Incremental Analysis

MODULE 6 19. Which one of the following is not a common mistake in a decision-making
process? A. Considering sunk costs as relevant.
INCREMENTAL ANALYSIS B. Considering opportunity cost, an imputed cost, being relevant.
C. Considering fixed costs as avoidable fixed costs.
Basic concepts
D. Unitizing fixed costs.
Steps in decision making process
24. One of the behavioral problems with relevant cost analysis is the overemphasis on
5.What is the first step in the decision making process?
short-term goals, which can lead to neglect of:
A. Specify the criteria by which the decision is to be made.
A. sales promotionC. quarterly net income results
B. Consider the strategic issues regarding the decision context.
B. expense control D. long-term strategic goals
C. Perform an analysis in which the relevant information is developed and
analyzed. Incremental analysis
D. Compare the alternatives. 25. Incremental analysis is the process of identifying the financial data that:
A. do not change under alternative courses of action
7. A major accounting contribution to the managerial decision-making process in
B. are mixed under alternative courses of action
evaluating possible courses of action is to
C. change under alternative courses of action
A. assign responsibility for the decision.
D. no correct answer is given
B. provide relevant revenue and cost data about each course of action.
C. determine the amount of money that should be spent on a project. 48. Incremental analysis is most useful
D. decide which actions that the management should consider. A. in evaluating the master budget.
B. in choosing between the net present value method and the internal rate of
8. An analysis of relevant costs and relevant revenues return method.
A. Will enable the decision maker to assess a decision’s impact on profit C. in developing relevant information for management decisions.
B. Is useful in assessing a variety of alternative decisions D. as a replacement technique for variance analysis.
C. Provides sufficient and complete evidence with which to make a decision
D. Answers a. and b. are correct Relevant information
2. Predicted future cost and revenue data that will differ among alternative courses of
Pitfalls in decision making action are known as
1. When discussing the pitfalls to be avoided in decision-making, four reminders usually A. relevant information C. marginal costs
emerge. B. direct information D. incremental costs
Which is NOT one of those
reminders? A. Ignore sunk 4.Which of the following is described as data that are pertinent to a decision?
costs. A. qualitative characteristics C. timely information
B. Beware of allocated fixed costs; identify the avoidable costs. B. accurate information D. relevant information
C. Pay special attention to identifying and including opportunity costs.
D. Do not overlook the time value of money in short-run decisions. 6.Which of the following best describes relevant information?

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 Incremental Analysis

A. Focused on the past and differs between the alternatives under consideration. B. outlay to be made for the new machine
B. Focused on the past and not related to the decision under consideration. C. annual savings to be enjoyed on the new machine
C. Focused on the future and differs between the alternatives under consideration. D. life of the new machine
D. Focused on the future and not related to the decision under consideration.
Unit costs
Application of incremental analysis 22. Unit costs can mislead decision makers. Which of the following situations dealing
3. Incremental analysis would not be with unit costs are not expected to result in a faulty analysis?
appropriate for A. a make or buy decision. A. Unit costs used in make-or-buy decisions might include costs such as avoidable
B. an allocation of limited resource decision. fixed costs.
C. elimination of an unprofitable segment. B. Variable unit cost directly varies with the changes in production units.
D. analysis of manufacturing variances. C. Total fixed costs increase as more units are produced within the relevant range.
D. Contribution margin on products that can be manufactured in using the freed
Irrelevant costs capacity is irrelevant in the decision.
Sunk costs Relevant costs
9.The kind of cost that can be ignored in a short-term decision making is a(an) 16. Relevant costs are
A. differential cost C. sunk cost A. all fixed and variable costs
B. incremental cost D. joint cost B. all costs that would be incurred within the relevant range of production
C. past costs that are expected to be different in the future
30. Sunk costs are
D. anticipated future costs that will differ among various alternatives
A. Costs that increase due to a higher volume of activity or the performance of an
additional activity 14. The Health Care Division of Piedmont Insurance employs three claims processors
B. Costs that a company must incur to perform an activity at a given level, but will capable of processing 5,000 claims each. The division currently processes 12,000
not be incurred if a company reduces or discontinues the activity claims. The manager has recently been approached by two sister divisions. Auto
C. The profits that a company forgoes by following a particular course of action Division would like the Health Care Division to process approximately 2,000 claims.
D. Costs that were incurred prior to making a decision Property Division would like the Health Care Division to process approximately
5,000 claims. The Health Care Division would be compensated by Auto Division or
33. A sunk cost is: Property Division for processing these claims. Assume that these are mutually
A. a cost incurred in the past and not relevant to any future course of action. exclusive alternatives. Claims processor salary cost is relevant for
B. an opportunity cost. A. Auto Division alternative only
C. useful in analysis of alternative courses of action. B. Property Division alternative only
D. relevant to current decision making. C. both Auto Division and Property Division alternatives
D. neither Auto Division nor Property Division alternatives
13. Which of the following is least likely to be a relevant item in deciding whether to
replace an old machine?
A. acquisition cost of the old machine

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 Incremental Analysis

Differential costs B. difference in total costs between the alternatives.

31. The difference in cost between or among various alternative courses of action C. maximum available contribution to profit that is given up when using limited
appropriately describes a(an): resources for another purpose.
A. differential cost C. constraint D. fixed cost avoided when a product, department, or business unit is abandoned.
B. ad hoc discount D. scarce resource
28. Opportunity costs are
Opportunity cost A. Costs that increase due to a higher volume of activity or the performance of an
10. An important concept in decision making is described as “the contribution to additional activity
income that is forgone by not using a limited resource in its best alternative use.” B. Costs that a company must incur to perform an activity at a given level, but will
This concept is called not be incurred if a company reduces or discontinues the activity
A. Marginal cost C. Incremental cost C. The profits that a company forgoes by following a particular course of action
B. Cost outlay D. Opportunity cost D. Costs that were incurred prior to making a decision

11. An “opportunity cost” is 27. Using opportunity cost to analyze the income effects of a given alternative is
A. the difference in total costs that results from selecting one alternative instead of referred to as
another A. engineering analysis C. account analysis
B. the profit forgone by selecting one alternative instead of another B. mixed-cost analysis D. differential analysis
C. a cost that may be saved by not adopting an alternative
D. a cost that may be shifted to the future with little or no effect on current Avoidable
operations 15. A fixed cost is relevant if it is
A. future cost C. avoidable
12. The best characterization of an opportunity cost is that it is B. sunk D. a product cost
A. relevant to decision making but is not usually reflected in accounting records
B. not relevant to decision making and is not usually reflected in accounting 17. Which of the following is (are) a true statement(s) about cost behaviors in
records incremental analysis?
C. relevant to decision making and is usually reflected in accounting records I. Fixed costs will not change between
D. not relevant to decision making and is usually reflected in accounting records alternatives. II. Fixed costs may change between
alternatives.
18. The potential benefit that may be obtained from following an alternative course of III. Variable costs will always change between alternatives.
action is called A. I C. III
A. opportunity benefit C. relevant cost B. II D. II and III
B. opportunity cost D. sunk cost
29. Avoidable costs are
26. Opportunity cost is the A. Costs that increase due to a higher volume of activity or the performance of an
A. cash outlay required to implement an alternative. additional activity

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 Incremental Analysis

B. Costs that a company must incur to perform an activity at a given level, but will D. a company's operations to be more efficient than when the parts are purchased
not be incurred if a company reduces or discontinues the activity from suppliers
C. The profits that a company forgoes by following a particular course of action
D. Costs that were incurred prior to making a decision 44. A company should decide to make, rather than buy, a part required for their
product, if
Out-of-pocket costs A. The company’s production facility is at full capacity
23. Which of the following is a cost that requires a future outlay of cash that is relevant B. The relevant cost per-unit of making the part exceeds the per-unit relevant costs
for future decision-making? of purchasing the part
A. Opportunity cost C. Out-of-pocket cost C. The supplier of the part can produce a higher-quality part
B. Relevant benefits D. Incremental D. The supplier of the part has questionable reliability
revenue
Sensitivity analysis Buy decision
20. Sensitivity analysis is useful in decision making when: 35. In any make or buy decision confronting a company, which of the following factors
should be considered?
A. there is a degree of uncertainty about the relevant data.
A. Can the supplier provide a sufficient quantity to meet the company's current
B. there is an opportunity cost included in the analysis.
and future needs?
C. sunk cost is included in the analysis.
B. Do the supplier's items meet product and quality specifications?
D. the analysis is subject to a review by the management.
C. Is the supplier reliable?
21. To determine the possible outcome in a decision analysis if a key prediction or D. All of the above should be considered.
assumption proves to be wrong, managers will use:
41. Which of the following qualitative factors favors the buy choice in a make or buy
A. sensitivity analysis. C. incremental analysis.
decision for a part?
B. total analysis. D. regression analysis.
A. maintaining a long-term relationship with suppliers
Make-or-buy decision B. quality control is critical
Qualitative Considerations C. utilization of idle capacity
38. Which of the following elements of the value chain should be considered when D. part is critical to product
deciding whether to make or buy a component needed for production?
Relevant costs
A. Marketing C. Manufacturing B. Distribution D. all of these
Fixed costs
choices
36. Within the context of the make or buy decision, when are fixed costs relevant?
Make decision A. Fixed costs are always relevant
34. Manufacturing parts internally by a company causes: B. Fixed costs are never relevant
A. the company to be dependent upon suppliers for timely delivery of parts C. Fixed costs are relevant when they differ among alternatives D. It cannot be
B. the quality of the parts to be under the control of the company determined without closely examining each particular situation
C. lower parts costs to be assured
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 Incremental Analysis

37. In a make or buy decision: B. variable production costs plus avoidable fixed production costs
A. Only variable costs are relevant. C. total manufacturing costs
B. Fixed costs that can be avoided in the future are relevant. D. variable costs
C. Fixed costs that will continue regardless of the decision are relevant.
D. Only conversion costs are relevant. 84. A company owns equipment that is used to manufacture important parts for its
production process. The company plans to sell the equipment for P10,000 and to
Opportunity costs select one of the following alternatives: (1) acquire new equipment for P80,000
39. In a make-or-buy decision, which of the following is true? A. (2) purchase the important parts from an outside company at P4 per part. The
Variable costs are the only relevant costs. company should quantitatively analyze the alternatives by comparing the cost of
B. Allocated fixed costs are relevant. manufacture the parts
C. Alternative uses of space and machinery are relevant. A. Plus P80,000 to the cost of buying the parts less P10,000.
D. Making the product is the correct decision when there is idle capacity. B. to the cost of buying the parts less P10,000.
C. Less P10,000 to the cost of buying the parts.
40. The opportunity cost of making a component part in a factory with D. To the cost of buying the parts.
excess capacity for which there is no alternative use is
A. the total manufacturing cost of the component. Special order decision
B. the total variable cost of the component. Process
C. the fixed manufacturing cost of the component. 49. In making a special order decision, management should:
D. zero. A. compute a reasonable sales price for items not normally produced.
B. consider additional overhead cost.
46. The cost of not receiving rent from a space because you decide to make the C. consider normal and relevant costs.
part rather than buying it from an outside supplier is considered a(an) D. All of the above.
A. sunk cost C. opportunity cost
B. future cost D. fixed cost 52. Which of the following factors should be considered in deciding whether to accept a
special order?
47. In a make-or-buy decision, an opportunity cost that should be considered is A. the sales price of the product or service
the: A. income that could be generated from idle production space. B. the production capacity of the company
B. total costs to produce the item C. the impact on regular customers
C. variable costs to produce the item D. all of these choices
D. fixed costs to produce the item
Irrelevant cost
Decision rule 83. In considering a special order that will enable a company to make a use of presently
42. Haribon Company is faced with a make-or-buy decision. Haribon should agree to buy idle capacity, which of the following costs would be irrelevant.
the part from a supplier provided the price is less than Haribon’s A. Materials C. Direct labor
A. total costs B. Depreciation D. Variable OH

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 Incremental Analysis

54. Given the following list of costs, which one should be ignored in a decision to 51. If the firm is operating under capacity, the minimum special order price should be
produce additional units of product for a factory that is operating at less than 100% high enough to cover:
capacity, and the additional business will not use up the remainder of the plant A. all variable costs and incremental fixed costs associated with the special order
capacity? minus foregone contribution margin on regular units not produced.
A. Direct material cost per unit C. Fixed selling expenses B. variable and incremental fixed costs associated with the special order and a
B. Direct labor cost per hour D. Variable selling expenses profit margin.
C. limited variable costs associated with the special order.
Relevant costs D. neither variable nor fixed costs associated with the special order.
Long-run decision
58. The sales price of a product, in the long run, must be enough to cover what type of 57. Green Giant Foods has some excess manufacturing capacity that it can leave idle,
costs? use to produce its own boxes for frozen foods, or use to process another company’s
A. Designing costs C. Servicing costs frozen foods. It will be more profitable for Green Giant to process the competitor’s
B. Marketing costs D. All of the above frozen foods as long as the net cost is
A. greater than both the cost to buy the boxes and the cost to leave the plant idle.
Opportunity costss B. less than the cost to leave the plant idle and greater than the cost to buy the
50. An opportunity cost commonly associated with a special order is boxes.
A. the contribution margin on lost sales C. greater than the cost to leave the plant idle and lower than the cost to buy
B. the variable costs of the order boxes from a supplier.
C. additional fixed cost that is related to the increased output D. less than both the cost to leave the plant idle and the cost to make or buy the
D. any of the above boxes.

53. Operating at or near full capacity will require a firm considering a special order to Minimum acceptable price
recognize the: With excess capacity
A. opportunity cost arising from lost sales 55. If there is excess capacity, the minimum acceptable price for a special
B. value of full employment order must cover A. variable costs associated with the special order.
C. time value of money B. variable and fixed manufacturing costs associated with the special order.
D. need for good management C. variable and incremental fixed costs associated with the special order.
D. variable costs and incremental fixed costs associated with the special order plus
Decision rule the contribution margin usually earned on regular units.
82. Production of a special order will increase gross profit when the additional revenue
from the special order is greater than At full capacity
A. The nonvariable costs incurred in producing the order. 56. If a firm is at full capacity, the minimum special order price must cover
B. The direct material and labor costs in producing the order. A. variable costs associated with the special order.
C. The fixed costs incurred in producing the order. B. variable and fixed manufacturing costs associated with the special order.
D. The marginal cost of producing the order. C. variable and incremental fixed costs associated with the special order.

