CPAR

CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila
MAS 9207
MANAGEMENT ADVISORY SERVICES

MANAGEMENT ACCOUNTING CONCEPTS AND TECHNIQUES FOR

DECISION MAKING

DECISION MAKING – choosing from at least two alternatives

1. Short term non-routine cases
a. Accept or reject a special order or a business proposal
b. Sell or process further a product line
c. Make or buy a part, subassembly or product line
d. Continue operating or close a business segment
e. Product combination
f. Utilization of scarce resources
g. Change in profit factors.

2. Long term cases, e.g., capital investment decisions.

THE DECISION MAKING PROCESS:

a. Defining the problem
b. Setting of criteria
c. Identifying the alternative courses
d. Determination of possible consequences of the alternatives
e. Evaluating the alternatives
f. Choosing the best alternative and making the decision.

QUALITATIVE AND QUANTITATIVE FACTORS:

Qualitative Factors – those that cannot easily and accurately be expressed in terms of money or any
other numerical unit of measures

Quantitative Factors – those that can more easily be expressed in terms of money or other units of
measure

APPROACHES IN SOLVING DECISION MAKING PROBLEMS:

1. Total Approach – the total revenues and costs are determined for each alternative, and the results
are compared to serve as bases for making decisions.

2. Differential Analysis – involves finding the most profitable alternative by analyzing the differential
revenues and costs

DEFINITIONS
• Relevant Revenues/Costs – future revenues/costs that are expected to be different under each
alternative course of action
• Differential Costs – the increases (increments) or decreases (decrements) in total costs between two
alternatives
• Avoidable Costs – costs that will be saved or those that will not be incurred if a certain decision is made
• Out-of-Pocket-Costs – costs that require current or near future cash outlays or incurring of a liability
for a decision at hand
• Postponable Costs – costs that may be deferred or shifted to a future date or period of time without
adversely affecting current operations
• Opportunity Costs – the benefit lost by taking one action as opposed to another. The “other” action
is the best alternative available other than the one being contemplated.
• Imputed Costs – assumed or hypothetical costs representing the costs or value of a resource that is
utilized for a specific purpose
• Sunk Costs – refer to the non-recoverable costs incurred in the past
• Joint Costs – costs incurred in simultaneously processing or manufacturing two or more products
which are difficult to identify individually as separate types of products until a certain
processing stage known as the point of separation or split-off point
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TACTICAL DECISION MAKING

TACTICAL DECISION MAKING CONSISTS OF CHOOSING AMONG ALTERNATIVES WITH AN IMMEDIATE OR LIMITED END IN VIEW.
ACCEPTING A SPECIAL ORDER FOR LESS THAN THE NORMAL SELLING PRICE TO UTILIZE IDLE CAPACITY AND INCREASE THIS
YEAR’S PROFITS IS AN EXAMPLE. THUS, SOME TACTICAL DECISIONS TEND TO BE SHORT-RUN IN NATURE; HOWEVER, IT SHOULD
BE EMPHASIZED THAT SHORT-RUN DECISIONS OFTEN HAVE LONG-RUN CONSEQUENCES. CONSIDER A SECOND EXAMPLE.
SUPPOSE THAT A COMPANY IS CONSIDERING PRODUCING A COMPONENT INSTEAD OF BUYING IT FROM SUPPLIERS. THE
IMMEDIATE OBJECTIVE MAY BE TO LOWER THE COST OF MAKING THE MAIN PRODUCT . YET, THIS TACTICAL DECISION MAY BE
A SMALL PART OF THE OVERALL STRATEGY OF ESTABLISHING A COST LEADERSHIP POSITION FOR THE FIRM . THUS, TACTICAL
DECISIONS ARE OFTEN SMALL-SCALE ACTIONS THAT SERVE A LARGER PURPOSE.

