Xtra Oils, Inc.

offered Essence to supply 15,000 units of measure of the exotic oil

for P1,260,000. Assuming the facilities for exotic oils have no alternative use,
Essence Producers, Inc., should
A. Continue to produce exotic oils at P1,170,000 relevant costs against purchase
cost of P1,260,000.
B. Produce 7,500 units and buy 7,500 units from Xtra Oils to save P300,000.
C. Buy from Xtra Oils, Inc. at P1,260,000 against cost to produce of P1,650,000
or savings of P390,000.
D. Produce 7,500 units and buy 7,500 units from Xtra Oil save P240,000. (rpcpa)

22. A
? A decision to make or buy a product.
 To decide whether to make or buy a part, the net relevant costs of making and
buying should be tabulated and compared. The alternative that results to lower
relevant costs would be the better alternative. In this case, the relevant cost
analysis, shall be:
Relevant costs of making (15,000 x P78) P1,170,000
Relevant costs of buying 1,260,000
Net advantage of making P 90,000

23. Union Company manufactures plugs used in its electrical gadgets at a cost of P108
per unit that includes P24 of fixed overhead. It needs 30,000 of these plugs yearly,
and Divisive Corp. offers to sell these items to Union at P99 per unit. If Union
decides to purchase the plugs, P180,000 of the annual fixed overhead applied will
be eliminated, and the company may be able to rent the facility previously used for
manufacturing the plugs. If Union purchases the plugs but does not rent the
unused facility, the company would
A. Save P6.00 per unit. C. Save P9.00 per unit
B. Lose P18.00 per unit. D. Lose P9.00 per unit. (rpcpa)
C.

23. D
? Effect on company’s profit if the company purchases the plugs but does not rent
the unused facility.
 If Union Company purchases the plugs but does not able to rent out the unused
facility, it will result to net disadvantage of P9 per unit, computed as follows:
Make Buy
Unit purchase price P 99
Unit variable production cost (108 – P24) P 84
Avoidable fixed overhead P180,000 / 30,000 units) 6 -
Net relevant unit costs P 90 P 99
Net advantage P 9
The company would be loosing P9 per unit if it buys the plugs and does not
able to rent out the unused facility.

24. Maeburg Inc. has excess production capacity. At times, it buys the same product
form third party. Below are pertinent information:
 Selling price per unit P70.00
Fixed cost per unit* 20.00
Variable cost per unit 35.00
*at present value
The most it should pay for buying this product it currently makes would be the
A. Selling price of P70.
B. Total variable cost of producing the product of P35.00 per unit.
C. Total variable cost per unit of P35.00 plus the reduced fixed cost per unit after
accounting for the effects of the added volume.
D. Total cost of production or P55.00 per unit. (rpcpa)

24. B
? The most (maximum amount) that a company should pay for buying a product that
it currently makes.
 The maximum amount that a company should pay for a product that it also makes
currently should at least equal to incremental cost plus opportunity cost attendant
to making the product. Since the company has an excess production capacity, and
there is no opportunity cost of using the said excess capacity, the maximum
amount that the company should be willing to pay an outside supplier for a product
that it currently makes should not exceed its variable cost of production which
amounts to P35, hence, choice-letter “b” is correct.
Choice-letter “a” is incorrect because buying the product at P70 per unit would
entail an additional cost of P35 (i.e., P70 - P35) and would be definitely unfavorable
on the part of the company. Choice-letter “c” is incorrect because fixed costs are
assumed to be unchanged from one level of production to another. And if ever fixed
costs are reduced on account of the increased production level, which is highly
irregular, the reduction or savings from fixed costs should be treated as deduction
in arriving at the maximum amount to be paid to supplier. Choice-letter “d” is also
incorrect because the total cost of production includes fixed costs and are
considered irrelevant, it does not change, and does not affect the decisions.

