafeteria requires fixed costs of
P4,700 per month and variable costs of 40 percent of sales. Cafeteria sales are currently averaging P12,000
per month. Darren has an opportunity to replace the cafeteria with vending machines. Gross customer
spending at the vending machines is estimated to be 40 percent greater than the current sales because the
machines are available at all hours. By replacing the cafeteria with vending machines, Darren would receive 16
percent of the gross customer spending and avoid all cafeteria costs. A decision by Darren Industries to
replace the cafeteria with vending machines will result in a monthly increase (decrease) in operating income of
a. P(580) c. P2,588
b. P1,820 d. P188

25. A manufacturing company's primary goals include product quality and customer satisfaction. The company sells
a product, for which the market demand is strong, for P50 per unit. Due to the capacity constraints in the
Production Department, only 300,000 units can be produced per year. The current defective rate is 12% (i.e.,
of the 300,000 units produced, only 264,000 units are sold and 36,000 units are scrapped). There is no
revenue recovery when defective units are scrapped. The full manufacturing cost of a unit is P29.5 0, including
Direct materials P17.50
Direct labor 4.00
Fixed manufacturing overhead 8.00
The company's designers have estimated that the defective rate can be reduced to 2% by using a different direct
material. However, this will increase the direct materials cost by P2.50 per unit to P20 per unit. The net benefit of
using the new material to manufacture the product will be
A. P(120,000) C. P750,000
B. P120,000 D. P1,425,000

26. A company can sell all the units it can produce of either Product A or Product B but not both. Product A has a
unit contribution margin of P36 and takes two machine hours to make and Product B has a unit contribution
margin of P45 and takes three machine hours to make. If there are 1,000 machine hours available to
manufacture a product, income will be
a. P3,000 less if Product B is made.
b. P3,000 less if Product A is made.
c. P3,000 more if Product A is made.
d. the same if either product is made.

27. The Calvary Company manufactures Part No. XXX for use in its production cycle. The cost p er unit for 20,000
units of part No. XXX are as follows:

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Direct materials P6
Direct labor 30
Variable overhead 12
Fixed overhead applied 16
P64
The Cross Company has offered to sell 20,000 units of part No. XXX to Calvary for P60 per unit. Calvary will make
the decision to buy the part from Cross if there is a savings of P25,000 for Calvary. If Calvary accepts Cross’s offer,
P9 per unit of the fixed overhead applied would be totally eliminated. Furthermore, Calvary has determined that the
released facilities could be used to save relevant costs in the manufacture of part No. YYY. In order to have a
savings of P25,000, the amount of the relevant costs that would be saved by using the released facilities in the
manufacture of part No. YYY would have to be
a. P80,000
b. P85,000
c. P125,000
d. P140,000
e. P35,000
28. Roxas Company currently sells 1,000 units of product M for P2 each. Variable costs are P1.50. A discount
store has offered P1.70 per unit for 400 units of product M. The managers believe that if they accep t the
special order, they will lose some sales at the regular price. Determine the number of units they could lose
before the order become unprofitable.
a. 200 units.
b. 160 units.
c. 400 units.
d. 500 units

29. One hundred pounds of raw material W is processed into 60 pounds of X and 40 pounds of Y. Joint costs are
P135. X is sold for P2.50 per pound and Y can be sold for P3.00 per pound or processed further into 30 pounds
of Z (10 pounds are lost in the second process) at an additional cost of P60. Each pound of Z can then be sold
for P6. What is the effect on profits of processing product Y further into product Z?
a. P60 increase c. No change
b. P30 increase d. P60 decrease

30. Plainfield Company manufactures part G for use in its production cycle. T he costs per unit for 10,000 units of
part G are as follows:
Direct materials P3
Direct labor 15
Variable overhead 6
Fixed overhead 8
P32
Verona Company has offered to sell Plainfield 10,000 units of part G for P30 per unit. If Plainfield accepts Verona’s
offer, the released facilities could be used to save P45,000 in relevant costs in the manufacture of part H. In
addition, P5 per unit of the fixed overhead applied to part G would be totally eliminated.
What alternatives is more desirable and by what amount?
Alternative Amount
a. Manufacture P10,000
b. Manufacture P15,000
c. Buy P35,000
d. Buy P65,000

31. The Twilight Company has 1,000 obsolete twinkling lights that are carried in stock at a manufacturing cost of
P200,000. If the twinkling lights are redesigned for P50,000, they could be sold for P90,000. If the twinkling
lights are scrapped, they could be sold for P10,000. What alternative is more desirable and what are the total
relevant costs for that alternative?
a. Redesign and P50,000.
b. Redesign and P150,000.
c. Redesign and P250,000.
d. Scrap and P200,000.
e. Neither, as there is an overall loss under either alternative.

