Q2

MAKE OR BUY DECISION

Imarflex Company manufactures 5,000 timers a month that it uses in producing oven-toasters. Production costs for each
timer unit are as follows:

Materials P 25
Labor 20
Variable overhead 15
Fixed overhead (based on 5,000 timers) 18
Total P 78
The company is considering to purchase the timers from a well-known timing control manufacturer for P65 per unit.
If the timers are purchased, the factory space currently used to produce the timers can be used as a warehouse, thus
reducing warehouse rental by P5,000 a month.
Should Imarflex Company continues to make the timers or just buy them from the outside supplier?

- If timers are made, the savings will be P20,000. Therefore, the company should continue making the timers
needed.
Q3
CONTINUE OR DISCONTINUE SELLING A PRODUCT LINE

Iota Company sells three products, A, B, and C. following are the sales and cost data for the three products.

A_____ B____ C_____

Units 5,000 6,000 3,000

Selling Price P 15 P 12 P 20

Costs:
Variable 12 5 10
Fixed 5 5 5

Total Unit Cost 17 10 15

Profit (Loss) Per Unit (P 2) P2 P5

50

Total fixed cost is allocated among the products based on the units produced and sold. The company does not keep
inventories. Production is done based on sales orders received from customers.
Requires:
1. Which product, if any, should be eliminated?
- None. Since the segment margin of Products A, B, and C are still positive. Discontinuing the Production of Product
A will only decrease further the overall profitability of the company by P15,000 (5,000 x P3), which is equal to
Product A’s segment margin
2. Assuming that if production of product A is discontinued, some customers originally buying A will shift to product B.
it is estimated that B’s sales will go up by 1,000. Fixed cost per unit of the remaining products will increase to P7.
Should production and sale of product A be discontinued?
Q4
CONTINUE OR DISCONTINUE OPERATING A BUSINESS SEGMENT
Mr. Jig is in charge of Ticket Sales Department of the Bulwagang Artistiko, Inc. aside from Bulwagan’s box office, the sales
outlets are Esem West, Alley mall and Squad. When he reviewed the operations of the sales outlets outside the Bulwagan,
he noted the poor performance of Alley Mall and is now considering closing it to eliminate the loss. He based his findings on
the following condensed statements for the three outlets:

Esem West Alley Mall Squad Total

Sales P 30,000 P 20,000 P 50,000 P 100,000

Cost of sales 12,000 8,000 20,000 40,000

Gross Profit P 18,000 P 12,000 P 30,000 P 60,000

Operating expenses:
Rent 5,000 6,000 8,000 19,000
Salary of sales clerk 2,000 2,000 2,000 6,000
Promotion & Advertising 4,000 4,000 4,000 12,000
Administrative & other cost 2,000 2,000 2,000 6,000

Total Expenses P 13,000 P 14,000 P 16,000 P 43,000

Profit (Loss) P 5,000 (P 2,000) P 14,000 P 17,000

The cost of sales represents cost of tickets and is entirely variable. Promotion, advertising and administrative and other
costs are allocated by the main office equally among the three sales outlets. Rent and salary of sales clerk are directly
identifiable with outlets and avoidable once the outlets are eliminated.

Solution:

A comparison of operating results under the alternatives continue or discontinue operating the Alley Mall is
presented on the following:

Operating loss would increase further if the Alley Mall would be discontinued. This is so because the company
would continue to incur the Rent cost despite the closure of the Alley Mall.
Another approach in solving this problem may be used, showing only the relevant factors: Alley Mall’s sales
and avoidable costs (variable and direct fixed costs). Rent costs, which is expected to remain in total, is an irrelevant factor,
hence may be ignored in making the cost analysis. The solution appears as follows:
Q5
SHUT DOWN
Mr. Reynante Sordilla operates a stall in the Malalag Public Market and sells shell foods, such as oysters (‘talaba’) and
‘tahong’. He normally earns P500 per day computed as follows:
Sales (100 kilos) P 2,000
Cost of sales _8,00

Gross profit P 1,200

Operating Expenses _700

Net profit P 500

His operating expenses are composed of the daily rental of P400 for the stall, store helper’s salary of P50 and
miscellaneous expenses of P250.
His merchandise, which he buys at an average cost of P8 per kilo, is supplied by fishermen who gather the shell
foods in Malalag Bay.
Unfortunately, the long dry season negatively affected his business. Because of the absence of the much needed
rainfall, the whole Malalag Bay area was contaminated with the so called ‘red tide’ which made oyster and tahong
poisonous and highly dangerous for both human and animal consumption.
When he tried to study the situation and opened his store, he incurred a loss because he sold only 40 kilos of the
shell foods. He expects that this trend will continue until such time when the red tide problem is over.
He is now considering shutting down his operations temporarily and going back to business only when the red tide
is gone. In case he closes his stall, he will continue to pay rent for the space in order to retain his right over the stall but he
will avoid incurring his other operating costs.
Required:
1. Determine income or loss with sales of 40 kilos.

- P 220 loss with sales of 40 kilos.

2. Compute the shut down costs.
- 400 per day is the shutdown cost.
3. Should Mr. Sordilla shut down the operations of his stall?
- Yes, Mr. Sordilla should not shutdown the operations of his stall since the loss from continuing operations is lesser
than the shutdown costs.
4. Determine the shut down point in kilos. How will the shut down point help Mr. Sordilla to decide whether to continue or
shut down operations?

- A shutdown point is defined as the level of operations at which a particular company experiences no benefit for
continuing the operations and thus, they decide to shut down, even though temporarily
Q6
SELL OR PROCESS FURTHER
Inseparable Company produces Product Trio in a joint manufacturing process. The joint cost allocated to Product Trio
amounts to P10 per unit. At the split-off point, the product can be sold for P15 per unit.
The company is considering to incur additional processing cost of P4 for Trio, after which the product can be sold
for P22..

Required:
Should Product Trio be processed further or just sold at the split-off point?

Incremental Revenue (P22 – P15) P7

Incremental Cost P4
Incremental Revenue (P22 – P15) P7
Incremental Cost P4

The company should process Product Trio

further since incremental revenue is greater
than the incremental cost of further
processing thus, further processing will
result to an incremental profit of P3 per unit
of each product.
The company should process Product Trio further as incremental revenue is greater than the incremental cost of further
processing thus. Moreover, the processing will result to an incremental profit of P3 per unit of each product.
Q7

SERVICE MAKE-BUY DECISION

Electrolacks Company is planning to provide its sales staff of 50 persons a training program on personality development. It
is considering two alternatives for this project. One is to use its own personnel to develop the materials and conduct the
seminar. Another is to avail the services of a consulting firm to develop the materials and teach the course. The two
alternatives are expected to provide training of equal quality to the sales staff. The costs involved under the two alternatives
are presented below:

Tuition-consulting firm P300 per person

Cost of training materials 200 per person
Salary of sales staff while in class 150 per person

For convenience, the Electrolacks wants to hold the seminars in the company’s conference room, which it depreciates at the
rate of P2,000 per month. Meals and snacks are to be served during the seminar. This will be shouldered by the company
at an estimated cost of P200 per person.

Required:
Which alternative should be chosen by Electrolacks Company?