Republic of the Philippines

Polytechnic University of the Philippines

Anonas, Sta. Mesa Manila, Philippines, 1016

Compilation of Activities/Assessments from Lessons 4, 8, and 9

ACCO 20293
Business Management Accounting

MONICA T. HAYOGON

BSBAMMOUMN 2-A

Prof. Andrea Rose Rimorin

 Lesson 4: Cost-Volume-Profit Analysis

Exercises- True or False

1. An assumption of CVP analysis is that all costs can be classified as either variable or
fixed.
Ans: True

2. In CVP analysis, the term cost includes manufacturing costs, and selling and
administrative expenses.
Ans: True

3. Contribution margin is the amount of revenues remaining after deducting cost of

goods
sold.
Ans: False

4. Unit contribution margin is the amount that each unit sold contributes towards the
recovery of fixed costs and to income.
Ans: True

5. The contribution margin ratio is calculated by multiplying the unit contribution margin
by the unit sales price.
Ans: False

6. Both variable and fixed costs are included in calculating the contribution margin.
Ans: False
7. A CVP income statement shows contribution margin instead of gross profit.
Ans: True

8. The break-even point is equal to the fixed costs plus net income.
Ans: False

9. The break-even point is where total sales equal total variable costs.
Ans: False

10. At the break-even point, total revenue equals total fixed costs plus total variable
costs.
Ans: False

Problem-solving

Problem 1. Wayman Company developed the following information for the product it
sells:
Sales price P50 per unit
Variable cost of goods sold P23 per unit
Fixed cost of goods sold P800,000
Variable selling expense 10% of sales price
Variable administrative expense P2.00 per unit
Fixed selling expense P400,000
Fixed administrative expense P300,000

For the year ended December 31, 2018, Wayman Company produced and sold 100,000
units of product.

Instructions:
(a) Prepare a CVP income statement for Wayman Company for 2018.
(b) What was the company's break-even point in units in 2018? Use the contribution
margin technique.
Answer:
(a) Prepare a CVP income statement for Wayman Company for 2018.

Wayman Company
Income Statement
For the Year Ended December 31, 2018

Sales (100, 000 units) ₱5, 000, 000

Variable Expenses
Cost of goods sold 23
Selling expense 10%
Administrative expense 2
Total variable expenses 500, 000
Contribution margin 4, 500, 000
Fixed expenses
Cost of goods sold 800, 000
Selling expense 400, 000
Administrative expense 300, 000
Total fixed expenses 1, 500, 000
Net Income ₱3, 000, 000

Solution:
(b) What was the company's break-even point in units in 2018? Use the contribution
margin technique.

Solution:

Problem 2. Down Company has a unit selling price of $500, variable cost per unit of
$300, and fixed costs of $220,000. Compute the break-even point in units and in sales
dollars.

Solution:
 Lesson 8: Short-term Decision Making (Differential Cost Analysis)

Exercise- Theories

1. Which of the following is a major accounting contribution to the managerial decision-

making process in evaluating possible courses of action?

a. Determine who is responsible for the decision.

b. Prepare internal reports that review the actual impact of a decision made.
c. Calculate how much should be invested for each potential project.
d. Select possible actions that management should consider.

2. Which of the following pairs of stages in the management decision-making process is

properly sequenced?

a. Evaluate possible courses of action ➔ Make a decision

b. Review the actual impact of the decision ➔ Determine possible courses of action

c. Assign responsibility for the decision ➔ Identify the problem

d. Make a decision ➔ Assign responsibility for the decision

3. Who prepares relevant revenue and cost data for the decision-making process?
a. Department heads
b. The controller
c. Management accountants
d. Factory supervisors

4. Which of the following steps in the management decision-making process generally

involves the managerial accountant?
a. Determine possible courses of action.
b. Make the appropriate decision based on relevant data.
c. Prepare internal reports that review the impact of decisions.
d. Assign responsibility.

5. Which one of the following is nonfinancial information that management might

evaluate in making a decision?
a. Opportunity costs of a decision
b. Contribution margin
c. The effect on profit of a decision
d. The corporate profile on the community

6. Which is the first step in the management decision-making process?

a. Determine and evaluate possible courses of action.
b. Review results of the decision.
c. Identify the problem and assign responsibility.
d. Make a decision.

7. Which of the following will never be a relevant cost?

a. Opportunity cost
b. Sunk cost
c. Variable cost
d. Fixed cost

8. Which of the following will always be a relevant cost?

a. Sunk cost
b. Fixed cost
c. Variable cost
d. Opportunity cost

9. Costs that will differ between alternatives and influence the outcome of a decision are
a. sunk costs.
b. unavoidable costs.
c. relevant costs.
d. product costs.

10. A previously incurred cost which will not change in the future is a(n)
a. opportunity cost.
b. historical cost.
c. fixed cost.
d. sunk cost.