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 Incremental Analysis

D. variable costs and incremental fixed costs associated with the special order plus Target pricing
foregone contribution margin on regular units not produced. 43. The concept of target pricing is employed when:
A. a company wishes to set price in order to capture a predetermined market
Product life cycle share.
45. A product life cycle includes the phases of B. a price is pre-set by market conditions.
A. research and development and design C. marketing and distribution C. a company wishes to meet marketing goals.
B. purchasing and production D. all of the above D. All of the above.

Product pricing Target cost approach

Variable cost approach 61. In contrast to the total product and variable cost concepts used in setting seller's
60. Managers who often make special pricing decisions are more likely to use which of prices, the target cost approach assumes that:
the following cost concepts in their work? A. a markup is added to total cost. C. a markup is added to variable cost.
A. Total cost. C. Variable cost. B. selling price is set by the marketplace. D. a markup is added to product
B. Product cost. D. Fixed cost. cost.

Cost-plus approach Sell-as-is-or-process further

59. In using the variable cost concept of applying the cost-plus approach to product Joint products
pricing, what is included in the markup? 67. Two or more manufactured products that have significant sales values and are not
A. Total costs plus desired profit. uniquely identifiable as individual products until the split-off point are called
B. Desired profit. A. common products. C. co-mingled products.
C. Total selling and administrative expenses plus desired profit. B. joint products. D. cooperative products.
D. Total fixed manufacturing costs, total fixed selling and administrative expenses,
and desired profit. Relevant costs
Incremental revenue
62. Which of the following is NOT a cost concept commonly used in applying the cost- 32. Incremental revenue is:
plus approach to product pricing? A. a difference in costs between two decisions.
A. Total cost concept. C. Variable cost concept. B. a concession based on competitive influences.
B. Product cost concept. D. Fixed cost concept. C. additional revenue across decision choices from potential sales.
D. the difference between selling price and variable costs.
63. The cost-plus pricing formula that takes into consideration all costs -- fixed, variable,
Cost to process further
and manufacturing, as well as selling and administrative costs -- is called the
65. Which of the following costs is relevant in deciding whether to sell joint products at
percentage of
split-off or process them further?
A. full costs. C. total variable costs.
A. The unavoidable costs of further processing.
B. variable manufacturing costs. D. absorption costs.
B. The additional costs of further processing.

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 Incremental Analysis

C. The variable costs of operating the joint process. D. decrease in direct fixed costs.
D. The cost of materials used to make the joint products.
Irrelevant cost
68. What are the manufacturing costs incurred beyond the split-off point called? 80. Which of the following should not enter into decision of whether to drop product?
A. Separable costs.C. Severance costs. A. Unavoidable costs
B. Joint costs. D. Common costs. B. Avoidable costs
C. Revenue that would be lost
Decision rule D. Nonfinancial impacts of the decision
64. How does a company determine whether to sell a product “as is” or process it
further? Decision rule
A. If the costs to process further exceed the costs of current production, the 79. As long as its marginal cost is lower than its marginal revenue, a company
product should be sold ‘as is.” should A. suspend additional production and sales activities.
B. If the costs to process further exceed the costs of current production, the B. perform a cost-benefit balance analysis before producing and selling additional
product should be processed further. products.
C. If the increase in revenue from selling the product after further processing is C. engage in additional production and sales activities.
greater than the additional costs incurred in further processing, the company D. examine cost behaviors and develop a cost function to measure the cost of
should opt for further processing. future production.
D. If the revenues generated by processing the product further exceed the
revenues from selling the product “as is,” the company should process further. Short-run profit maximization
Factors affecting sales mix
Keep-or-drop decision 70. Which of the following is an important factor affecting the sales mix of any
Strategic considerations company?
66. The decision to keep or drop products or services involves strategic consideration of A. organizational advertising expenditures
the: B. organizational sales force compensation plan
A. potential impact on remaining products or services C. product selling price
B. impact on employee morale D. All of the above
C. growth potential of the firm
D. All of the above answers are correct To relax a constraint
73. Which of the following will relax a constraint?
Goal A. Outsourcing all or part of the bottleneck operation
78. The goal in deciding whether to add or drop products, services, or departments is to B. Working overtime at the bottleneck operation
obtain the greatest C. Retraining employees and shifting them from the bottleneck
A. reduction in total costs. D. A and B, only
B. contribution possible to cover unavoidable costs.
C. increase in sales revenues.

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 Incremental Analysis

Decision rule B. contribution margin

76. A product mix decision involves C. contribution margin per unit of items that are best sellers
A. Influencing the sales volume mix of the products to minimize cost. D. contribution per unit of the constraining resource
B. Influencing the sales volume mix of the products to maximize revenue.
C. Producing the maximum amount of items that provide the highest contribution 77. A company should advertise those products that
margin. A. Require the lowest commitment of resources to produce
D. Producing the maximum amount of items that carry the lowest per-unit cost. B. Have the largest total contribution margin
71. A useful device for solving production problems involving multiple products and C. Can be outsourced
limited resources is: D. Have the largest total contribution margin after deducting the cost of the ad
A. gross sales per unit of product C. net profit per unit of product campaign
B. contribution per unit of scarce resource D. total benefit
Pitfall
72. When there is only one production constraint and excess demand, it is generally 81. The major pitfall in the contribution margin approach to pricing is
best to focus production and sales on the product with the highest: A. its failure to recognize fixed costs.
A. Contribution per unit of scarce resource C. Contribution margin in pesos B. B. its failure to recognize depreciation expense.
Margin of Safety D. Operating Leverage C. its inability to control waste.
D. its inability to recognize financing costs of the production in question.
69. When there is one scarce resource, the product that should be produced first is the
product with the highest PROBLEMS:
A. contribution margin per unit of the scarce resource. Incremental (decremental) cost
B. sales price per unit of scarce resource. 1.
For the year ended April 30, 2007, Salmo Company incurred direct costs of P800,000
C. demand. based on a particular course of action. Had a different course of action been taken,
D. contribution margin per unit. direct costs would have been P650,000. In addition, Salmo’s fixed costs during the
fiscal year were P110,000.
74. Uranus Company has 2 products that use the same manufacturing facilities and The incremental (decremental) cost was:
cannot be subcontracted. Each product has sufficient orders to utilize the entire A. P 40,000 C. P 150,000
manufacturing capacity. For short-run profit maximization, Uranus should B. P( 40,000) D. P(150,000)
manufacture the product with the A. Lower total manufacturing costs for the
manufacturing capacity. Opportunity cost
B. Lower total variable manufacturing costs for the manufacturing capacity. 2.
Luzon Fabricators, Inc. estimates that 60,000 special components will be used in the
C. Greater gross profit per hour of manufacturing capacity. manufacture of a specialty steel window for the whole next year. Its supplier
D. Greater contribution margin per hour of manufacturing capacity. quoted a price of P60 per component. Luzon prefers to purchase 5,000 units per
month, but its supplier could not guarantee this delivery schedule. In order to
75. Profit can be maximized by producing products with the highest ensure availability of these components, Luzon is considering the purchase of all the
A. selling price

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 Incremental Analysis

60,000 units at the beginning of the year. Assuming Luzon can invest cash at 8%, the Unit relevant cost
company’s opportunity cost of purchasing all the 5.
Venus Company, a manufacturer of lamps, budgeted sales of 400,000 lamps at P20
60,000 units at the beginning of the year is per unit for the year. Variable manufacturing costs were budgeted at P8 per unit,
A. P132,000 C. P144,000 and fixed manufacturing costs at P 5 per unit. A special order offering to buy 40,000
B. P150,000 D. P264,000 lamps for P11.50 each was received by Venus in April. Venus has sufficient plant
capacity to manufacture the additional quantity of lamps; however, the production
Defective/obsolete inventory would have to be done by the present work force on an overtime-basis at an
Incremental net income estimated additional cost of P1.50 per lamp. Venus will not incur any selling
3
. Sieney & Company has 24,000 defective units of a product that cost P8 per unit to expenses as a result of the special order. Venus Company would have a unit
manufacture, and can be sold for P4 per unit. These units can be reworked for P2 relevant cost of
per unit and sold at their full price of P12 each. If Sieney reworks the defective units, A. P 8.00 C. P 9.50
how much incremental net income will result? B. P13.00 D. P14.50
A. P144,000 C. P 72,000
B. P 96,000 D. P 48,000
6.
Wawa Enterprises has the capacity to produce 10,000 bearings, but operates at 90%
of capacity. Bearings normally sell for P60 each, and cost an average of P50 to make,
Minimum price including a share of the monthly fixed costs of P180,000. Ilog Corp has offered to
4
. Joji Company manufactures and sell FM radios. Information on last year’s operations buy 1,000 bearings at P40 each. What is the relevant cost per unit?
(sales and production of the 2006 model) follows: A. P 20 C. P 40
Selling price P300 B. P 30 D. P 50
Cost per unit:
Direct materials 70 Total relevant cost
Direct labor 40
7
. Intellectual Co. recently received an order for a product that it does not normally
Overhead (50% variable) 60 Selling costs (40% variable) 100 produce. Since the company has excess production capacity, management is
considering accepting the order. In analyzing the decision, the assistant controller is
Production in units 10,000
compiling the relevant costs of producing the order.
Sales in units 9,500
The special order requires 1,000 kilograms of powdered Nitrocide, a solid chemical
At this time (May 2007), the 2007 model is in production and it renders the 2006
regularly used in the company’s products. The current stock of Nitrocide is 8,000
model radio obsolete. A foreign firm is willing to purchase the obsolete products at
kilograms at a book value of P8.10 per kilogram. If the special order is accepted, the
a net price of P140 each. If the remaining 500 units of the 2006 model radios are to
firm will be forced to restock powdered Nitrocide earlier than expected, at a
be sold through regular channels, what is the minimum price the company would
predicted cost of P8.70 per kilogram. Without the special order, the purchasing
accept for the radios?
manager predicts that the price will be P8.30, when normal restocking takes place.
A. P300 C. P270
Any order of the Nitrocide must be in 5,000 kilograms. What is the relevant cost of
B. P180 D. P 40
powdered Nitrocide to be included in the special order?
Special order A. P 8,700 C. P10,300
B. P 8,300 D. P43,500

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 Incremental Analysis

Incremental cost What unit price would the company have to charge to make P22,500 on a sale of
8
. Balagtas & Company expects to incur the following costs at the planned production 1,500 additional units that would be shipped out of the normal market area?
level of 10,000 units: A. P 51 C. P 41
Direct materials P100,000 B. P 56 D. P 50
Direct labor 120,000
Variable overhead 60,000
11.
Kaila Company’s unit cost of manufacturing and selling a given item at an activity
Fixed overhead 30,000 level of 10,000 units per month are:
The selling price is P50 per unit. The company currently operates at full capacity of Manufacturing costs
10,000 units. Capacity can be increased to 13,000 units by operating overtime. Direct materials P39
Variable costs increase by P14 per unit for overtime production. Fixed overhead Direct labor 6
costs remain unchanged when overtime operations occur. Balagtas has received a
special order from Florante, Inc. who has offered to buy 2,000 units at P45 each. Variable overhead 8
What is the incremental cost associated with this special order?
Fixed overhead 9
A. P42,000C. P31,000
B. P84,000D. P62,000 Selling expenses

Minimum acceptable price Variable 30

9.
Brace Co. has considerable excess manufacturing capacity. A special job order’s cost
Fixed 11
sheet includes the following applied manufacturing overhead costs:
Variable costs P56,250 The company desires to seek an order for 5,000 units from a foreign customer. The
Fixed costs 45,000 variable selling expenses will be reduced by 40%, but the fixed costs for obtaining
The fixed costs include a normal P6,800 allocation for in-house design costs, the order will be P20,000. Domestic sales will not be affected by the order.
although no inhouse design will be done. Instead, the special job will require the The minimum break-even price per unit to be considered on this special sale is
use of external designers costing P13,750. A. P 71 C. P 69
What is the minimum acceptable price for the job? B. P 75 D. P 84
A. P 63,050 C. P101,250 B. P 70,000 D. P108,200
12.
Chrisy Company sells a product for P18 per unit and the standard cost card for the
10.
The cost to produce 24,000 units at 70% capacity consists of: product shows the following costs:
Direct materials P360,000 Direct materials P 1.00
Direct labor 540,00 Direct labor 2.00
0 Overhead (80% fixed) 7.00
Factory overhead, all fixed 290,00 Total P10.00
0 Chrisy received a special order for 1,000 units of the product. The only additional
Selling expense (35% variable, 65% fixed) 240,00 cost to Chrisy would be foreign import taxes of P1 per unit. If Chrisy is able to sell all
0
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 Incremental Analysis

of the current production domestically, what would be the minimum sales price that for the firm to P25,000, what sales price must be quoted for each of the 5,000
Chrisy would consider for this special order? units?
A. P 18 C. P 17 A. P18.50 C. P29.00
B. P 19 D. P 11 B. P24.50 D. P26.50
13.
De Silva Co. is a manufacturer of industrial components. One of their products that Maximum lost regular sales
is used as a subcomponent in auto manufacturing is KB69. This product has the 15.
Chua Company sells a product for P20 with variable cost of P8 per unit. Chua could
following financial structure per unit: accept a special order for 1,000 units at P14. If Chua accepted the order, how many
Selling price P150 units could it lose at the regular price before the decision become unwise?
A. 1,000 units C. 500 units
Direct materials P 20
B. 200 units D. 0 units
Direct labor 15 16.
Filamer Company currently sells 1,000 units of product M for P2 each. Variable
Variable manufacturing overhead 12 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 accept the special order, they will lose some
Fixed manufacturing overhead 30 sales at the regular price.
Variable shipping and handling 3 Determine the number of units they could lose before the order become
unprofitable.
Fixed selling and administrative 10 A. 200 units. C. 400 units.
Total P 90 B. 160 units. D. 500 units