32. Tagaytay Open-Air Flea Market is along the highway leading to Taal Vista Lodge. Arnel has a stall which
specializes in hand-crafted fruit baskets that sell for P60 each. Daily fixed costs are P15,000 and variable costs
are P30 per basket. An average of 750 baskets are sold each day. Arnel has a capacity of 800 baskets per
day. By closing time, yesterday, a bus load of teachers who attended a seminar at the Development Academy
of the Philippines stopped by Arnel’s stall. Collectively, they offered Arnel P1,500 for 40 baskets. Arnel should
have
a. Rejected the offer since he could have lost P500.
b. Rejected the offer since he could have lost P900.
c. Accepted the offer since he could have P300 contribution margin.
d. Accepted the offer since he could have P700 contribution margin.

33. Kirklin Co. is a manufacturer operating at 95% of capacity. Kirklin has been offered a new order at P7.25 per
unit requiring 15% of capacity. No other use of the 5% current idle capacity can be found. However, if the

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order were accepted, the subcontracting for the required 10% additional capacity would cost P7.50 per unit .
The variable cost of production for Kirklin on a per-unit basis follows:
Materials P3.50
Labor 1.50
Variable overhead 1.50
P6.50
In applying the contribution margin approach to evaluating whether to accept the new order, assuming
subcontracting, what is the average variable cost per unit?
a. P6.83 c. P7.17
b. P7.00 d. P7.25

34. Tame Corporation’s Outlet No. 3 reported the following results of operations for the period just ended:
Sales P2,500,000
Less: Variable expenses 1,000,000
Contribution margin P1,500,000
Less: Fixed expenses

Salaries & wages P 750,000

Insurance on inventories 50,000
Depreciation - Equipment 325,000
Advertising 500,000 1,625,000
Net income (loss) (P125,000)
The management is contemplating on dropping outlet No. 3 due to the unfavorable operational results. If this would
happen, one employee will have to be retained with an annual salary of P150,000. The equipment has no resale
value. Outlet No. 3 should
a. Not be dropped due to foregone overall income of P350,000.
b. Be dropped due to foregone overall income of P325,000.
c. Not be dropped due to foregone overall income of P25,000.
d. Be dropped due to overall operational loss of P25,000.

35. Following are the operating results of the two segments of Parklin Corporation.
Segment A Segment B Total
Sales P100,000 P150,000 P250,000
Variable COGS 40,000 85,000 125,000
Fixed COGS 15,000 25,000 40,000
Gross margin 45,000 40,000 85,000
Variable S&A 20,000 30,000 50,000
Fixed S&A 15,000 15,000 30,000
Operating income P 10,000 ( 5,000) 5,000

Variable costs of goods sold are directly related to the operating segments. Fixed costs of goods sold are
allocated to each segment based on the number of employees. Fixed selling and administrative expenses are
allocated equally. If Segment B is eliminated, P15,000 of fixed selling and administrative expenses would be
eliminated. Assuming Segment B is closed, the effect on operating income would be a(n):
a. increase of P35,000. d. increase of P20,000.
b. decrease of P35,000. e. decrease of P20,000.
c. increase of P5,000.

36. Troy Instruments uses ten units of Part Number S1798 each month in the production of scientific equipment.
The unit cost to manufacturing one unit of S1798 is presented below.
Direct materials P4,000
Materials handling (10% of direct materials cost) 400
Direct manufacturing labor 6,000
Indirect manufacturing (200% of direct labor) 12,000
Total manufacturing cost P22,400
Materials handling represents the direct variable costs of the Receiving Department that are applied to direct
materials and purchased components on the basis of their cost. This is a separate charge in addition to indirect
manufacturing cost. Troy’s annual indirect manufacturing cost budget is one-fourth variable and three-fourths
fixed. Duncan Supply, one of Troy’s reliable vendors, has offered to supply Part Number S1798 at a unit price
of P17,000. If Troy purchases the S1798 units from Duncan, the capacity Troy used to manufacture these parts
would be idle. Should Troy decide to purchase the parts from Duncan, the unit cost of S1798 would
a. decrease by P3,700.
b. decrease by P5,600.
c. increase by P3,600.
d. increase by P5,300.