THE OVERALL OBJECTIVE OF STRATEGIC DECISION-MAKING IS TO SELECT AMONG ALTERNATIVE STRATEGIES SO THAT A
LONG-TERM COMPETITIVE ADVANTAGE IS ESTABLISHED. TACTICAL DECISION MAKING SHOULD SUPPORT THIS OVERALL
OBJECTIVE, EVEN IF THE IMMEDIATE OBJECTIVE IS SHORT-RUN (ACCEPTING A ONE-TIME ORDER TO INCREASE PROFITS) OR
SMALL-SCALE (MAKING INSTEAD OF BUYING A COMPONENT). THUS, SOUND TACTICAL DECISION-MAKING MEANS THAT
THE DECISIONS MADE NOT ONLY ACHIEVE THE LIMITED OBJECTIVE BUT ALSO SERVE A LARGER PURPOSE. IN FACT, NO TACTICAL
DECISION SHOULD BE MADE THAT DOES NOT SERVE THE OVERALL STRATEGIC GOALS OF AN ORGANIZATION.

1. RECOGNIZE AND DEFINE THE PROBLEM.

2. IDENTIFY ALTERNATIVES AS POSSIBLE SOLUTIONS TO THE PROBLEM; ELIMINATE ALTERNATIVES THAT ARE CLEARLY
NOT FEASIBLE.
3. IDENTIFY THE COSTS AND BENEFITS ASSOCIATED WITH EACH FEASIBLE ALTERNATIVE. CLASSIFY COSTS AND
BENEFITS AS RELEVANT OR IRRELEVANT AND ELIMINATE IRRELEVANT ONES FROM CONSIDERATION.
4. TOTAL THE RELEVANT COSTS AND BENEFITS FOR EACH ALTERNATIVE.
5. ASSESS QUALITATIVE FACTORS.
6. SELECT THE ALTERNATIVE WITH THE GREATEST OVERALL BENEFIT.

THESE SIX STEPS DEFINE A SIMPLE DECISION MODEL. A DECISION MODEL IS A SET OF PROCEDURES THAT, IF FOLLOWED, WILL
LEAD TO A DECISION.

PROBABILITY ANALYSIS

PROBABILITY is important to management decision-making because of the unpredictability of future

events.

Decision-making under conditions of risk – occurs when the probability distribution of the possible
future states of nature is known.

Decision-making under conditions of uncertainty – occurs when the probability distribution of possible
future states of nature is not known and must be subjectively determined.
The probability of an event varies from 0 to 1 (or 0 to 100%)
a. 0 probability – the event cannot occur
b. Probability of 1 (or 100%) – the event is certain to occur

BASIC TERMS USED WITH PROBABILITY

1. Two events are mutually exclusive if they cannot occur simultaneously.
2. The joint probability of two events is the probability that both will occur.
3. The conditional probability of two events is the probability that one will occur given that the
other has already occurred.
4. Two events are independent if the occurrence of one has no effect on the probability of the other.

• Expected value
The expected value of an action is found by multiplying the probability of each outcome by its
pay-off and summing the products.

LINEAR PROGRAMMING

LINEAR PROGRAMMING – a technique used to optimize an objective function (maximize revenue or

profit function, or minimize a cost function), subject to constraints (such as scarce resources,
minimum/maximum levels of production, performance, etc.)
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In business, linear programming is used for planning resource allocations (to make optimum use of
limited resources). Conditions calling for the use of linear programming include:
1. specification of a cost or revenue objective formula.
2. the limited resources must be subject to alternative uses.
3. the alternative uses of the limited resources must be specified.

EXERCISES:
1. Identifying relevant items.
Mr. Negosyante purchased a used automobile for ₱400,000 at the beginning of last year
and incurred the following operating costs:

Depreciation (₱400,000 ÷5 years) ₱80,000

Insurance 60,000
Garage rent 18,000
Automobile tax and license 2,000
Variable operating costs ₱7 per kilometer

The variable operating costs consist of gasoline, oil, tires, maintenance, and repairs. Mr.
Negosyante estimates that, at his current rate of usage, the automobile will have zero
resale value in five years, so the annual straight-line depreciation is ₱80,000. The
automobile is kept in a garage for a monthly fee.