De Silva is operating at full capacity. It has received a special, one-time, order for Effect on profit of accepting the order
1,000 KB69 parts. The next best alternative use of the excess capacity is to produce 17.
You have been approached by a foreign customer who wants to place an order for
LB46, resulting in a contribution margin of P10,000. The minimum price that is 15,000 units of Product C at P22.50 a unit. You currently sell this item for P39 a
acceptable for this one-time special order is unit, and the item has a cost of P29 a unit. Further analysis reveals that you will not
A. P 60 C. P 70 be paying sales commission of P2.50 a unit on this sales and its packaging
B. P 87 D. P100 requirement will save you an additional P1.50 per unit. However, the additional
graphics required on this job will cost you P30,000. Note also that fixed costs
14
. Sylvania Company. is currently operating at a loss of P15,000. The sales manager has amounting to P400,000 for the production of 50,000 of such products by the firm
received a special order for 5,000 units of product, which normally sells for P35 per will not change. You decide to accept this order, but another customer who buys an
unit. Costs associated with the product are: direct material, P6; direct labor, P10; average of 2,000 units for the period wants to pay you P22.50 rather than the
variable overhead, P3; applied fixed overhead, P4; and variable selling expenses, P2. regular price of P39 a unit.
The special order would allow the use of a slightly lower grade of direct material, Profit will
thereby lowering the price per unit by P1.50 and selling expenses would be A. increase profit by P19,500 C. increase profit by P52,500
decreased by P1. If Sylvania wants this special order to increase the total net income B. increase profit by P16,500 D. decrease profit by P52,500

22
 Incremental Analysis

18.
The Thermo Company has received a special order for 300 units of product X for P6 this product drops to 6,000 ounces monthly. In November, Garrison Co. offers to
a unit. It usually sells for P9.50 a unit with a cost of P7.50 a unit inclusive of 75 cents buy 1,500 ounces for P60,000. If Louderhead accepts the order, it must design a
a unit as sales commission that will not be paid on this order. The cost also includes special label for Garrison at a cost of P5,000. Each label will cost P2.50 to make and
P3 in manufacturing overhead, was two-third of which is for the fair share of apply. Louderhead should:
depreciation, rent, utilities and supervisor's salary. The latter’s (supervisor's salary) A. accept the order, at a gain of P6,250
accounts for one-half of this amount. Assuming that excess capacity is available, and B. reject the order, at a loss of P18,750
this order requires a mold that costs P150, accepting the order will increase C. reject the order, at a loss of P23,750
A. loss by P225 C. gain by P225 D. accept the order, at a gain of P11,250
B. loss by P375 D. gain by P375
Question Nos. 68 and 69 are based on the following information:
19.
Alejar Company manufactures a product with a unit variable cost of P50 and a unit The Disk Division of Systems Specialist Company produces a high quality computer disks.
sales price of P88. Fixed manufacturing costs were P240,000 when 10,000 units Unit production costs (based on capacity production of 100,000 units per year) follow:
were produced and sold. The company has a one-time opportunity to sell an Direct materials P50
additional 3,000 units at P70 each in a foreign market. This special sale would not Direct labor 20 Overhead (20% variable) 10
affect its present sales. If the company has sufficient capacity to produce the Other information:
additional units, acceptance of the special order would affect net income as follows: Sales price 100
A. Income would decrease by P 12,000. SG & A costs (40% variable) 15 The Disk Division is operating at a level of
B. Income would increase by P 12,000. 70,000 chips per year.
C. Income would increase by P210,000. D.Income would increase by P 60,000.
22.
What is the minimum price that the division would consider on a “special order” of
20.
KC Industries manufactures a product with the following costs per unit at the 1,000 disks to be distributed through normal channels?
expected production of 30,000 units. A. P 72 C. P 81
Direct materialsP 4 Direct labor 12 B. P 78 D. P 6
Variable manufacturing overhead 6 23.
Assuming that that the Disk Division is producing and selling at capacity. What is the
Fixed manufacturing overhead 8 minimum selling price that the division would consider on a “special order” of 1,000
The company has the capacity to produce 40,000 units. The product regularly sells chips on which no variable period costs would be incurred?
for P40. A wholesaler has offered to pay P32 a unit for 2,000 units. A. P100 C. P 94
If the firm accepts the special order the effect on its operating income would be a B. P 72 D. P 90
A. P20,000 increase C. P4,000 increase
B. P16,000 decrease D. P 0 effect Make-or-buy decision
Relevant costs
21.
Louderhead Company makes bull-repellent scent according to a traditional Western 24
. For the past 12 years, the JLO Company has produced the small electric motors that
recipe, which normally sells at P90 per unit. Normal production volume is 10,000
fit into its main product line of dental drilling equipment. As materials costs have
ounces per month. Average cost is P50 per ounce, of which P20 is direct material
steadily increased, the controller of the JLO Company is reviewing the decision to
and P10 is variable conversion cost. This product is seasonal. After July, demand for
continue to make the small motors and has identified the following facts:

23
 Incremental Analysis

1) The equipment which is used to manufacture the electric motors has a

book value of P1,500,000. In the past years, ELM has manufactured all of its required components; however,
2) The space being occupied now by the electric motor manufacturing this year only 30,000 hours of otherwise idle machine time can be devoted to the
department could be used to eliminate the need for storage space production of components. Accordingly, some of the parts must be purchased from
which is presently being rented. outside suppliers. In producing the parts, factory overhead is applied at P10 per
3) Comparable units can be purchased from an outside supplier for standard machine hour. Fixed capacity costs that will not be affected by any make-
P597.50. or-buy decision represent 60% of the applied overhead.
4) Four of the people who work in the electric motor manufacturing The available 30,000 machine hours are to be scheduled so that ELM realizes
department would be terminated and given eight weeks of separation maximum potential cost savings. The relevant unit production costs that should be
pay. considered in the decision to schedule machine time are:
5) A P750,000 unsecured note is still outstanding on the equipment that is A. P54.00 for Beta and P147.00 for Zeta C. P14.00 for Beta and P127.00 for
being used in the manufacturing process. Zeta
Which of the items above are relevant to the decision that the controller has to B. P50.00 for Beta and P150.00 for Zeta D. P30.00 for Beta and P135.00 for
make? Zeta
A. 1, 2, 4, and 5 C. 1, 3, 4, and 5
B. 1, 3, and 4 D. 2, 3, and 4 Maximum buy price
26
. The following are a company’s monthly unit costs to manufacture and market a
particular product.
25
ELM Electronics has the following standard costs and other data: Manufacturing Costs:
.
Part Beta Part Direct materials P2.00
Zeta
Direct labor 2.40
Direct materials P 4.00 P80.0
20.0
P147.0
00 Variable indirect 1.60
Units
Direct needed per year
labor 6,000
10.00 0 8,000
Machine hours per unit 4 2
47.0 Fixed indirect 1.00
Unit cost if purchased P50.00 P150.00
0 Marketing Costs:

Relevant cost to make Variable 2.50

Fixed 1.50

The company must decide to continue making the product or buy it from an outside
supplier. The supplier has offered to make the product at a level of quality that the
Factory overhead 40.00
company prescribes. Fixed marketing costs would be unaffected, but variable
Unit standard cost P54.00
marketing costs would continue at 30% if the company were to accept the proposal.

24
 Incremental Analysis

What is the maximum amount per unit that the company can pay the supplier Effect of make decision
without decreasing its operating income? 29.
A business is operating at 90% of capacity and is currently purchasing a part which is
A. P8.50 C. P7.75 being used in its manufacturing operations for P15 per unit. The unit cost for the
B. P6.75 D. P5.25 business to make the part is P20, including fixed costs, and P12, not including fixed
costs. If 30,000 units of the part are normally purchased during the year but could
27.
Sinta Company can make 1,000 units of a necessary component with the following be manufactured using unused capacity, what would be the amount of differential
costs: cost, increase or decrease, from making the part rather than purchasing it?
Direct Materials P64,000 A. P150,000 cost increase C. P150,000 cost decrease
Direct Labor 16,000 Variable Overhead 8,000 Fixed Overhead B. P 90,000 cost decrease D. P 90,000 cost increase
?
The company can purchase the 1,000 units externally for P104,000. An analysis 30.
Alfaro's Manufacturing Company can make 100 units of a necessary component part
shows that at this external price, the company is indifferent between making or with the following costs:
buying the part. Sinta Company could avoid P6,000 in fixed overhead costs if it Direct Materials P80,000
acquires the components externally. If cost minimization is the major consideration Direct Labor 13,000
and the company would prefer to buy the components, what is the maximum Variable Overhead 40,000
external price that Sinta Company would accept to acquire the 1,000 units Fixed Overhead 27,000
externally? If Alfaro's Manufacturing Company can purchase the component externally for
A. P102,000. C. P 96,000. B. P 94,000. D. P P145,000 and only P4,000 of the fixed costs can be avoided, what is the correct
88,000. “make or buy” decision?
A. Make and save P8,000 C. Make and save P20,000
28.
Almeda's Shop can make 1,000 units of a necessary component with the following B. Buy and save P8,000 D. Buy and save P20,000
costs:
Effect of buy decision
Direct Materials P64,000
On fixed overhead cost
Direct Labor 16,000 Variable Overhead 8,000 31.
Sisa's Shop can make 1,000 units of a necessary component with the following
Fixed Overhead ?
costs:
The company can purchase the 1,000 units externally for P104,000. None of Almeda
Direct Materials P64,000
Company's fixed overhead costs can be reduced, but another product could be
Direct Labor 16,000 Variable Overhead 8,000
made that would increase profit contribution by P16,000 if the components were
Fixed Overhead ?
acquired externally. If cost minimization is the major consideration and the
The company can purchase the 1,000 units externally for P104,000. The unavoidable
company would prefer to buy the components, what is the maximum external price
fixed costs are P5,000 if the units are purchased externally. An analysis shows that
that Almeda Company would be willing to accept to acquire the 1,000 units
at this external price, the company is indifferent between making or buying the part.
externally?
What are the fixed overhead costs of making the component?
A. P 86,000. C. P 96,000. B. P110,000. D.
A. P21,000. C. P11,000.
P104,000.
B. P16,000. D. Cannot be determined.

25
 Incremental Analysis

On income 36.
The Rainbow Company manufactures Part No. 498 for use in its production cycle.
32.
Sylvan Processing Company is considering whether to make 2,000 units of product The cost per unit if 20,000 units of Part No. 498 are manufactured are as follows:
Whirl which costs P16 a unit or buy it from outside for P15 a unit. A further analysis Direct materialsP 6 Direct labor 30
shows that if product Whirl is outsourced, fixed costs of P8,000 attributable to this Variable overhead 12
product will be reduced by 25%. Fixed overhead applied 16
If the product is outsourced, Sylvan will Total unit cost P64
The Reeves Company has offered to sell 20,000 units of part No. 498 to Rainbow for
A. Decrease profit by P2,000 C. Increase profit by
P60 per unit. Rainbow will make the decision to buy the part from Reeves if there is
P2,000
a savings of P25,000 for Rainbow. If Rainbow accepts Reeves’s offer, P9 per unit of
B. Decrease profit by P4,000 D. Increase profit by the fixed overhead applied would be totally eliminated. Furthermore, Rainbow has
P4,000 determined that the released facilities could be used to save relevant costs in the
33.
Sylvan Processing Company is considering whether to make 2,000 units of product manufacture of part No. 575. In order to have a savings of P25,000, the amount of
Whirl which costs P16 a unit or buy it from outside for P15 a unit. A further analysis the relevant costs that would be saved by using the
shows that if product Whirl is outsourced, fixed costs of P8,000 attributable to this released facilities in the manufacture of Part No. 575 would have to be
product will be reduced by 25%. If Sylvan Processing Company purchased the A. P 80,000 C. P125,000
product Whirl, the space could be rented out for P6,000. If the product is
B. P 85,000 D. P140,000
outsourced, profit would
A. decrease, P2,000 C. increase, P2,000 37.
Leis Manufacturing Co. uses 10 units of Part Number WS73 each month in the
B. decrease, P4,000 D. increase, P4,000 production of computer printer. The unit cost to manufacture one unit of WS73 is
presented below.
34.
It costs P450,000 to make 15,000 units of a part in this plant. This cost includes Direct materials P
material of P90,000, direct labor of P120,000, variable overhead of P15,000, and
1,000
P225,000 in fixed overhead inclusive of P45,000 in depreciation and common
Materials handling (20% of direct material cost) 20
overhead allocation of P150,000. The balance is for the section supervisor's salary.
0
The part can be purchased for P20 a unit. If the part is purchased, the space
Direct labor 8,00
released can be rented for P65,000. If the part is purchased, the company will
0
A. lose P20,000 C. gain P20,000
Manufacturing overhead (150% of direct labor) 12,00
B. lose P45,000 D. gain P45,000
0
35.
Lane Co. manufactures ballpoint pens. Another manufacturer has offered to supply Total manufacturing cost P21,200
Lane with the 5,000 ink cartridges that it needs annually. The cost to buy the Material handling represents the direct variable costs of the Receiving Department
cartridges would be P15 each. In producing its own cartridges, Lane has incurred that are applied to direct materials and purchased components on the basis of their
P10 in fixed costs and P8 in variable costs. If Lane buys the cartridges, its net income cost. This is a separate charge in addition to manufacturing overhead. Leis’ annual
will: manufacturing overhead budget is one-third variable and two-thirds fixed. Garland
A. not change C. increase by P35,000 B. decrease by P35,000 D. increase by Company, one of Leis’ reliable vendors, has offered to supply part WS73 at a unit
P25,000 price of P15,000.
26
 Incremental Analysis