Problem-solving
1. LC Company supplies schools with floor mattresses to use in physical education
classes. Vincent has received a special order from a large school district to buy 400
mats at P40 each. Acceptance of the special order will not affect fixed costs but will
result in P800 of shipping costs.
For the first 6 months of 2018, the company reported the following results while
operating at 70% capacity:
Sales (25,000 units) P1,250,000
Cost of goods sold 980,000
Gross profit 270,000
Operating expenses 170,000
Net income P100,000

Cost of goods sold was 75% variable and 25% fixed; operating expenses were 70%
variable and 30% fixed.
Instructions:
(a) Prepare an incremental analysis for the special order.
(b) Should LC Company accept the special order? Justify your answer.

Answers:

(a) Prepare an incremental analysis for the special order.

Net Income
Reject Accept Increase Decrease
Revenue 0 ₱16,000 ₱16,000
Cost 0 320,300 (320,300)
Net Income 0 (₱304,300) (₱304,300)
Solution:

(b) Should LC Company accept the special order? Justify your answer.
 The analysis above indicates that the net income will decrease by ₱304,300;
therefore, LC Company should reject the special order.

2. Taylor Dubs, Inc. budgeted 10,000 smartphones for production during 2018. Taylor
has capacity to produce 12,000 units. Fixed factory overhead is allocated using ABC.
The following estimated costs were provided:
Direct materials (P6/unit) P60,000
Direct labor (P15/hr × 2 hrs./unit) 300,000
Variable manufacturing overhead (P3/unit) 30,000
Fixed factory overhead (P4/unit) 40,000
Total P430,000
Cost per unit P43.00

Instructions
Answer each of the following independent questions:
(a) Taylor received an order for 1,000 units from a new customer in a country in which
Taylor has never done business. This customer has offered P41 per smartphone.
Should Taylor accept the order?
(b) Taylor received an offer from another company to manufacture the same quality
smartphones for P38. Should Taylor let someone else manufacture all 10,000
smartphones and focus only on distribution?

Answers:
Net Income
Reject Accept Increase Decrease
Revenue 0 ₱41,000 ₱41,000
Cost 0 43,000 43,000
Net Income 0 (₱2,000) (₱2,000)

(a) The analysis above indicates that the net income will decrease by ₱2, 000;
therefore, Taylor Dubs Inc. should reject the order.

Solution:

Net Income
Reject Accept Increase Decrease
Revenue 0 ₱380,000 ₱380,000
Cost 0 430,000 430,000
Net Income 0 (₱50,000) (₱50,000)

(b) The analysis above indicates that the net income will decrease by ₱50,000;
therefore, Taylor Dubs Inc. should reject the offer by another company to manufacture
all the 10,000 smartphones.

Solution:

3. Cheatem and Howe, Attorneys, relies heavily on a color laser printer to process its
paperwork. Recently the printer has not functioned well and print jobs are not being
processed. Management is considering updating the printer with a faster model.
 Current Printer New Model
Original purchase cost P20,000 P16,000
Accumulated depreciation 11,000 —
Estimated operating costs (annual) 2,000 1,000
Useful life 4 years 4 years

If sold now, the current printer would have a salvage value of P3,000. If operated for the
remainder of its useful life, the current printer would have zero salvage value. The new
printer is expected to have zero salvage value after four years.

Instructions:
Prepare an analysis to show whether the company should retain or replace the printer.

Answer:
Net Income
Retain Replace Increase Decrease
Operating Costs ₱8,000 ₱4,000 ₱4,000
New machine cost 0 16,000 (16,000)
Salvage Value 0 (3,000) (3,000)
Net income ₱8,000 ₱17,000 (₱9,000)

Cheatem and Howe should retain and not replace the current printer. The
analysis show that the net income for the four-year period will be ₱9,000 higher by
replacing.

Solution: Operating Costs = Estimated operating costs x Useful life

Current Printer = ₱2,000 x 4 years New Model = ₱1,000 x 4 years
= ₱8,000 = ₱4,000

4. A recent accounting graduate from Duke University evaluated the operating

performance of Fane Company's three divisions. The following presentation was made
to Fane's Board of Directors. During the presentation, the accountant made the
recommendation to eliminate the Southern Division, stating that total net income would
increase by P20,000 as shown in the analysis below.
Other Two Divisions Southern Division Total
Sales P1,000,000 P300,000 P1,300,000
Cost of Goods Sold 650,000 200,000 850,000
Gross Profit 350,000 100,000 450,000
Operating Expenses 100,000 120,000 220,000
Net Income P 250,000 P (20,000) P 230,000

Cost of goods sold is 75% variable and operating expenses are 70% variable. If the
division is eliminated, 40% of the fixed costs will be eliminated.
Instructions:
Do you agree with the new accountant's recommendation? Present a schedule to
support your answer.
Answer:
Net Income
Continue Eliminate Increase Decrease
Sales ₱1,300,000 ₱1,000,000 (₱300,000)
Variable Expenses
Cost of goods sold 637,500 487,500 150,000
Operating expense 154,000 70,000 84,000
Total Variable Expenses (791,500) (557,500) (234,000)
Contribution Margin 508,500 442,500 66,000
Fixed Expenses
Cost of goods sold 212,500 162,500 50,000
Operating expense 66,000 30,000 36,000
Total Fixed Expenses (278,500) (192,500) (86,000)
Net Income (₱230,000) (₱250,000) (₱20,00)

If Southern Division is eliminated there will be an increase in net income of

₱20,000; therefore, the accountants’ recommendation is correct. I agree to the
accountants’ recommendation, the analysis/schedule above supported my answer.
 Lesson 9: Capital Investment Decision (Capital Budgeting)

Exercises- Theory

1. All of the following are involved in the capital budgeting evaluation process except a
company's
a. board of directors.
b. capital budgeting committee.
c. officers.
d. stockholders.