REQUIRED:

1. Mr. Negosyante drove the automobile 10,000 kilometers last year. Compute the average
cost per kilometer of owning and operating the car.

2. Mr. Negosyante is unsure about whether he should use his own automobile or rent an
automobile to go on an extended cross-province trip for two weeks during summer break.
What costs above are relevant in this decision?

3. Mr. Negosyante is thinking about buying an expensive automobile to replace the automobile
he bought last year. He would drive the same number of kilometers regardless of which
automobile he owns and would rent the same parking space. The expensive automobile’s
variable operating costs would be roughly the same as the variable operating costs of the
old automobile. However, his insurance and automobile tax and license costs would go up.
What costs are relevant in estimating the incremental costs of owning the more expensive
automobile?

2. Special Order. Theena Company has been approached by a new customer with an offer to
purchase 34,000 units of Theena’s product at a price of ₱24 each. The new customer is
geographically separated from Theena’s other customers, and there would be no effect on
existing sales. Theena normally produces 400,000 units but plans to produce and sell only
360,000 in the coming year. The normal sales price is ₱30 per unit. Unit cost information is as
follows:
Direct materials ₱ 8.00
Direct labor 10.00
Variable overhead 4.00
Fixed overhead 3.40
Total ₱25.40

If Theena accepts the order, no fixed manufacturing activities will be affected because there is
sufficient excess capacity.

Required:
1. Should Theena accept the special order? By how much will profit increase or decrease if the
order is accepted?
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2. Suppose that Theena’s distribution center at the warehouse is operating at full capacity and
would need to add capacity costing ₱6,000 for every 5,000 units to be packed and shipped.
Should Theena accept the special order? By how much will profit increase or decrease if the
order is accepted?

3. SPECIAL ORDER. Twirl company produces Hula-Hoops that it sells for ₱30 each. At capacity,
the company can produce 50,000 Hula-Hoops per year. The costs of producing and selling
50,000 Hula-Hoops are as follows:
Cost per Unit Total Costs
Direct materials ₱12 ₱ 600,000
Direct labor 3 150,000
Variable manufacturing overhead 1 50,000
Fixed manufacturing overhead 5 250,000
Variable selling expenses 2 100,000
Fixed selling expenses 4 200,000
Total ₱27 ₱1,350,000
Required:
1. Suppose the company is currently producing and selling 40,000 Hula-Hoops. At this
level of production and sales, its fixed costs are the same as given above. Toy Town
wants to place a one-time special order for 10,000 Hula-Hoops at ₱18 each. Twirl
Company will incur no variable selling costs for this special order. Should Twirl accept
this one-time special order?

2. Now suppose Twirl is currently producing and selling 50,000 Hula-Hoops. If Twirl
accepts Toy Town’s offer it will have to sell 10,000 fewer Hula-Hoops to its regular
customers.
(a) On financial considerations alone, should Twirl accept this one-time special
order?

(b) What other factors should Twirl consider in deciding whether to accept the
one-time special order?

- possibility of future long-term seem likely at a higher price

- negative long-term effect on customer relationships of not selling to regular customers

(c) On financial considerations alone, at what price would Twirl be indifferent

between accepting the special order and continuing to sell to its regular
customers at ₱30 per Hula-Hoops

4. MAKE OR BUY Dela Cruz Dentistry Services operates in a Metro Manila. Currently, Dela Cruz has
its own dental laboratory to produce porcelain and gold crowns. The variable manufacturing costs
to produce the crowns are as follows:

Porcelain Gold
Direct materials ₱ 80 ₱165
Direct labor 27 27
Variable overhead 8 8
Total ₱115 ₱200

Fixed overhead is detailed as follows:

Salary (supervisor) ₱10,000
Depreciation 5,000
Rent (lab facility) 20,000

A local dental laboratory has offered to supply Dela Cruz all the crowns it needs. Its price is ₱120
for porcelain crowns and ₱215 for gold crowns; however, the offer is conditional on supplying both
types of crowns—it will not supply just one type for the price indicated. If the offer is accepted,
the equipment used by Dela Cruz’s laboratory would be scrapped (it is old and has no market
MAS 9207 MANAGEMENT ACCOUNTING CONCEPTS AND TECHNIQUES
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value), and the lab facility would be closed. Dela Cruz uses 2,000 porcelain crowns and 500 gold
crowns per year.