If Leis purchases the WS73 units from Garland, the capacity being used by Leis to D. Increase the handle unit cost by P0.50.
manufacture these parts would be idle. Should Leis decide to purchase the parts
from
40.
The Minolta, Inc. produces 1,000 units of Part M per month. The total
Garland, the unit cost of WS73 would manufacturing costs of the part are as follows:
A. Increase by P4,800 C. Decrease by P6,200 Direct materials P10,000
B. Decrease by P3,200 D. Increase by P1,800 Direct labor 5,000
Variable overhead 5,000
38.
The Rural Cooperative, Inc. produces 1,000 units of Part M per month. The total Fixed overhead 30,000
manufacturing costs of the part are as follows: Total manufacturing cost P50,000
Direct materials P10,000 An outside supplier has offered to supply the part at P30 per unit. It is estimated
Direct labor 5,000 that 20% of the fixed overhead assigned to Part M will no longer be incurred if the
Variable overhead 5,000 company purchases the part from the outside supplier.
Fixed overhead 30,000 If Minolta purchases 1,000 units of Part M from the outside supplier per month,
Total manufacturing cost P50,000 then its monthly operating income will
An outside supplier has offered to supply the part at P30 per unit. It is estimated A. decrease by P 4,000 C. increase by P 1,000
that 20% of the fixed overhead being assigned to Part M will no longer be incurred if B. decrease by P20,000 D. increase by P20,000
the company purchases the part from the outside supplier.
If Rural Cooperative purchases 1,000 units of Part M from the outside supplier, its
41.
Bulacan Company manufactures part G for use in the production of its principal
monthly operating income will product. The costs per unit for 10,000 units of part G are as follows:
A. decrease by P 4,000 C. increase by P 1,000 Direct materials P 3
B. decrease by P20,000 D. increase by P20,000 Direct labor 1
5
39.
Migs Corporation currently manufactures all component parts used in the Variable overhead 6
manufacture of various hand tools. A steel handle is used in three different tools. Fixed overhead 8
The budgeted costs per unit based on 20,000 units are: Total P32
Direct material P6.00 Pampanga Company has offered to sell Bulacan 10,000 units of part G for P30 per
Direct labor 4.00 unit. If Bulacan accepts Pampanga’s offer, the released facilities could be used to
Variable overhead 1.00 save P45,000 in relevant costs in the manufacture of part H. In addition, P5 per unit
Fixed overhead 2.00 of the fixed overhead applied to part G would continue.
Total unit cost P13.00 What alternative is more desirable and by what amount?
Sans Steel, Inc. has offered to supply 20,000 units of the handle to Migs for P12.50 A. B. C. D.
each delivered. If Migs currently has idle capacity that cannot be used, accepting
the offer will A. Decrease the handle unit cost by P0.50. Alternative Manufacture Manufacture Buy Buy
B. Increase the handle unit cost by P1.50. Amount P10,000 P15,000 P15,000 P10,000
C. Decrease the handle unit cost by P1.50.

27
 Incremental Analysis

42.
Blade Division of Dana Company produces hardened steel blades. One-third of the manufacture of Part 501 would be rented to another company for P6,000 per year.
Blades Division’s output is sold to the Lawn Products Division of Dana; the If Connell accepts the offer of the outside supplier, annual profits will
remainder is sold to outside customers. The Blade Division’s estimated sales and A. Increase by P13,500 C. Increase by P 7,250
standard costs data for the fiscal year ending June 30 are as follows:
B. Increase by P11,000 D. Increase by P 1,250
Lawn Products Outsiders
Point of indifference - Units
Sales P15,000 P40,000 44
. Mars Industries is a multi-product company that currently manufactures 30,000 units
Variable costs (10,000) (20,000)
of Part QS42 each month for use in the production of its main product. The facilities
Fixed costs (3,000) (6,000)
now being used to produce Part QS42 have fixed monthly cost of P150,000 and a
Gross margin P 2,000 14,000 capacity to produce 84,000 units per month. If Mars were to buy Part QS42 from an
Unit sales 10,000 20,000 outside supplier, the facilities would be idle, but 60 percent of its fixed costs would
The Lawn Products Division has an opportunity to purchase 10,000 identical quality not continue. The variable production costs of Part QS42 are P11 per unit.
blades If Mars Industries is able to obtain Part QS42 from an outside supplier at a unit
from an outside supplier at a cost of P1.25 per unit on a continuing basis. Assume purchase price of P12.875, the monthly usage at which it will be indifferent between
that the Blade Division cannot sell any additional products to outside customers. purchasing and making Part QS42 is
Should Dana allow its Lawn Products Division to purchase the blades from the A. 30,000 units C. 80,000 units
outside supplier, and why? B. 32,000 units D. 48,000 units
A. Yes, because buying the blades would save Dana Company P500. Point of indifference - price
B. No, because making the blades would save Dana Company P1,500. 45
. Calero Manufacturing Company can make 100 units of a necessary component
C. Yes, because buying the blades would save Dana Company P2,500. part with the following costs:
D. No, because making the blades would save Dana Company P2,500 Direct Materials P80,000
Direct Labor 13,000
43.
The Connell Company uses 5,000 units of Part 501 each year. The cost of
Variable Overhead 40,000
manufacturing one unit Part 501 at this volume is as follows:
Fixed Overhead 27,000
Direct materials P2.50
If Calero Manufacturing Company purchases the component externally, P20,000 of
Direct labor 3.50 the fixed costs can be avoided. At what external price for the 100 units is the
company indifferent between making or buying?
Variable overhead 1.50 A. P160,000. C. P153,000.
Fixed overhead 1.00 B. P113,000. D. P133,000.

Total P8.50 Profit maximization

Point of indifference
An outside supplier has offered to sell Connell unlimited quantities of Part 501 at a 46
. Dipsum Soft Drinks makes three products: iced tea, soda, and lemonade. The
unit cost of P7.75. If Connell accepts this offer, it can eliminate 50 percent of the following data are available:
fixed costs assigned to part 501. Furthermore, the space devoted to the
28
 Iced Tea Soda Lemonade

Sales price per unit P9.00 P6.00 P5.00

Incremental Analysis
Variable cost per unit
Contribution margin per unit
follows: A. B. C. D.
Dipsum is experiencing a bottleneck in one of its processes that affects each product
Bottleneck process hours per unit as 3 3 4 Product X 16,000 8,000 7,000 3,000
Iced Tea Soda Lemonade Product Y zero 4,000 zero 8,000
49.
Mary Manufacturing has assembled the following data pertaining to two popular
What price for lemonade would equate its profitability to that of soda?
A. P8.00. C. P6.00. Direct materials P 6 P11
B. P7.00. D. P5.50. Direct labor 4 9
Factory overhead @ P16 per hour 16 32
Optimal mix
Cost if purchased from an outside supplier 20 38
47.
Product A sells for P12 per unit and its variable cost per unit is P10. Product B sells
Annual demand (units) 20,000 28,000
for P15 per unit and its variable cost per unit is P12. The plant capacity is 350,000
products. Blender Electric mixer
machine hours and both products require one machine hour to manufacturer.
Which of the following will provide the best sales mix of Product A and Product B Past experience has shown that the fixed manufacturing overhead component
assuming the market limitation of Product A is 200,000 units and the market included in the cost per machine hour averages P10. Mary has a policy of filling all
limitation of Product B is 250,000 units? sales orders, even if it means purchasing units from outside suppliers.
A. 250,000 units of Product A, 100,000 units of Product B If 50,000 machine hours are available, and Mary Manufacturing desires to follow an
B. 50,000 units of Product A, 300,000 units of Product B optimal strategy, it should
C. 100,000 units of Product A, 250,000 units of Product B A. produce 25,000 electric mixers, and purchase all other units as needed
D. 150,000 units of Product A, 200,000 units of Product B B. produce 20,000 blenders and 15,000 electric mixers, and purchase all other
48.
The Hingis Corporation manufactures two products: X and Y. Contribution margin units as needed
per unit is determined as follows: C. produce 20,000 blenders and purchase all other units as needed
Product X Product D. produce 28,000 electric mixers and purchase all other units as needed
Y
Decision
Revenue P130 50.
A company can sell all the units it can produce of either Product A or Product B but
P80 not both. Product A has a unit contribution margin of P36 and takes two machine
Variable costs 70 hours to make and Product B has a unit contribution margin of P45 and takes three
P38 machine hours to make. If there are 1,000 machine hours available to manufacture
Contribution margin P 60 a product, income will be
P42 A. P3,000 more if Product A is made. C. P3,000 less if Product A is
Total demand for X is 16,000 units and for Y is 8,000 units. Machine hour is a scarce made.
resource. 42,000 machine hours are available during the year. Product X requires 6 B. P3,000 less if Product B is made.D. the same if either product is made.
machine hours per unit while product Y requires 3 machine hours per unit. How
many units of X and Y should Hingis Corporation produce? 51.
The Baco Company produces three products with the following costs and
selling prices:
29
 Incremental Analysis

A B C Scarce Company will maximize its net benefits by purchasisng

A. 7,000 units of Plastic and manufacturing the remaining bearings.
Selling price per unit P16 P21 P21
B. 11,000 units of Metal and manufacturing 7,000 units of Plastic.
Variable cost per unit 7 11 13
C. 6,000 units of Plastic and manufacturing the remaining bearings.
Contribution margin per unit P 9 P10 P 8
D. 5,000 units of Metal and manufacturing the remaining bearings.
Direct labor hours per unit 1.0 1.5 2.0
Machine hours per unit 4.5 2.0 2.5 53.
HILO Company manufactures electric carpentry tools. The production department
In what order should the three products be produced if either the direct labor-hours had met all production requirements for the current month and has an opportunity
or the machine hours are the company’s production constraint? to produce additional units of product with its excess capacity. Unit selling prices
A. B. C. D. and unit costs for three different drill models are as follows:
Home Model Deluxe Model Pro Model
Direct labor hours A, B, C B, C, A B, C, A A, B, C
Machine hours B, C, A B. C. A A, C, B A, C, B Selling price P58 P65 P80
52.
Scarce Company has been producing two types of bearings, Plastic and Metal, for its Direct material 16 20 19
own use in the production of main products. The data regarding these two bearings Direct labor (P10 per 10 15 20
follow: hour)
Plastic Metal Variable overhead 8 12 16
Fixed overhead 16 5 15
Machine hours required per unit 3.0 4.5 Variable overhead is applied on the basis of direct-labor pesos, while fixed overhead
Standard cost per unit is applied on the basis of machine hours. There is sufficient demand for the
Prime costs P 8.00 P 9.00 additional production of any model in the product line. If it has excess machine
Variable overhead* 3.00 4.00 capacity but a limited amount of labor time, to which product or products should
Fixed overhead** 4.50 6.75 HILO Company devote its excess production?
A. Home model C. Deluxe model
Total P15.50 P19.75
B. Pro Model D. Equally
*Variable manufacturing overhead is applied on the basis of direct labor hours.
**Fixed manufacturing overhead is applied on the basis of machine hours. 54.
Product A sells for P12 per unit and its variable cost per unit is P10. Product B sells
for P15 per unit and its variable cost per unit is P12. The plant capacity is 350,000
Scarce’s annual requirements for these bearings is 7,000 units of Plastic and 11,000
machine hours and Product A requires 48 minutes to complete while Product B
units of Metal. Recently, Scarce’s management decided to devote additional
requires 75 minutes. Which of the following will provide the best sales mix of
machine hours to other product lines resulting to only 48,000 machine hours per
Product A and Product B assuming the market limitation of Product A is 200,000
year that can be dedicated to the production of the bearings. An outside company
units and the market limitation of Product B is 250,000 units?
has offered to sell Scarce the annual supply of the bearings at prices of P15.50 for
A. 46,875 units of Product A, 250,000 units of Product B
Plastic and P17.50 for Metal. Scarce wants to schedule the otherwise idle 48,000
B. 200,000 units of Product A, 152,000 units of Product B
machine hours to produce bearings so that the company can minimize its costs
C. 152,000 units of Product A, 200,000 units of Product B
(maximize its net benefits).

30
 Incremental Analysis

D. 100,000 units of Product A, 250,000 units of Product B What is the correct decision using the sell or process further
decision rule? A. Sell before assembly, the company will be
55.
Dimasalang Company has only 25,000 hours of machine time each month to better off by P18 per unit.
manufacture its two products. Product X has a contribution margin of P50 and B. Sell before assembly, the company will be better off by P26 per unit.
Product Y has a contribution margin of P64. Product X requires 5 machine hours C. Process further, the company will be better off by P26 per unit.
and Product Y, 8 hours. If Dimasalang wants to dedicate 80% of its machine time to D. Process further, the company will be better off by P8 per unit.
the product that will provide the most income, it will have a total contribution
margin of 58.
Sales of 25,000 units at P7.20 per unit are made monthly. The unit cost is P5.90.
A. P250,000 C. P210,000 Incremental costs of P1.35 per unit to further process the units will result in the
B. P240,000 D. P200,000 25,000 units being sold for P8.75 each. Which course of action should the company
Sell-as-is-or-process-further take?
Minimum sales A. Commit its resources to a different product
56
. Snow Clean Corporation produces cleaning compounds and solutions for industrial B. Sell the units at the current stage of completion
and household use. While most of its products are processed independently, a few C. Do further processing and sell the units at P8.75
are related. Grit 337, a coarse cleaning powder with many industrial uses, costs P16 D. Do further processing on only one-half of the units
a pound to make and sells for P20 a pound. A small portion of the annual
production of this product is retained for further processing in the Mixing
59.
Aaron Company produces a product that can be sold for P250,000 at an
Department, where it is combined with several other ingredients to form a paste, intermediate stage. If Aaron finishes the product, they will incur P75,000 of
which is marketed as a silver polish selling for P40 per jar. This further processing additional material costs and another P15,000 in labor and overhead costs. When
requires ¼ pound of Grit 337 per jar. Costs of other ingredients, labor, and variable finished, Aaron will be able to sell the product for P350,000.
overhead associated with this further processing amount to P25 per jar. Variable Which of the following answers is correct?
selling costs are P3 per jar. If the decision were made to cease production of the A. Sell now
silver polish, P56,000 of Mixing Department fixed costs could be avoided. Snow B. Finish the product because profits will increase by P25,000
Clean has limited production capacity for Grit 337, but unlimited demand for the C. Finish the product because profits will increase by P12,500
cleaning powder. What is the minimum number of jars of silver polish that would D. Finish the product because profits will increase by P10,000
have to be sold to justify further processing of Grit 337.
A. 8,000 C. 7,000 Effect of decision
B. 5,600 D. 4,667
60.
Ottawa Corporation produces two products from a joint process. Information about
the two joint products follows:
Decision Product X Product Y
57.
Beal Company is starting business and is unsure of whether to sell its product Anticipated production 2,000 lbs 4,000 lbs
assembled or unassembled. The unit cost of the unassembled product is P40 and Selling price per pound at split-off P30 P16
Beal Company would sell it for P90. The cost to assemble the product is estimated at Additional processing costs/pound after split- P15 P30
P18 per unit and Beal Company believes the market would support a price of P116 off (all variable)
on the assembled unit. Selling price/pound after further processing P40 P50

