13. Great Electronics is operating at 70% capacity.

The plant manager is considering

making component 501 now being purchased for P110 each, a price that is
projected to increase in the near future. The plant has the equipment and labor
force required to manufacture the component. The design engineer estimates that
each component requires P40 of direct materials and P30 of direct labor. The plant
overhead is 200% of direct labor peso cost, and 40% of the overhead is fixed cost.
a decision to manufacture component 501 will result in a gain or (loss) for each
component of
A. P28 C. P(20)
B. P16 D. P4 (rpcpa)

14. D
? The gain(loss) for each component if component 501 is manufactured by the
company.
 It is a case of make or buy decision. The alternative that gives the lower relevant
cost will be selected. A relevant costs analysis is shown below:

Cost to Cost to
make buy
Purchase price P - P110.00
Direct materials 40.00
Direct labor 30.00
Variable overhead (P30 x 200% x 60%) 36.00
Unit relevant costs P106.00 P110.00
Advantage of making, per unit (P110 – P106) P4.00

15. Efren Corporation uses Part BIX in the assembly of a major product line. The cost
to produce one BIX is presented below:
Direct materials P 4,000
Material handling (20% of direct materials) 800
Direct labor 32,000
Overhead 48,000
Total manufacturing costs P84,800
Materials handling which is not included in manufacturing overhead represents the
direct variable costs of the receiving department that are applied to direct materials
and purchased component on the basis of their cost. The company’s annual
overhead budget is one-third variable and two-thirds fixed. Ten units of BIX are
 expected to be required for one month. Zim Company offers to supply BIX at a unit
price of P60,000. If product BIX is purchased from Zim, the released facilities
would be used to produce product CZX and generate a profit of P208,000.
A. P208,000 C. P512,000
B. P302,000 D. P 16,000 (fta)

15. D
? The net opportunity cost of the better alternative, make or buy.
 Whichever alternative that would give a lower relevant costs would be the better
choice in the short-run analysis of maximizing profit. The relevant cost analysis is
presented below:
Cost to MAKE Cost to BUY
Purchase price P -- P 60,000
Direct materials 4,000
Materials handling (20% x P4,000) 800
(20% x P60,000) 12,000
Direct labor 32,000 -
Variable overhead (P48,000 x 1/3) 16,000
Profit from product CZX if the part is
purchased (P208,000/10) (20,800)
Unit relevant costs P 52,800 P 51,200
x No. of units needed 10 units 10 units
Total relevant costs P528,000 P512,000
Less: Costs to buy 512,000
Net opportunity costs of making the parts P 16,000

16. Syanton manufactures a particular computer component. Manufacturing cost per

units are as follows:
Direct materials P 50
Direct labor 500
Variable overhead 250
Fixed overhead 400
Total manufacturing costs P1,200
Fredix, Inc. has contracted Syanton with an offer to sell 10,000 of the component
for P1,100 per unit. If Syanton accepts the proposals, P2,500,000 of the fixed
overhead will be eliminated. Should Syanton make or buy the component and
why?
A. Buy due to savings of P1,000,000.
B. Make due to savings of P500,000.
C. Buy due to savings of P2,500,000.
D. Make due to savings of P3,000,000. (rpcpa)

16. D
? Should Syanton make or buy a component part?
 The total unit variable costs of production (which includes direct materials, direct
labor, and variable overhead) is P800 (P50 + P500 + P250). Below is the
relevant costs analysis:
 Make Buy
Purchase costs (10,000 x P1,100) P11,000,000
Variable mfg. Costs (10,000 x P800) P 8,000,000
Avoidable fixed overhead 2,500,000
Total relevant costs P10,500,000 11,000,000
Less: Cost to make 10,500,000
Net advantage of making P 500,000

17. The Blade Division of Dan Corporation produces hardened steel blades. One-third of the Blade
Division’s output is sold to the Lawn Products Division of Dana, the remainder is sold to outside
customers. The Blade Division’s estimated sales and standard cost data for the fiscal year
ending June 30, 2006, are as follows:
Lawn Products Outsiders
Sales P15,000 P40,000
Variable costs (10,000) (20,000)
Fixed costs ( 3,000) ( 6,000)
Gross margin P 2,000 P14,000
Unit sales 10,000 20,000
The Lawn Products Division has an opportunity to purchase 10,000 identical quality blades from
an outside supplier at a cost of P1.25 per unit on a continuing basis. Assume that the Blade
Division cannot sell any additional products to outside customers. Should Dana allow its Lawn
Products Division to purchase the blades from the outside supplier, and why?
A. Yes, because buying the blades would save Dana Company P500.
B. No, because making the blades would save Dana Company P1,500.
C. Yes, because buying the blades would save Dana Company P2,500.
D. No, because making the blades would save Dana Company P2,500. (aicpa)

17. D
? Should Dan allow its Lawn Products Division to purchase the blades from the outside supplier and
why?
 The unit variable cost to make is P1.00 (i.e., P10,000 / 10,000 units). The outside supplier is
offering to sell at P1.25. It would be advantages not to allow Lawn Products Division to buy
blades from an outside supplier and save P2,500, as follows:
Relevant cost to make (10,000 units x P1.00) P10,000
- Relevant cost to buy (10,000 x P1.25) 12,500 Advantage
of making the blades P 2,500

18. The following standard costs pertain to a component part manufactured by Atoy Company:
Direct materials P 2 Direct labor
5
Factory overhead 20
Standard cost per unit P 27
Factory overhead is applied at P1 per standard machine hour. Fixed capacity cost is 60% of
applied factory overhead, and is not affected by any “make or buy”