2. Most of the capital budgeting methods use

a. accrual accounting numbers.
b. cash flow numbers.
c. net income.
d. accrual accounting revenues.
3. The first step in the capital budgeting evaluation process is to
a. request proposals for projects.
b. screen proposals by a capital budgeting committee.
c. determine which projects are worthy of funding.
d. approve the capital budget.

4. The capital budgeting decision depends in part on the

a. availability of funds.
b. relationships among proposed projects.
c. risk associated with a particular project.
d. all of these.
5. Capital budgeting is the process
a. used in sell or process further decisions.
b. of determining how much capital stock to issue.
c. of making capital expenditure decisions.
d. of eliminating unprofitable product lines.

Problem-solving

1. Corn Doggy, Inc. produces and sells corn dogs. The corn dogs are dipped by hand.
Austin Beagle, production manager, is considering purchasing a machine that will make
the corn dogs. Austin has shopped for machines and found that the machine he wants
will cost $262,000. In addition, Austin estimates that the new machine will increase the
company’s annual net cash inflows by $40,300. The machine will have a 12-year useful
life and no salvage value.

Instructions:
(a) Calculate the cash payback period.
(b) Calculate the machine’s net present value using a discount rate of 10%.
(c) Is the investment acceptable? Why or why not?
Answers:
(a) Calculate the cash payback period.

Solution:
(b) Calculate the machine’s net present value using a discount rate of
10%.

Given:
PV = $262,000
i = 10% or 0.10
n = 12 years

Year Future Value Factor Present Value

A B A/B
12 $262,000 (1+0.10) ¹²
3.1384 or $83,481.27
Net Present Value 3.14 $83,439.49

(c) Is the investment acceptable? Why or why not?

 Austin Beagle’s investment is acceptable. It is expected that the investment will
earn a greater return that 10%. Also, as you can see in the illustration above the
net present value is positive.

2. Top Growth Farms, a farming cooperative, is considering purchasing a tractor for

$455,500. The machine has a 10-year life and an estimated salvage value of $32,000.
Delivery costs and set-up charges will be $12,100 and $400, respectively. Top Growth
uses straight-line depreciation.
Top Growth estimates that the tractor will be used five times a week with the average
charge to the individual farmers of $350. Fuel is $50 for each use of the tractor. The
present value of an annuity of 1 for 10 years at 9% is 6.418.
Instructions
For the new tractor, compute the:
(a) cash payback period.
(b) net present value.

Answers:
(a) cash payback period.

Solution:

(b) net present value.

Given:
PV = $455,500
i = 9% or 0.09
n = 10 years

Year Future Value Factor Present Value

A B A/B
10 $455,500 (1+0.09) ¹°
2.3673 or $192,413.30
Net Present Value 2.37 $192,194.09

3. Compute for Accounting Rate of Return. XYZ Company is considering investing in a

project that requires an initial investment of $100,000 for some machinery. There will be
net inflows of $20,000 for the first two years, $10,000 in years three and four, and
$30,000 in year five. Finally, the machine has a salvage value of $25,000.
Solution:

Case
You are the general accountant for Word Systems, Inc., a typing service based in Los
Angeles, California. The company has decided to upgrade its equipment. It currently
has a widely used version of a word processing program. The company wishes to invest
in more up-to-date software and to improve its printing capabilities.
Two options have emerged. Option #1 is for the company to keep its existing computer
system, and upgrade its word processing program. The memory of each work station
would be enhanced, and a larger, more efficient printer would be used. Better
telecommunications equipment would allow for the electronic transmission of some
documents as well.
Option #2 would be for the company to invest in an entirely different computer system.
The software for this system is impressive, and it comes with individual laser printers.
However, the company is not well known, and the software does not connect well with
well-known software. The net present value information for these options follows:

Option #1 Option #2
Initial Investment $(95,000) $(270,000)
Returns Year 1 55,000 90,000
Year 2 30,000 90,000
Year 3 10,000 90,000
Net present value 0 0

Required:
Prepare a brief report for management in which you make a recommendation for one
system or the other, using the information given.

Answer:
 As a general accountant for Word Systems Inc., I recommend that we should
keep the existing computer system because the initial investment is lower
compared to Option No.2 which is a different computer system. Secondly, the
statistics above shows that the two choices have different returns per year but
the net present value is still the same. Lastly, although the feature of the software
is impressive it does not connect to a well-known brand so it would be too risky
for my company to invest and trust immediately with a less experienced
company.