31
 Incremental Analysis

The joint cost is P85,000. Ottawa currently sells both products at the split-off point. A. This segment has a net loss of P8,000.
If Ottawa makes decision which maximizes profit, its profit will increase by B. This segment's revenue is greater than its avoidable costs.
A. P16,000C. P 4,000 C. This segment is a good candidate for elimination.
B. P50,000D. P10,000 D. This segment's avoidable costs are greater than unavoidable costs.
61.
The cost to manufacture an unfinished unit is P40 (P30 variable and P10 fixed). The Effect of drop decision
selling price per unit is P50. The company has unused production capacity and has 64.
Banahaw Company plans to discontinue a department that has a contribution
determined that units could be finished and sold for P65 with an increase in variable margin of P240,000 and P480,000 in fixed costs. Of the fixed costs, P210,000 can be
costs of 40%. What is the additional net income per unit to be gained by finishing avoided. The
the unit? effect of this discontinuance on Banahaw’s overall net operating income would be
A. P 3 C. P10 a(an)
B. P15 D. P12 A. decrease of P30,000 C. increase of P30,000
B. decrease of P10,000 D. increase of P10,000
Total processing cost
62
. Matador Manufacturing schedules a weekly production of 15,000 units of 65.
Mina Co. mines three products. Gold Ore sells for P1,000,000 per ton, variable costs
Product M and 30,000 units of N for which P800,000 common variable costs are P600,000 per ton, and fixed mining costs are P6,000,000. The segment margin
are incurred. These two products can be sold as is or processed further. for 2007 was P1,200,000. The management of Mina Co. was considering dropping
Further processing of either product does not delay the production of the mining of Gold Ore. Only one-half of the fixed expenses are direct and would be
subsequent batches of the joint products. Below are some of the information: eliminated if the segment was dropped. If Gold Ore were dropped, net income for
M N Mina Co. would
Unit selling price without further processing P25 P19 A. Increase by P2,000,000 C. Decrease by P2,000,000
Unit selling price with further processing P31 P23 B. Increase by P1,200,000 D. Decrease by P1,200,000
Total separate weekly variable costs of further processing P100,000 P110,000 66.
Agimat Company plans to discontinue a segment with a P32,000 segment margin.
To maximize Matador’s manufacturing contribution margin, the total separate
Common expenses allocated to the segment amounted to P45,000, of which
variable costs of further processing that should be incurred each week are
P20,000 cannot be eliminated if the segment were closed. The effect of closing
A. P105,000 C. P110,000
down the segment on Agimat
B. P100,000 D. P210,000
Company’s before tax profit would be
Keep-or-drop decision A. P12,000 decrease C. P12,000 increase
Analysis B. P 7,000 decrease D. P 7,000 increase
63
. A company is deciding whether or not to eliminate a segment of its business. The
Shutdown point
segment generates total sales of P104,000, its direct expenses are P22,000, and its 67.
Bulusan Company normally produces and sells 30,000 units of E14 each month. E14
indirect expenses are P26,000. Its cost of goods sold is P64,000. Six thousand pesos
is a small electrical relay used in the automotive industry as a component part in
of the direct expenses and P8,000 of its indirect expenses are avoidable expenses.
various products. The selling price is P22 per unit, variable costs are P14 per unit,
Which of the following is not true?

32
 Incremental Analysis

fixed manufacturing overhead costs total P150,000 per month, and fixed selling repair, insurance, and property tax expenses estimated at P10,000. At lease-end,
costs total P30,000 per month. the equipment is expected to have no residual value. The net differential income
from the lease alternative is:
Employment-contract strikes in the companies that purchase the bulk of the E14 A. P15,000. C. P25,000. B. P 5,000. D. P12,500.
have caused Bulusan Company’s sales to temporarily drop to only 9,000 units per
month. Bulusan Company estimates that the strikes will last for about two months, Comprehensive
after which time sales of E14 should return to normal. Due to the current low level Questions 70 through 74 are based on the following information:
of sales, however, Bulusan Company is thinking about closing down its own plant Adrenal Company has a single product called a CAD. The company normally produces
during the two months that the strikes are on. If Bulusan Company does close down and sells 60,000 CADS each year at a selling price of P32 per unit. The company’s unit
its plant, it is estimated that fixed manufacturing overhead costs can be reduced to costs at this level of activity are given below:
P105,000 per month and that fixed selling costs can be reduced by 10%. Start-up Direct materials P10.00
costs at the end of the shutdown period would total P8,000. Since Bulusan
Company uses just-in-time production method, no inventories are on hand. Direct labor 4.50

At what level of unit sales for the two-month period should Bulusan Company be Variable manufacturing overhead 2.30
indifferent between temporarily closing the plant or keeping it open? Fixed manufacturing overhead 5.00
A. 11,000 C. 10,000
B. 24,125 D. 8,000 Variable selling expenses 1.20

Fixed selling expenses 3.50

Equipment replacement
68.
MNL Company has an opportunity to acquire a new machine to replace one of its Total cost per unit P26.50
present machines. The new machine would cost P90,000, have a 5-year life and no
estimated salvage value. Variable operating costs would be P100,000 per year. The
70.
Assume that Adrenal Company has sufficient capacity to produce 90,000 CADS each
present machine has a book value of P50,000 and a remaining life of 5 years. Its year without any increase in fixed manufacturing overhead costs. The company
disposal value now is P5,000, but it would be zero after 5 years. Variable operating could increase its sales by 25% above the present 60,000 units each year if it were
costs would be P125,000 per year. Ignore income taxes. Considering the 5 years in willing to increase the fixed selling expenses by P80,000. The increase in income if
total, what would be the difference in profit before income taxes by acquiring the the production is increased by 25% is
new machine as opposed to retaining the present one? A. P130,000 C. P 25,000
A. P10,000 decrease C. P35,000 increase B. P108,333 D. P 20,800
B. P15,000 decrease D. P40,000 increase 71.
Assume again that Adrenal Company has sufficient capacity to produce 90,000 CADS
Lease each year. A customer in a foreign market wants to purchase 20,000 CADS. Import
69.
Darren Co. is considering disposing an equipment that costs P50,000 and has duties on the CADS would be P1.70 per unit, and costs for permits and licenses
P40,000 of accumulated depreciation to date. Darren Co. can sell the equipment would be P9,000. The only selling costs that would be associated with the order
through a broker for P25,000 less 5% commission. Alternatively, Minton Co. has would be P3.20 per unit shipping cost.
offered to lease the equipment for five years for a total of P48,750. Darren will incur What is the break-even price on this order?

33
 Incremental Analysis

A. P23.35C. P22.15 sell 800 units. The pilot run required 14.25 direct-labor hours for the 50 cylinders,
B. P28.65D. P21.70 averaging 0.285 direct-labor hours per cylinder. Henderson has experienced a
significant learning curve on the direct-labor hours needed to produce new cylinders.
As cumulative output doubles, say from 25 to 50 units for example, the average labor
72.
The company has 1,000 CADS on hand that have some deformities and are time per unit declines by 20 percent. Past experience indicates that learning tends to
therefore considered to be “seconds.” Due to the deformities, it will be impossible cease by the time 800 parts are produced. Henderson’s manufacturing costs for
to sell these units at the normal price through regular distribution channels. What cylinders are as follows:
unit cost figure is relevant for setting a minimum selling price?
Direct labor P120.00 per hour
A. P16.80C. P 4.70
Variable overhead 100.00 per direct labor
B. P18.00D. P 1.20
hour
73.
Due to a strike in its supplier’s plant, Adrenal Company is unable to purchase more Fixed overhead 166.00 per direct labor
material for the production of CADS. The strike is expected to last for two months. hour
Adrenal Company has enough material on hand to continue to operate at 30% of Direct material 40.50 per unit
normal levels for the two months. If the plant were closed, fixed overhead costs Henderson has received a quote of P75 per unit from the Leyte Machine Company for
would continue at 60% of their normal level during the two-month period; the fixed the additional 750 cylinders needed. Henderson frequently subcontracts this type of
selling costs would be reduced by 20% while the plant was closed. How much is the work and has always been satisfied with the quality of the units produced by Leyte.
advantage or disadvantage of closing the plant for the two-month period? Recently, Henderson Equipment Company has been operating at considerably less than
A. Disadvantage, P144,000 C. Disadvantage, P15,000 full capacity.
B. Advantage, P144,000 D. Advantage, P15,000 75.
How many direct-labor hours are expected to be used for the production of 800
cylinders (including the pilot run)?
74.
An outside manufacturer has offered to produce CADS for Adrenal Company and to A. 93.4 hours C. 79.1 hours
ship them directly to Adrenal’s customers. If Adrenal Company accepts this offer, B. 74.7 hours D. 67.6 hours
the facilities that it uses to produce CADS would be idle; however, fixed overhead
costs would be reduced by 75% of their present level. Since the outside
76.
The production of 800 cylinders, including the pilot run, requires total incremental
manufacturer would pay for all the costs of shipping, the variable selling costs would costs of:
be only two-thirds of their present amount. What is the unit cost figure that is A. P48,834 C. P68,452
relevant for comparison to whatever quoted price is received from the outside B. P49,802 D. P52,948
manufacturer? 77.
The effect on profit of producing 750 units instead of buying them from Leyte
A. P20.95C. P20.55
Machine Company a(an)?
B. P21.35D. P16.80
A. Increase of P 8,470. C. Increase of P12,676.
Question Numbers 75 though 77 are based on the following: B. Increase of P 7,052. D. Decrease of P22,560.
Henderson Equipment Company has produced a pilot run of 50 units of a recently
Questions 78 through 81 are based on the following:
developed cylinder used in its finished products. The company expects to produce and

34
 Incremental Analysis

CLASP Industries received an order for a piece of special machinery from Tigok The following additional information is available regarding CLASP’s operations:
Company. Just as CLASP completed the machine, Tigok declared backruptcy, defaulted
on the order, and forfeited the 10 percent deposit paid on the selling price of P72,500. 1. The sales commission rate on sales of standard models is 2 percent, while the rate
on special orders is 3 percent.
CLASP’s manufacturing manager identified the costs already incurred in the production
of the special machinery for Tigok as follows: 2. Normal credit terms for sales of standard models are 2/10, net/30. This means that
Direct material P16,600 a customer receives a 2 percent discount if payment is made within 10 days, and
payment is due no later than 30 days after billing. Most customers take the 2
Direct labor 21,400 percent discount. Credit terms for a special order are negotiated with the
Manufacturing overhead: customer.
Variable P10,700
3. The allocation rates for manufacturing overhead and fixed selling and administrative
Fixed 5,350 16,05 costs are as follows: Manufacturing costs:
0 Variable 50% of direct-labor costs
Fixed selling and administrative costs 5,405 Fixed 25% of direct-labor costs Fixed selling and administrative costs 10% of
Total P59,455 the total manufacturing costs

Another company, Kay Corporation, will buy the special machinery if it is reworked to 4. Normal time required for rework is one month.
Kay’s specifications. CLASP offered to sell the reworked machinery to Kay as a special
order for P68,400. Kay agreed to pay the price when it takes delivery in two months. 78. How much peso contribution would the sale to Kay Corporation add to CLASP’
The additional identifiable costs to rework the machinery to Kay’s specifications are as before-tax profit?
follows: A. P53,848C. P55,900
B. P55,948D. P 9,300
Direct materials P 6,200
79. How much peso contribution would the alternative of converting the special
Direct labor 4,200 Total P10,400
machinery to standard model add to CLASP’s before-tax profit?
A second alternative available to CLASP is to convert the special machinery to the A. P52,200C. P52,825
standard model, which sells for P62,500. The additional identifiable costs for this B. P54,475D. P 7,650
conversion are as follows:
80. If Kay makes CLASP a counteroffer, what is the lowest price CLASP should accept for
Direct materials P2,850
the reworked machinery from Kay?
Direct labor 3,30
A. P10,400C. P10,722
0
B. P12,500D. P12,887
Total P6,150
A third alternative for CLASP is to sell the machine as is for a price of P52,000. However, 81. How much would the alternative of selling unmodified machinery to the potential
the potential buyer of the unmodified machine does not want it for 60 days. This buyer buyer contribute to CLASP’s before-tax profit?
has offered a P7,000 down payment, with the remainder due upon delivery.
35
 Incremental Analysis

A. P50,440C. P49,920 The sales department believes that the monthly demand for the next six months will be
B. P 1,740 D. P49,400 as follows:
Product Monthly Unit Sales
Question Nos. 82 and 85 are based on the following: 401 500
Constraint Company manufactures and sells three products, which are manufactured in 403 400
a factory with four departments. Both labor and machine time are applied to the
405 1,000
products as they pass through each department. The machines and labor skills required
Inventory levels are satisfactory and need not be increased or decreased during the next
in each department are so specialized that neither machines nor labor can be switched
six months. Unit price and cost data that will be valid for the next six months are as
from one department to another.
follows:
Constraint Company’s management is planning its production schedule for the next few P R O D U C T S
82.
Which department has capacity constraint401 403
in labor hours? 405
months. The planning is complicated, because there are labor shortages in the Unit costs:
community and some machines will be down several months for repairs. A. Depa
Direct material P 7 P 13 P 17
rtme
Direct labor nt 1
Management has assembled the following information regarding available machine and
labor time by department and the machine hours and direct-labors required per unit of Department 1 12 6 12
product. These data should be valid for the next six months. Department 2 21 14 14 C.
Department 3 24 -- 16
DEPARTMENT
Department 4 9 18 9
Monthly Capacity Available 1 2 3 4
Variable overhead 27 20 25
Norman machine capacity in MH 3,500 3,500 3,000 3,500
Fixed overhead 15 10 32
Capacity of machines being repaired
Variable selling expenses 3 2 4
in machine hours ( 500) ( 400) ( 300) ( 200) Available machine capacity in MH
Unit selling price P196 P123 P167
3,000 3,100 2,700 3,300
Available direct labor hours (DLH) 3,700 4,500 2,750 2,600 Department 3
B. Department 2 D. Department 4
Labor and Machine Specifications per 83.
The total Machine Hours required by estimated monthly unit sales are:
Unit of Product
A. 10,600 C. 11,600
Product Labor and Machine Time
B. 12,100 D. 13,500
401 Direct labor hours 2 3 3 1
Machine hours 1 1 2 2
403 Direct labor hours 1 2 - 2 84.
The total number of labor hours as constraint for a month is:
Machine hours 1 1 - 2 A. 50 C. 300 B. 750 D. No constraint
405 Direct labor hours 2 2 2 1
Machine hours 2 2 1 1
85.
In order to maximize its monthly profit, Constraint Company should produce:

36
 Incremental Analysis

A. B. C. D. P72 per unit. Mr. Syjuco will have to spend P40,000 for a special device which will be
discarded when the job is done.
401 250 250 500 500
403 0 400 400 0 86.
What is the incremental cost of the special order of 5,000 units?
405 1,000 1,000 625 625 A. P600,000 C. P779,000
Question Nos. 86 through 89 are based on the following; B. P421,000 D. P371,000
Arnold Syjuco operates a small machine shops. He manufactures one standard product 87.
What is the full cost of the special order?
available from many other similar businesses and he also manufactures products to
A. P779,000 C. P421,000
customer order. Hi accountant prepared the annual income statement shown below:
B. P492,400 D. P651,000
Custom Sales Standard Sales Total
88.
The amount of opportunity cost of taking the special order is:
Sales P1,000,000 P500,000 P1,500,000
A. P183,000 C. P250,000
Material P 200,000 P160,000 P 360,000
B. P 71,000 D. P124,600
Labor 400,000 180,000 580,000
Depreciation 126,000 72,000 198,000 89.
What is the effect on the overall profit if the special order is accepted?
Power 14,000 8,000 22,000 A. P450,000 C. P( 25,000)
Rent 120,000 20,000 140,000 B. P( 85,000) D. P 29,000
Heat and light 12,000 2,000 14,000
Other 8,000 18,000 26,000 Question Nos. 90 through 94 are based on the following:
Total P 880,000 P460,000 P1,340,000 The Verbatim Corporation, which produces and sells to wholesalers a highly successful
Income P 120,000 P 40,000 P 160,000 line of summer lotions and insect repellents, has decided to diversify in order to
The depreciation charges are for machines used in the respective product lines. The stabilize sales over the year. A natural area for the company to consider is the
power charge is apportioned on the estimate of power consumed. The rent is for the production of special lotion and cream to prevent dry and chapped skin.
building space which has been leased for 10 years at P140,000 per year. The rent and
After considerable research, a special product line has been developed. However,
heat and light are apportioned to the product lines based on amount of floor space
because of the conservatism of the company management, Verbatim’s president has
occupied. All other costs are current expenses identified with the product line incurring
decided to introduce only one of the new products for this coming rainy season. If the
them.
product is a success, further expansion will be initiated in future years.
A valued custom parts customer has asked Mr. Syjuco to manufacture 5,000 special
The product selected (called Chaps) is a lip balm that will be sold in a lipstick-type tube.
units for him. Mr. Syjuco is working at capacity and would have to give up some other
The product will be sold to wholesalers in boxes of 24 tubes for P800 per box. Because
business to take this business. He cannot renege on custom orders already agreed to
of available capacity, no additional fixed charges will be incurred to produce the
but he could reduce the output of his standard product by about one-half for one year
product. However, a P10,000,000 fixed charge will be absorbed by the new product to
while producing the specially requested custom part. The customer is willing to pay
allocate a fair share of the company’s present fixed costs to it.
P140 for each part. The material cost will be about P40 per unit and the labor will be

37
 Incremental Analysis

Using the estimated sales and production of 100,000 boxes of Chaps as the standard Question Nos. 95 through 101 are based on the following:
volume, the accounting department has developed the following costs: Medical Supply Company produced hydraulic hoists that were used by hospitals to move
bedridden patients. The costs of manufacturing and marketing hydraulic hoists at the
Direct labor P200 per box company’s normal volume of 3,000 units per month are show below:
Direct materials 300 per box Unit manufacturing costs:
Total overhead 150 per box Total P650 per box
Direct materials P1,000
Verbatim has approached a cosmetics manufacturer to discuss the possibility of
Direct labor 1,500
purchasing the tubes for Chaps. The purchase price of the empty tubes from the
cosmetics manufacturer would be P90 per 24 tubes. If the Verbatim Corporation Variable overhead 500
accepts the purchase proposal, it is estimated that direct labor and variable overhead
costs would be reduced by 10% and direct material costs would be reduced by 20%. Fixed overhead 1,200 P4,20
Unit marketing costs: 0
90.
What is the variable overhead rate per box of Chaps? Variable 500
A. P100 C. P 50
B. P150 D. P200 Fixed 1,400 1,90
0
Total unit costs P6,10
91.
What is the material cost per box of Chaps saved by purchasing them? 0
A. P300 C. P 60 Unless otherwise stated, assume there is no connection between the situations
B. P240 D. P 30 described in the questions; each is to be treated independently. Unless otherwise
stated, a regular selling price of P7,400 per unit should be assumed. Ignore income
92.
How much would it cost Verbatim to produce the tubes per box? taxes and other costs that are not mentioned in the cost schedule or in a question itself.
A. P 60 C. P 90
B. P 85 D. P120 95.
What is the monthly breakeven units for Medical Supply Company?
A. 2,000 C. 1,950
93.
How much would Verbatim incur by making 125,000 boxes, assuming that B. 2,689 D. 2,614
additional equipment, at an annual rental of P1,000,000, must be acquired to
produce this volume? 96.
Market research estimates that volume could be increased to 3,500 units, which is
A. P10,625,000 C. P11,250,000 well within hoist production capacity limitations, if the price were ct from P7,400 to
B. P11,625,000 D. P12,500,000 P6,500 per unit. Assuming the cost behavior patterns implied by the data in the cost
schedule is correct, would you recommend this action be taken?
94.
Referring to Question No. 93, what is the impact on its profit if Verbatim were to A. Yes, because the profit will increase by P1,500,000.
buy 125,000 boxes? B. Yes, because the profit will increase by P 200,000.
A. Additional profit of P1,000,000. C. Additional profit of P375,000. C. No, because the profit will decrease by P1,200,000.
B. Additional profit of P1,250,000. D. Decrease in profit of P625,000. D. No, because the profit will decrease by P2,400,000.

38
 Incremental Analysis

97.
On March 1, a contract offer is made to Medical Supply Company by the Veterans’ would be unaffected, but its variable marketing costs would be cut by 20 percent for
Hospital to supply 500 units for delivery by March 31. Because of an unusually large these 1,000 units produced by the contractor. Medical Supply’s plant would
number of rush orders form their regular customers. Medical Supply plans to operate at two thirds of its normal level, and total allocated fixed manufacturing
produce 4,000 units during March, which will use all available capacity. If the costs for these 1,000 units would be cut by 30 percent. What inhouse unit cost
Veterans’ Hospital’s order is accepted, 500 units normally sold to regular customers should be used to compare with the quotation received from the supplier?
would be lost to a competitor. The contract given by the hospital would reimburse A. P 3,760 C. P 4,240
the Veterans’ Hospital’s share of March manufacturing costs, plus pay a fixed fee B. P 3,000 D. P 3,460
(profit) of P500,000. (There would be no variable marketing costs incurred on the
hospital’s unit.) What impact would accepting the Veterans’ Hospital contract have
101.
Assume the same facts as in requirement No. 101 except that the idle facilities
on March income? would be used to produce 800 modified hydraulic hoists per month for us in
A. P 1,100,000 C. P(1,350,000) hospital operating rooms. These modified hoists could be sold for P9,000 each,
B. P( 850,000) D. P 500,000 while the costs of production would be P5,500 per unit variable manufacturing
expense. Variable marketing costs would be P1,000 per unit. Fixed marketing and
98.
Medical Supply Company has an opportunity to enter a foreign market in which manufacturing costs would be unchanged whether the original 3,000 regular units
price competition is keen. An attraction of the foreign market is that demand there hoists were manufactured or the mix of 2,000 regular hoists plus 800 modified
is greatest when demand in the domestic market is quite low; thus idle production hoists were produced. What is the maximum purchase price per unit that Medical
facilities could be used without affecting domestic business. Supply should be willing to pay the outside contractor?
An order for 1,000 units is being sought at a below-normal price in order to enter A. P 5,100 C. P 5,500
this market. Shipping costs for this order will amount to P750 per unit, while total B. P 3,100 D. P 5,600
costs of obtaining the contract (marketing costs) will be P40,000. No other variable
marketing costs would be required on this order. Domestic business would be Question Nos. 102 and 103 are based on the following:
unaffected by this order. What is the minimum unit price should Medical Supply Marcus Fibers, Inc., specializes in the manufacturing of synthetic fibers that the
Company consider for this order of 1,000 units? company uses in many products such as blankets, coats, and uniforms for police and
A. P3,750 C. P3,790 firefighters. Marcus has been in business since 1975 and has been profitable every year
B. P3,000 D. P4,290 since 1983. The company uses a standard cost system and applies overhead on the basis
of direct labor hours.
99.
An inventory of 230 units of an obsolete model of the hoist remains in the
stockroom. These must be sold through regular channels at reduced prices, or the Marcus has recently received a request to bid on the manufacture of 800,000 blankets
inventory will soon be valueless. What is the minimum price that would be scheduled for delivery to several military bases. The bid must be started at full cost per
acceptable in selling these units? unit plus a return on full cost of no more than 9 percent after income taxes. Full cost has
A. P3,500 C. P3,000 been defined as including all variable costs of manufacturing the product, a reasonable
B. P4,200 D. P 500 amount of fixed overhead, and reasonable incremental administrative costs associated
with the manufacture and sale of the product. The contractor has indicated that bids in
100.
A proposal is received from an outside contractor who will make and ship 1,000 excess of P25 per blankets are not likely to be considered.
hydraulic hoist units per month directly to Medical Supply’s customers as orders are
received from Medical Supply’s sales staff. Medical Supply’s fixed marketing costs
39
 Incremental Analysis

In order to prepare the bid for the 800,000 blankets, Andrea Lighter, cost accountant, 102.
The minimum price per blanket that Marcus Fibers, Inc., could bid without reducing
has gathered the following information about the cost associated with the production of the company’s net income is
the blankets. A. P
2
Direct material P 1.50 per pound of fibers 4
Direct labor P 7.00 per hour .
Direct machine costs* P10,00 per blanket 0
Variable overhead P 3.00 per direct labor hour 0
Fixed overhead P 8.00 per direct labor hour
Incremental administrative costs P2,500 per 1,000 blankets
Special fee** P 0.50 per blanket
Material usage 6 pounds per blanket
Production rate 4 blankets per DLH
Effective tax rate 40% 103.
Using the full-cost criteria and the maximum allowable return specified, Marcus
Fibers’ bid price per blanket would be:
A. P24.00 C. P26.00
B. P29.90 D. P27.90

ANSWER EXPLANATIONS

40
1 . Answer: C

Cost of alternative selected P800,000

Cost of alternative rejected 650,000

Incremental cost P150,000

2 . Answer: A
The company needs to purchase 55,000 units earlier than their scheduled 5,000-unit monthly purchase.
Hence, the average investment for the inventory is (55,000 x P60 ÷ 2) or P1,650,000. The opportunity cost
is P132,000 or (P1,650,000 x 0.08).
3
. Answer: A

Additional revenue after rework (24,000(12 – 4) P192,000

Less Additional cost (24,000 x 2) 48,000

Additional profit P144,000

4
. Answer: B
The only relevant out-of pocket cost is the variable selling expense which is P40. The sale thru the regular
channels involves an opportunity cost of P140.
Variable selling expense (40% x 100) 40
Opportunity cost 14
Total 18
0
0
5
. Answer: C

Regular variable cost P8.00

Overtime premium 1.50

Relevant cost per unit P9.50

6 20.0 Fixed overhead

. Answer: B 30.0 (180,000/9,000)
0
Full cost 50.00
0
Relevant unit cost
7
. Answer: C
Cost of 1,000 kg at latest price (1,000 x 8.70) 8,700
Add excess price include on the remaining 4,000 kg. 4,000 x (8.70 – 8.30) 1,600
Relevant cost 10,300

8 . Answer: B

Direct materials (2,000 @ 10) 20,000

Direct labor (2,000 @ 12) 24,000

Variable overhead (2,000 @ 6) 12,000

Increase in variable cost due to overtime (2,000 @ 14) 28,000

 Incremental cost 84,000

9 . Answer: B

Variable costs P56,250

Additional fixed costs 13,750

Minimum bid price P70,000

10 . Answer: B

Direct material (360,000 ÷ 24,000) P15.00

Direct labor (540,000 ÷ 24,000) 22.50

Variable selling expenses (84,000 ÷ 24,000) 3.50

Total P41.00

Add Profit per unit (22,500 ÷ 1,500) 15.00

Selling price P56.00

11 . Answer: B

Relevant cost to make and sell:

Direct materials 39

Direct labor 6

Variable OH 8

Reduced selling expenses (30 x 0.06) 18

Add’l fixed cost (20,000 ÷ 5,000) 4

Minimum selling price 75

12 . Answer: B
The company has no existing capacity. The minimum selling price for this special sales should equal the
regular selling price plus additional expenses.
Regular selling price P18

Additional expenses 1

Minimum selling price P19

13 . Answer: A

Direct materials 20.00

Direct labor 15.00

Variable overhead 12.00

Variable shipping and handling 3.00

 Lost contribution margin – LB46 (10,000 ÷ 1,000) Minimum price 10.0
The lost contribution margin on regular sale is relevant because the 60.0
0 company is operating at
capacity. In a special sale wherein the company has to give up some of 0 its regular units, the
relevant costs consist of incremental costs plus any opportunity costs.
14 . Answer: D