37. Sari-Sari Grocery is currently open only on Monday to Saturday. It is considering opening on Sundays. The
annual incremental costs of Sunday opening is estimated at P124,800. Its gross margin is 20%. It estimates
that 60% of Sunday sales to customers would be on other days if its stores w ere not open on Sundays. The
Sunday sales that would be necessary for Sari-sari to attain the same weekly operating income is
a. P19,500. c. P30,000.
b. P29,250. d. P20,000.

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38. Lazaro Industries produces two products, Sofa and bed. Per unit selling prices, costs, and resource utilization
for these products are:
Sofa Bed
Selling price P2,000 P3,000
Direct material costs 500 500
Direct labor costs 800 1,000
Variable OH costs 200 500
Variable selling costs 100 200
Machine hours per unit 2 hours 4 hours
Production of Sofa and Bed involves joint processes and use of the same facilities. The total fixed factory
overhead cost is P2,000,000 and total fixed selling and administrative costs are P840,000. Production and sales
are scheduled for 5,000 Sofa and 7,000 Bed. Lazaro has a normal capacity to produce a total of 20,000 units
in any combination of Sofa and bed, and maintains no direct materials, work-in-process, or finished goods
inventory. Due to plant renovations Lazaro Industries will be limite d to 10,000 machine hours. What is the
maximum amount of contribution margin Lazaro can generate during the renovation period?
a. P2,000,000. c. P3,000,000.
b. P7,000,000. d. P1,500,000.

39. Eagle Brand Inc. produces two products. Data regarding these products are presented below.
Product X Product Y
Selling price per unit P100 P130
Variable cost per unit 80 100
Raw materials used per unit 4 lbs. 10 lbs.
Eagle Brand has 1,000 pounds of raw materials which can be used to produce Products X and Y. Wh ich one of
the alternatives below should Eagle Brand accept in order to maximize contribution margin?
a. 200 units of product X and 50 units of product Y.
b. 250 units of product X.
c. 200 units of product X and 20 units of product Y.
d. 100 units of product Y.

40. Decker Products manufactures standard and deluxe wooden swing sets. Selected data related to each product
is as follows:
Standard Deluxe
Sales price per unit P900 P2,000
Direct materials per unit 100 500
Direct labor per unit 300 700
Variable overhead per unit 50 100
Machine hours per unit 4 8
Most of the manufacturing process for the sets is done on machines. There is a maximum of 10,000 machine
hours available each year. If demand were strong for both sets and the company could sell a n unlimited
number of either style, what is the maximum total contribution margin the company could have?
a. P 875,000
b. P 281,250
c. P1,125,000
d. P1,750,000

41. High Class Townhouse, Inc. manages five upscale townhouse in Makati, Ortigas, and Greenhill s area. Shown
below are the summary income statements for each complex:
In Thousand Pesos
One Two Three Four Five
Rent Income 10,000 12,100 23,470 18,780 10,650
Expenses 8,000 13,000 26,000 24,000 13,000
Profit 2,000 (900) (2,530) (5,220) (2,350
Included in the expenses is P12,000,000 of corporate overhead allocated to the townhouse based on rental income.
The complex that the company should consider selling is (are)
a. Three, Four & Five. c. Two, Three, Four & Five.
b. Four & Five. d. Four.

42. Green Company’s unit cost of manufacturing and selling a given item at an activity level of 10,000 units per
month are:
Manufacturing costs
Direct materials P24
Direct labor 8
Variable overhead 5
Fixed overhead 6
Selling expenses
Variable 11
Fixed 8
The company has an inventory of 3,000 of this item left over from last year’s model. These must be sold through
regular channels at reduced prices. The inventory will be valueless unless sold this way. What unit cost is relevant
for establishing the minimum selling price of these 3,000 units?
a. P11 c. P48
b. P37 d. P62

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43. Information about three joint products follows:

A B C
Anticipated production (in lbs.) 24,000 16,000 14,000
Selling price/lb. at split-off P16 P26 P48
Additional processing costs/lb. after split-off (all variable) P8 P20 P20
Selling price/lb. after further processing P20 P40 P70
The cost of the joint process is P280,000. Assuming all of the sell now or process further decisions were correctly
made, what will be the firm’s income?
a. P1,472,000 d. P1,028,000
b. P1,308,000 e. P1,220,000.
c. P1,192,000

44. The following information pertains to the Ace Company’s three products:
D E F
Unit sales per month 450 700 400
Selling price per unit P2.00 P3.75 P2.50
Variable price per unit 1.00 3.00 2.60
Unit contribution margin P1.00 P0.75 P(0.10)
Assume that product F is discontinued and the space is used to produce E. Product E’s production is increased to
1,100 units per month, but E’s selling price of all units of E is reduced to P3.40. Monthly profits will
a. decrease by P345 d. increase by P440
b. increase by P200 e. increase by P125.
c. decrease by P45

45. Ysabelle Industries, Inc. has an opportunity to acquire a new equipment to replace one of its existing
equipment. The new equipment would cost P900,000 and has a five-year useful life, with a zero terminal
disposal price. Variable operating costs would be P1 million per year. The present equipment has a book value
of P500,000 and a remaining life of five years. Its disposal price now is P50,000 but would be zero after five
years. Variable operating costs would be P1,250,000 per year. Considering the five years in total but ignoring
the time value of money and income taxes. Ysabelle should
a. Replace due to P400,000 advantage.
b. Not replace due to P150,000 disadvantage.
c. Replace due to P350,000 advantage.
d. Not replace due to P100,000 disadvantage.

Use the following information for the next two questions.

Hermo Company has just completed a hydro-electric plant at a cost of P21,000,000. The plant will provide the
company’s power needs for the next 20 years. Hermo will use only 60% of the power output annually. At this level of
capacity, Hermo’s annual operating costs will amount to P1,800,000, of which 80 percent is fixed.

Quigley Company currently purchases its power from MP Electric at an annual cost of P1,200,000. Hermo could supply
this power thus increasing output of the plant to 90 percent of capacity. This would reduce the estimated life of the plant
to 14 years.
46. If Hermo decides to supply power to Quigley, it wants to be compensated for the decrease in the life of the
plant and the appropriate variable costs. Hermo has decided that the charge for the decreased life should be
based on the original cost of the plant calculated on a straight-line basis. The minimum annual amount that
Hermo would charge Quigley would be
a. P450,000 c. P990,000
b. P630,000 d. P1,050,000

47. The maximum amount Quigley would be willing to pay Hermo annually for the power is
a. P600,000 c. P1,200,000
b. P1,050,000 d. P450,000

Use the following information for the next three questions.

PM Specialists, a chain of retail stores, sells books and music CDs. The condensed monthly income data are
presented in the following table for November of this year.
Downtown Mall Total
Sales P240,000 P360,000 P600,000
Less Variable expenses 96,000 252,000 348,000
Contribution margin 144,000 108,000 252,000
Less Fixed expenses 60,000 120,000 180,000
Operating income P 84,000 P(12,000) P 72,000
Additional information:
Management estimates that closing the mall store would result in a 10% percent decrease in downtown store sales,
while closing the downtown store would not affect mall store sales. One -fourth of each store’s fixed expenses would
continue through December 31 of the next year if either store was closed. The operating results for November are
representative of all months.
48. The increase or decrease in PM Specialists’ monthly operating income if the mall store is closed is
a. P32,400 decrease c. P18,000 decrease
b. P75,600 increase d. P122,400 decrease

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49. The management of PM Specialists is considering a promotional campaign at the mall store that would not
affect the downtown store. Annual promotional expenses at the mall store would be increased by P180,000 in
order to increase mall store sales by 10 percent. What would be the effect of this promotional campaign on the
company’s monthly operating income?
a. P10,800 increase c. P129,600 increase
b. P4,200 decrease d. P169,200 decrease

50. One-half of the mall store’s peso sales are from items sold at their variable cost to attract customers to the
store. PM Specialists’ management is considering the deletion of these items, a move that would reduce the
mall store’s direct fixed expenses by 15 percent and result in the loss of 20 percent of the remaining mall
store’s sales volume. This change would not affect the downtown store. What would be the effect on PM
Specialists’ monthly operating income if the items sold at their variable cost are eliminated?
a. P3,600 increase c. P18,000 increase
b. P3,600 decrease d. P57,600 decrease

– end -

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