25. Picnic Items, Inc. manufactures coolers of 10,000 units that contain a freezable ice
bag. For an annual volume of 10,000 units, fixed manufacturing costs of P500,000
are incurred. Variable costs per unit are:
Direct materials P80
Direct labor 15
Variable overhead 20
Bags Corp. offered to supply the assembled ice bag for P40 with a minimum order
of 5,000 units. If Picnic accepts the offer, it will be able to reduce variable labor and
overhead by 50%. The direct materials for the freezable bag will cost Picnic P20 if
it will produce it. Considering Bags Corp. offer, Picnic should
A. Buy the freezable ice bag due to P150,000 advantage.
B. Produce the freezable ice bag due to P225,000 advantage.
C. Produce the freezable ice bag due to P50,000 advantage.
D. Buy the freezable ice bag due to P50,000 advantage. (rpcpa)

25. A
? A decision on whether to produce or buy the ice bag.
 The decision shall be based on the relevant cost analysis as follows:
Make Buy
Purchase price (10,000 x P40) P400,000
Direct materials (10,000 x P20) P200,000
Direct labor (10,000 x P15) 150,000
Variable overhead (10,000 x P20) 200,000
Relevant costs P550,000 P400,000
Savings in buying (P550,000 – P400,000) P150,000
It is more advantageous for the business to buy the ice bags and save
P150,000 in the process.

26. The Reno Company manufactures part no. 498 for use in its production line. The
manufacturing costs per unit for 20,000 units of part no. 498 are as follows;
Direct materials P 6
Direct labor 30
Variable overhead 12
Fixed overhead allocated 16
Total P 64
The Tray Corporation has offered to sell 20,000 units of part no. 498 to Reno for
P60 per unit. Reno will make the decision to buy the part from Tray if there is an
overall savings of P25,000 for Reno. If Reno accepts Tray’s offer, P9 per unit of
the fixed overhead allocated would be totally eliminated. Furthermore, Reno has
determined that the released facilities could be used to save relevant costs in the
manufacture of part no. 575. For Reno to have an overall saving of P25,000, the
amount of relevant costs that would have to be saved by using the released
facilities in the manufacture of part no. 498 would have to be
A. P 80,000 C. P125,000
B. P 85,000 D. P140,000 (aicpa)

26. B
? Amount to be saved by using the released facilities in the manufacture of a part.
 The unit variable cost is P48, and the avoidable fixed overhead is P9 per unit. A
net savings in the amount of P25,000 is a condition before Reno buys the parts
from Tray, an outside suppler. The required savings from released facilities is
determined as follows:
Make Buy
Purchase price (20,000 x P60) P1,200,000
Variable production costs (20,000 x P48) P 960,000
Avoidable fixed overhead (20,000 x P9) 180,000
Net savings from buying (25,000)
Totals P1,140,000 P1,115,000
Savings from released facilities
(P1,140,000 – P1,115,000) P 85,000
27. The ABC Company manufactures components for use in producing one of its
finished products. When 12,000 units are produced, the full cost per unit is P35,
separated as follows:
Direct materials P 5
Direct Labor 15
Variable overhead 10
Fixed overhead 5
The XYZ Company has offered to sell 12,000 components to ABC for P37 each. If
ABC accepts the offer, some of the facilities currently being used to manufacture
the components can be rented as warehouse space for P40,000. However, P3 of
the fixed overhead currently applied to each component would have to be covered
by ABC’s other products. What is the differential cost to the ABC Company of
purchasing the components from the XYZ Company?
A. P 8,000 C. P24,000
B. P20,000 D. P44,000 (cia)

27. B
? The differential cost of purchasing the component.
 The unit variable cost is P30. The avoidable fixed overhead is P2 (i.e., P 5 – P3).
The relevant costs of making and buying are as follows:
Make Buy
Purchase price (12,000 x P37) P444,000
Variable production costs (12,000 x P30) P360,000
Avoidable fixed overhead (12,000 x P2) 24,000
Rental income ( 40,000)
Net relevant costs P384,000 P404,000
Savings (P404,000 – P384,000) P 20,000
The differential cost, as used here, refers to the difference in the net relevant
costs of producing and purchasing the part.

28. Listed below are a company’s monthly unit costs to manufacture and market a
particular product
Manufacturing Cost:
Direct materials P2.00
Direct Labor 2.40
Variable indirect 1.60
Fixed Indirect 1.00
Marketing costs:
Variable 2.50
Fixed 1.50
The company must decide whether to continue making the product or buy it from
an outside supplier. The supplier has offered to make the product at the same level
of quality that the company can make it. Fixed marketing would be unaffected, but
variable marketing costs would be reduced by 30% if the company were to accept
the proposal. What is the maximum amount per unit that in the company can pay
the supplier without decreasing its operating income?
A. P8.50 C. P7.75