Direct materials 4.50

Direct labor 10.00

Variable overhead 3.00

Variable selling expense 1.00

Additional profit (40,000/5,000) 8.00

Required selling price 26.50

15 . Answer: C
The maximum number of units in regular sales that Benjing could afford to lose equals the quantity that
provides regular contribution margin that matches the contribution margin provided by special sale.
Contribution margin from special sale 1,000 (14 – 8) 6,000

Divided by regularCM (20 – 8) ÷ 12

Maximum Number of units 500

To illustrate the solution:

Contribution margin from special sale 6,000

Less Decrease in regular sales’ contribution margin (500 x 12) 6,000

Effect on profit NIL

16 . Answer: B
The maximum decrease in regular sale = Contribution margin from special sale/Unit contribution
margin on regular sale
(400 x 0.20) ÷ (2.00 -1.50) = 160

17 . Answer: A
Total contribution margin from special sale(15,000 x P5.50) P82,500
Less Additional fixed costs 30,000
Profit from special sale P52,500
Less Decrease in contribution margin on regular
Sale 2,000(P39 – P22.50) 33,000
Additional profit P19,500
Please refer to Solution for Number regarding details of contribution margin per unit.
18 . Answer: C

Selling price P6.00

Relevant cost per unit:

 Regular cost per unit P7.50

Less: Commission P0.75

Fixed overhead (P3 x 2/3) 2.00 (2.75)

Net amount P4.75

Incremental fixed cost (P150 300) 0.50

Advantage per unit, Buy
Number of units 300
Increase in profit P 225

19 . Answer: D
Additional profit: 3,000 x (70 – 50) = 60,000

20 . Answer: A
Special price 32
Relevant cost:
Direct materials 4
Direct labor 12
Variable overhead 6 22
Unit contribution margin 10 Units ordered 2,000 Additional
profit 20,000

21 . Answer: A
Sales 60,000
Less: Variable production cost (1,500 x 30) 45,000
Additional Fixed cost 5,000
Labeling cost (1,500 x 2.50) 3,750 53,750 Profit 6.250

22 . Answer: B
The minimum selling price should equal the relevant cost to produce and sell a unit of product.
Direct materials P50
Direct labor 2
0
Variable overhead (P10 x 0.2) 2
Selling expense (P15 x 0.4) 6
Minimum selling price P78
23 . Answer: C
The company has no excess capacity to be devoted to the production of additional units for special sale. In
a special sale decision where there is no excess capacity, the minimum selling price must be equal to the
market price less any avoidable expenses.
Selling price P100
Less Avoidable selling expense (P15 x 0.4) 6
Minimum selling price P 94
24 . Answer: D
The book value of the old equipment is a sunk cost and therefore not a relevant one. Also, the related cost
on outstanding note are irrelevant. They are not affected by a decision.
25 . Answer: D
Relevant Costs
BetaZetaDirect materials 4.00 80.00Direct labor10.00 47.00Factory overhead 40% 16.00 8.00Relevant Unit
costP30.00135.00
26 . Answer: C
Direct material 2.00
Direct labor 2.40
Variable overhead 1.60
Avoidable marketing cost (0.7 x 2.50) 1.75
Relevant cost Make 7.75
The maximum purchase price, if ever the company has to decide buying the product, is P6.75. Any amount
higher than P6.75 will necessarily increase the unit cost of the product.

27 . Answer: B
Direct materials 64,000
Direct labor 16,000
Variable overhead 8,000
Avoidable fixed overhead 6,000
Total relevant cost to make 94,000

28 . Answer: D
Direct materials 64,000
Direct labor 16,000
Variable overhead 8,000
Additional contribution margin Total relevant cost to make 16,00
104,00
0
29 . Answer: B 0
Variable cost to make parts (30,000 x 12) 360,000
Cost buy (30,000 x 15) 450,000 Cost savings – “Make” decision
90,000

30 . Answer: A
Direct materials 80,000
Direct labor 13,000
Variable overhead 40,000
Avoidable fixed overhead 4,000 Relevant cost – make 137,000
Purchase price 145,000 Advantage – Make 8,000

31 . Answer: A
Direct materials 64,000
Direct labor 16,000
Variable overhead 8,000 Total variable cost 88,000
Less Purchase cost 104,000
Avoidable fixed cost 16,000 Add unavoidable FC 5,000
Total fixed overhead 21,000

32 . Answer: B
Purchase cost (2,000 x P15) P30,000
 Relevant cost to make:
Variable cost (2,000 x P16) – 8,000 P24,000
Avoidable fixed cost (8,000 x 0.25) 2,000 26,000 Additional cost – Buy
(Decrease in profit) P 4,000

Alternative computation for relevant cost to make:

Total cost (2,000 x P16) P32,000
Less unavoidable fixed cost (8,000 x 0.75) 6,000 Relevant cost to make
P26,000

33 . Answer: C
Cost of purchase (2,000 x P15) P30,000
Relevant cost – make:
Variable cost (2,000 x P16) – P8,000 P24,000 Avoidable
fixed cost (P8,000 x 0.25) 2,000
Opportunity cost – rent 6,000 32,000
Cost savings – Buy (increase in profit) P( 2,000)

34 . Answer: C
Relevant costs to make
Direct materials P 90,000 Direct labor 120,000
Variable overhead 15,000
Supervisor’s salary 30,000
Opportunity costs, rent 65,000
Total 320,000
Relevant cost to buy (15,000 x P20) 300.000 Advantage - Buy P 20,000 If
the company would purchase the units, it would save P20,000.

35 . Answer: B
Cost of ink cartridges (5,000 x P15) P75,000
Less: Relevant cost to produce (5,000 x P8) 40,000
Additional cost if ink cartridges are purchased P35,000

36 . Answer: B
Direct material (20,000 @ 6) 120,000
Direct labor (20,000 @30) 600,000 Variable overhead (20,000 @ 120 240,000
Avoidable fixed cost (20,000 @ 9) 180,000 Total relevant costs - Make 1,140,000

Purchase cost (20,000 @ 60) 1,200,000

Add net savings 25,000
Total 1,225,000
Less: Cost to make 1,140,000
Opportunity cost 85,000

37 . Answer: A
Purchase price 15,000
Handling cost (20% x P15,000) 3,000
Total 18,000
 Cost to make (21,200 – 8,000)* 13,200 Increase in unit cost if goods are
purchased 4,800

*Fixed OH (12,000 x 2 ÷ 3) = 8,000

38 . Answer: A
Cost to make:
Direct materials P10,000 Direct labor 5,000 Variable overhead
5,000 Avoidable fixed OH (20% x 30,000) 6,000
Relevant cost P26,000
Purchase costs (1,000 @ 30) 30,000
Decrease in profit in profit P 4,000

39 . Answer: B
Relevant costs to make per unit:
Direct materials 6.00
Direct labor 4.00 Variable overhead 1.00 Relevant cost –
“to make” 11.00 Purchase price per unit 12.50 Increase
in per unit cost if purchased 1.50

40 . Answer: A
Direct materials10,000 Direct labor 5,000
Variable overhead 5,000 Avoidable fixed overhead (30,000 x 0.2) 6,000
Total relevant cost 26,000
Purchase cost 30,000 Additional cost if purchased 4,000

41 . Answer: C
Direct materials 3.00 Direct labor 15.00
Variable overhead 6.00 Avoidable fixed cost 3.00 Total per
unit 27.00 Number of unit x10,000
Total 270,00
0
Add savings from the manufacture of other product 45,00
0
Total relevant cost – make 315,00
0
Total purchase cost (10,000 x 30) 300,00
0
Advantage “Buy” 15,00
0
42 . Answer: D
Though the problem deals with transfer of goods from one division to another division, the solution focuses
on make on buy decision approach.
Purchase price, outside supplier 1.25

Variable cost to make (10,000 ÷ 10,000) 1.00

Additional unit cost to the company 0.25

 Units to be purchased 10,000

Decrease in Dana’s profit if goods are purchased 2,500

43 . Answer: C

Total purchase cost (5,000 x 7.75) 38,750

Less Relevant cost to make

Direct materials @ 2.5 12,500

Direct labor @ 3.5 17,500

Variable overhead @ 1.5 7,500

Avoidable fixed cost @ 0.5 2,500

Opportunity cost 6,000 46,000

Net saving – purchase (7,250)

44 . Answer: D
The solution is made in equation form, using y = a + bx for 2 alternatives:
Let x = indifference point in units
Make: y = 150,000 + 11x
Buy: y = 60,000 + 12.875x
150,000 + 11x = 60,000 + 12.875x
1.875x =
60,000 x =
48,000

45 . Answer: C
Direct materials 80,000
Direct labor 13,000
Variable overhead 40,000
Avoidable fixed overhead 20,00
Total relevant cost 153,00
0
46
. Answer: 0
B
SodaLemomadeSelling price6.005.00Variable cost 1.501.00Contribution margin4.504.00Processing
hours34CM/Hr1.501.00For the Lemonade to be as profitable as Soda, its contribution margin per hour
should be P1.50.
Therefore the required selling price for Lemonade is P7, calculated as:

Contribution margin per unit (4 hours x P1.50) P6.00

Variable cost per unit 1.0
0
Selling price P7.00
47
. Answer: C
 Product B has a greater contribution margin per unit (P15 - P12 = P3) than Product A (P12 - P10 = P2). The
company should produce the maximum units it can sell of Product B (250,000) and use the rest of the
machine hour capacity to produce 100,000 units of Product A.
48
. Answer: D
Production order: Y, X
Product X: 60 ÷ 6 = 10
Product Y: 42 ÷ 3 = 14
Total capacity – MH 42,000
Machine hours devoted to Product Y (8,000 x 3) 24,000
Hours available to X 18,000 Production of X: 18,000 ÷ 6 = 3,000
49
. Answer: B
Production order:
BlenderElectric MixerPurchase price 20 38Variable cost to make: Direct materials 6 11 Direct materials 4 9
Overhead *(16 – 10) @ 6 12 Total( 16) (32)Additional cost if purchased 4 6Additional cost per hour
(Blender, 1 hr; Mixer 2 hours)
4
3
Since it will cost Mary P4 per hour to buy Blender and only P3 if Electric Mixer is purchased, it will produce all
of
Blender’s requirement and just purchase units of electric mixer that cannot be accommodated by the
remaining capacity.

Product:
Blender 20,000 Electric Mixer [50,000 – (20,000 @ 1)] ÷ 2 15,000
Purchase:
Electric Mixer (28,000 – 15,000) 13,000
50
. Answer: A
CM – Product A 36/2 x 1,000 18,000
CM – Product B 45/3 x 1,000 15,000
Difference in contribution margin 3,000
51
. Answer: A

Based on DLH
ProductsUCMDLH/unitCM/DLHPriorityA91.09.01STB101.56.672ndC82.04.003rd
Based on MH
ProductsUCMMH/unitCM/MHPriorityA94.52.03rdB1025.01stC82.53.22nd
52
. Answer: D
PlasticMetalRC – make 11.00 13.00RC – Buy 15.50 17.50Additional Cost-Buy 4.50 4.50Hours
required/unit÷ 3
÷ 4.5Additional cost /hr. 1.50 1.0Priority 1st 2ndCapacity (machine hours) 48,000MH used - Plastic
(7,000 x 3)
21,000Available MH to Metal27,000MH used - Metal (6,000 x 4.50) (27,000)Purchase of Metal (11,000 –
6,000) 5,000
53
. Answer: A
 HomeDeluxeProSelling price586580Direct materials(16)(20)(19)Direct labor(10)(15)(20)Variable overhead( 8)
(12)
(16)CM/unit241825Processing hour(s) ÷ 1 ÷ 1.5 ÷ 2CM/DLH2412 12.50Profitability rank1st3rd2nd
54
. Answer: B
Unit contribution margin:
Product A P12 – P10 P2
Product B P15 – P12 P3

Contribution margin per hour:

Product A P2 ÷ 0.8 P2.50
Product B P3 ÷ 1.25 P2.40
Total capacity in hours 350,000
Less hours used by Product A 200,000 x 0.8 (160,000)
Available hours for production of Product B 190,000
Less hours by Product B 152,000 x 1.25 (190.000)
Number of units to be produced:
Product A 200,000
Product B 152,000
Product A has higher contribution margin per hour. The company should produce the maximum units it
can sell of Product A and use the rest of the machine hour capacity to produce units of Product A in order
to maximize its profit.
55
. Answer: B
CM per hour:
Product X: 50/5 10 Product Y: 64/8 8
The 20,000 hours (0.8 x 25,000) will be devoted to the production of X.
Total contribution margin: (20,000 x 10) + (5,000 x 8) 240,000
56
. Answer: A
Selling price per unit – silver polish P40
Less variable costs:
Grit 337 (P20 ÷ 4) P 5
Ingredients, direct labor and variable OH 25
Variable selling costs 3 33
Contribution margin per unit P 7

Minimum number of jars of silver polish to be produced:

Avoidable fixed costs ÷ Contribution margin per jar P56,000 ÷ P7 8,000

The solution used the selling price of P20 as cost of Grit337 because there was unlimited demand for the
cleaning powder. If, however, the demand for the cleaning powder is limited, the recommended solution
would use P16 as the cost of Grit 337.
57
. Answer: D
Increase in selling price 116 – 90 26
Additional processing cost 18
Addition profit per unit 8
58
. Answer: C
Selling price after further processing P8.75
Selling price if not processed further 7.20
Additional sales per unit 1.55 Number of units 25,000 Additional total
sales P38,750
Less additional processing costs 33,750
Increase in profit if the product is processed P 5,000
Because further processing will provide more profit per unit, the company should process further.
59
. Answer: D

Additional sales (350,000 – 250,000) P100,000

Additional costs (75,000 + 15,000) 90,000

Additional profit P 10,000

60
. Answer: A
XYAdditional sales value1034Additional processing costs1530Incremental (decremental) profit per unit(5)
4If Product Y is processed further, profit will increase by P16,000 (4,000 x 4).
61
. Answer: A

Additional Sales Price (65 – 50) 15.00

Additional Cost (30 x 40%) 12.00

Additional profit 3.00

62
. Answer: C
Product to be processed further:Prod MProd NFinal selling price3123Selling price at split-off
point2519Increase in selling price64Units15,00030,000Total increase in sales90,000120,000Additional
processing costs100,000110,000Increase (decrease) in profit(10,000)10,000
63
. Answer: C

Revenues P104,00
Avoidable costs: 0
Cost of goods sold P 64,000

Avoidable expenses (P6,000 + P8,000) 14,000 78,000

Segment margin P
26,000
A segment is a potential candidate for elimination if its revenues are less than its avoidable costs. This is not
the case for this segment. The company will lose P26,000 of income if this segment is eliminated.
64
. Answer: A

Avoidable fixed cost (benefit) 210,000

Lost contribution margin 240,000

Decrease in profit 30,000

65
. Answer: D
 The question did not require any computation. If Mina Co. drops the Gold Ore, it will lose the segment
margin of P1,200,000, a decrease in Mina Co.’s income. The amount of direct fixed expenses that would be
eliminated were previously deducted from contribution margin, and therefore, not considered in the
determination of the effect on income.
66
. Answer: B
Avoidable common expenses (45,000 – 20,000) P 25,000
Segment margin lost 32,000
Decrease in profit P (7,000)
67
. Answer: A
Avoidable fixed expenses:
Manufacturing (150,000 – 105,000) 2 90,000 Selling (30,000 x 0.10 x 2)
6,000
Start up cost (additional fixed expense (8,000
Net avoidable costs 88,00
)
Indifference point 88,000 ÷ (22-14) 0
11,000 units
At 11,000 unit level (2 months), the contribution margin equals the avoidable costs.
68
. Answer: D

Total Savings 5 year (125,000 – 100,000 ) 5 125,000

Less:
Additional depreciation (90,000 – 50,000) (40,000
)
Loss on sale of old machine (5,000 – 50,000) (45,000
)
Increase in profit 40,000
69
. Answer: A
Lease arrangement:
Rental income (5 years) 48,000
Cost of repairs, insurance and property taxes Net income

Sale arrangement:
Net proceeds (25,000 x 0.95) 23,75
Differential income –lease 15,00
0
0
70
. Answer: A
Additional contribution (60,000 x 0.25 x 14) 210,000
Additional fixed selling costs 80,000 Additional profit 130,000

Selling price 32.00

Variable expenses:
Materials 10.00
Direct labor 4.50
Variable overhead 2.30
Variable selling costs 1.20 Unit contribution margin 18.0
14.0
0
0
71
. Answer: C
Direct materials10.00 Direct labor 4.50
Variable OH 2.30
Variable selling cost 3.20
Import duties 1.70
Permits and licenses (9,000 ÷ 20,000) 0.45 Minimum selling price 22.15

Import duties are assumed to be paid by Adrenal Company because of the nature of the sale.
72
. Answer: D
The relevant cost in selling the units on hand (inferior quality) is P1.20, the variable selling costs the
production costs, though variable, are considered irrelevant because they are historical (sunk) costs.
73
. Answer: C
Avoidable fixed costs:
Manufacturing (0.40 x 50,000) 20,000 Selling (35,000 x 0.20) 7,000 Total
27,000

Contribution margin if the company has to operate (60,000 ÷ 6 x 0.30 x 14) 42,000
Disadvantage, closing the plant (15,000)
74
. Answer: A
Direct materials10.00 Direct labor 4.50
Variable overhead 2.30
Avoidable fixed overhead (0.75 x 5) 3.75
Avoidable variable expense (1.20 x 1 ÷ 3) 0.4
Relevant cost – Make 20.9
0
5
75
. Answer: A
Batch (each 50 units)Cum Ave.
Hrs114.25211.4049.1287.296165.8368 Total Hours required: 16 x 5.8368 = 93.4
76
. Answer: D
Materials (800 x 40.50) 32,400 Direct labor (93.40 x 120) 11,208
Variable OH (93.40 x 100) 9,340 Total 52,948
77
. Answer: A
Production cost – 750 units:
Materials (750 x 40.00) 30,375
Direct labor (93.40 – 14.25) 120 9,498
VOH (93.40 – 14.25) 100 7,915
Total 47,780
Purchase cost (750 x 75)
Advantage – make 56,25
08,47
78
. Answer: A 0
Sales price to Kay Corp. 68,400
Rework costs:
 Direct materials 6,200
Direct labor 4,200
Variable OH (4200 x 50%) 2,100 (12,500) Commission (68,400 x 0.03) ( 2,052)
Before – tax peso contribution 53.848
79
. Answer: A
Regular price 62,500
Deduct:
2% commission (62,500 x 0.02) 1,250
Sales discount (62,500 x 0.02) 1,250 2,500 Net price 60,000
Less additional conversion costs:
Direct materials 2,850
Direct labor 3,300
Variable OH - 50% 1,650 7,800
Net before – tax contribution 52,200
80
. Answer: D
Cost of rework 6,200
Direct labor 4,200
Variable OH (4,200 x 0.50) 2,100
Total 12,500
Commission [0.03 (12,500 0.97)] 387
Total 12,887
81
. Answer: A

Sales price 52,000

Less: Commission (52,200 x 0.03) 1,560

Net contribution 50,440

82
. Answer: C
Department 3 has constraint in labor hours of 750.
Dept. 1Dept. 2Dept. 3Dept. 4Available DLH3,7004,5002,7502,600DLH required4011,0001,5001,500 500402
400 800 --
8004032,0002,0002,0001,000 Total3,4004,3003,5002,300Excess (Constraint) 300 200( 750) 300
83
. Answer: A
The available machine hours are sufficient to produce the estimated monthly sales. The schedule for
monthly production should consider maximizing the use of available direct labor hours in Department 3
because it is the only one with constraint.
Dept. 1Dept. 2Dept. 3Dept. 4Available MH3,0003,1002,7003,300MH required401 500 5001,0001,000402
400 400 --
8004032,0002,000 1,0001,000 Total2,9002,9002,0002,800Excess (Constraint) 100 200
700 500 Total machine hours required by monthly unit sales: (2,900 + 2,900 + 2,000 + 2,800) 10,600
84
. Answer: B
The table showing the comparison of available hours and required hours to produce all the required units
in number 82 indicated that Department 3 is short by 750 hours. Any excess direct labor hours in the other
departments cannot be switched to Department 3.
85
. Answer: B
The production plan that will maximize monthly profit should be based on the profitability of the three
products in terms of the use of direct labor hours in Department 3.
P R O D U C T S401403405Selling price per unitP196P123P167Variable unit costsDirect
material71317Direct labor663851Variable overhead272025Selling expenses324 Total variable
cost1037397Unit contribution marginP 93P
50P 70No. of DLH required – Dept 33-2Contribution margin per DLHP 31-P 35Based on the above schedule,
Product
405 is more profitable per hour than Product 401’s and, therefore, all of the units required for Product 405
should be produced. Product 403 would not use any direct labor hours in Department 3 and so all of the
required units for Product 403 can be produced.
Available direct labor hours – Department 3 2,750

Hours used by Product 405 1,000 x 2 2,000

Available hours for Product 401 750

Production units – Product 401 250 x 3 750

Production:
Product 401 250
Product 403 400
Product 405 1,000
Alternative Solution:

Since Product 401 is the less profitable per DLH, Product 403 and 405 will be produced in full and Product
401 will be partially produced.

Total required units, Product 401 500

Equivalent units based on constraint 750 ÷ 3 25
Production of Product 401 25
0
Alternative question: What is the maximum monthly contribution margin 0 that Constraint
Company can earn?
Product 401 250 @ P93 P 23,250

Product 403 400 @ P50 20,000

Product 405 1,000 @ P70 70,000

Total contribution margin P113,250

86
. Answer: B
Costs incurred to make the order:
Material (5,000 x 40) P200,000

Labor (5,000 x 72) 360,000

Incremental fixed cost (special device) 40,000

Costs to be incurred P600,000

Decrease in costs for standard products:

 Material (0.5 x 160,000) P 80,000

Labor (0.5 x P180,000) 90,000

Other (0.5 x P18,000 9,000

Decrease in costs P179,00

Net incremental costs P421,00
0
0
The amounts for depreciation, rent, and heat and light are assumed to be not affected by the special order.
There is no information provided as to how power cost was exactly incurred.
87
. Answer: D

Costs to be incurred for special order P600,000

Fixed costs:
Depreciation (0.5 x 72,000) P36,000

Power (0.5 x 8,000) 4,000

Rent (0.5 x 20,000) 10,000

Heat and Light (0.5 x 2,000) 1,000 51,000

Total cost P651,000
The amount of fixed costs allocated to special order would be the costs that should have been assigned
to the standard sales that would be cancelled.
88
. Answer: B
Decrease in sales of standard products0.50 x 500,000
P250,000 Less variable costs:
Material (160,000 x 0.5) P80,000
Labor (180,000 x 0.5) 90,000
Other (18,000 x 0.5) 9,000 179,000 Opportunity costs P 71,000
89
. Answer: D
Special sales (5,000 x 140) P700,000
Variable costs 600,000
Contribution margin from special sale 100,000
Less opportunity costs 71,000
Increase in profit P 29,000
90
. Answer: C
Total overhead rate per box P150 Less fixed overhead allocated per
boxP10,000,000 ÷ 100,000 boxes 100 Variable overhead rate per box
P 50
91
. Answer: C
The cost of materials saved by a decision of purchasing the tubes: is P300 x 0.20 = P 60
92
. Answer: B
The relevant cost to make the tubes by Verbatim should equal the amount of cost savings as follows:
Savings on materials 0.2 x P300 P 60
 Labor 0.1 x P200 20 Overhead 0.1 x P 50 5
Total savings (relevant cost) P 85 The maximum amount that Verbatim is
willing to pay per box of 24 tubes must be P85.
93
. Answer: B
Cost of making 125,000 boxes:
Variable costs 125,000 x 85 10,625,000 Additional fixed costs
1,000,000 Total 11,625,000
94
. Answer: C
Total purchase cost 125,000 x 900 11,250,000
Total cost to make 125,000 x 85 11,625,000
Savings if purchased 375,000
95
. Answer: A
Fixed costs:
Manufacturing 3,000 x 1,200 P3,600,000
Marketing 3,000 x 1,400 4,200,000 Total P7,800,000

Selling Price P 7,400

Less Variable costs:
Direct materialsP1,000 Direct labor 1,500
Variable overhead 500
Marketing costs 500 Total 3,500 Unit contribution margin P
3,900

Breakeven units 7,800,000 ÷ 3,900 2,000 units

96
. Answer: C
In as much that there would be no change in the amount of fixed costs, the recommended solution was
made by just comparing the amounts of contribution margin based on the revised data and the original
information:

Contribution margin based on new estimates 3,500 x (6,500 – 3,500) 10,500,000

Contribution margin based on current estimates
Decrease 3,000 x (7,400 – 3,500) 11,700,000 Decrease in profit ( 1,200,000)

Alternative Solution:
Total contribution margin 3,000 x (7,400 – 3,500) 11,700,000
Less Fixed costs 7,800,000
Current profit 3,900,000
Total contribution margin at reduced price 3,500 x (6,500 –
3,500) 10,500,000
Less Fixed costs 7,800,000
Revised profit 2,700,000
Current profit
Decrease in profit ( 1,200,000
97
. Answer: B

Fixed fee P
500,000
Fixed overhead reimbursement 500 x 1,200 600,000

Total
1,100,000
Less lost contribution margin on regular customers (500 x 3,900) 1.950,000

Decrease in profit P( 850,00

0)
The reimbursement for fixed overhead is an income for Medical Hospital Company because the special
order does not entail additional fixed overhead.
98
. Answer: C

Direct materials 1,000

Direct labor 1,500

Variable overhead 500

Shipping cost 750

Cost of obtaining the order 40,000 ÷ 1,000 40

Minimum selling price 3,790

99
. Answer: D
All the production costs, both variable and fixed, are no longer relevant because they are sunk costs. To be
relevant to a decision, the cost must be both valid and relevant. Therefore, the only relevant cost is the
variable marketing cost, because if the units will be sold through regular channel, P500 will be incurred.
100
. Answer: D
The maximum price at which the price charged by the contractor would indifferent to the cost to make the
hoist is the total differential cost or avoidable cost.
 Direct materials 1,000

Direct labor 1,500

Variable overhead 500

2,00
Avoidable fixed overhead 1,200 x 0.30 360
5,10
0
Avoidable variable marketing cost 500 x 0.2 0100

Maximum purchase price 3,460

101
. Answer: A
Direct materials 1,000

Direct labor 1,500

Variable overhead 500

Avoidable marketing costs 100

Opportunity cost [800 x (9,000 – 5,500 – 1,000)] ÷ 1,000 Maximum purchase

price

A better understanding of the solution can be made by drawing a schedule to compute income for this
alternative and compare it with the income shown in solution for Question No. 97 as follows:

ModifiedRegularSales7,200,00022,200,000Variable production costs: In house production (2,000 x

3,000) 6,000,000 (800 x 5,500)4,400,000 Contractor’s cost 1,000 x 5,100 5,100,000Variable marketing costs
Regular (2,000 x 500) +
(1,000 x 400) 1,400,000 Modified (800 x 1,000) 800,000Fixed costs. .
7,800,000Profit2,000,0001,900,000
Total profit (2,000,000 + 1,900,000) 3,900,000
102
. Answer: A

Direct material (6 lbs.  P1.50) P9.00

Direct labor (0.25 hr.  P7) 1.75

Direct machine cost (P10/blanket) 10.00

Variable overhead (0.25 hr.  P3) 0.75

Administrative costs (P2,500/1,000) 2.50

Minimum bid price P24.00

103
. Answer: B
Using the full-cost criteria and the maximum allowable return specified, Marcus Fibers’ bid price per
blanket would be:
Relevant costs (from Requirement 1) P24.00
Fixed overhead (0.25 hr.  P8) 2.00
Subtotal P26.00
Allowable return (0.15*  P26) 3.90
Bid price P29.90
*0.09/(1 – 0.40) = 0.15