REQUIRED:
1. Should Dela Cruz continue to make its own crowns, or should they be purchased from the
external supplier? What is the peso effect of purchasing?
2. What qualitative factors should Dela Cruz consider in making this decision?
3. Suppose that the lab facility is owned rather than rented and that the ₱20,000 is depreciation
rather than rent. What effect does this have on the analysis in Requirement 1?
4. Refer to the original data. Assume that the volume of crowns used is 3,000 porcelain and 1,000
gold. Should Dela Cruz make or buy the crowns? Explain the outcome.

5. Make or Buy a Component. A company manufactures 2,000 units of Part A each year for use
on its production line. At this level of activity, the cost per unit for Part A is as follows:

Direct materials ₱ 100

Direct labor 300
Variable manufacturing overhead 80
Fixed manufacturing overhead 450
Total cost per unit of Part A ₱930

Am outside supplier has offered to sell 2,000 units of Part A each year to the company for ₱1,100
per unit. If the company accepts this offer, the facilities now being used to manufacture Part A
could be rented to another company at an annual rental of ₱450,000. However, the company
has determined that one-third of the fixed manufacturing overhead being applied to Part A would
continue even if Part A were purchased from the outside supplier.

Required: Based on financial considerations alone, should the company accept the outside
supplier’s offer?

6. Dropping or Retaining a Segment. ABC Company produces three products: A, B, and C. A

segmented income statement, with amounts given in thousands, follows:

A B C Total
Sales revenue ₱1,800 ₱1,600 ₱ 210 ₱ 3,610
Less: Variable expenses 1,350 1,000 140 2,490
Contribution margin ₱ 450 ₱ 600 ₱ 70 ₱1,120
Less: Direct fixed expenses 150 300 80 530
Segment margin ₱ 300 ₱ 600 ₱(10) ₱ 590
Less: Common fixed expenses 340
Operating income ₱ 250

Direct fixed expenses include depreciation on equipment dedicated to the product lines of
₱20,000 for A, ₱120,000 for B, and ₱25,000 for C. None of the product line equipment can be
sold, and would have to be disposed of if the product line were dropped

Required:
What impact on profit would result from dropping Product C?

7. Shoppeeda Corporation, a retailing company, has two departments, Hardware and Linens. The
company’s most recent monthly contribution margin format income statement follows:

TOTAL HARDWARE LINENS

Sales ₱4,000,000 ₱3,000,000 ₱1,000,000
Variable costs 1,300,000 900,000 400,000
Contribution margin ₱2,700,000 ₱2,100,000 ₱ 600,000
Fixed costs 2,200,000 1,400,000 800,000
Operating income (loss) ₱ 500,000 ₱ 700,000 ₱(200,000)
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A study indicates that ₱340,000 of the fixed expenses being charged to the Linens Department
are sunk costs or allocated costs that will continue even if the Linens Department is dropped. In
addition, the elimination of the Linens Department will result in a 10% decrease in the sales of
the hardware Department.

Required: If the Linens Department is dropped, what will be the effect on the operating income
of the company as a whole?

8. Sell or Process Further. Deo Company manufactures three main products, A, B, and C, and
a by-product D from a common input in a joint processing operation. Joint processing costs up
to the split-off point total P200,000 per month. The company allocates these costs to the joint
products based on their relative sales value at the split-off point. Unit selling prices and total
output at the split-off point are as follows:

Product Selling Price Monthly Output

A ₱16 per kilo 15,000 kilos
B 8 per kilo 20,000 kilos
C 25 per kilo 4,000 kilos
D ₱0 100 kilos

Each product can be processed further after the split-off point. Additional processing requires
no special facilities. The additional processing costs (per month) and unit selling prices after
further processing are given below:
Additional
Product Processing Costs Selling Price
A ₱ 55,000 ₱20 per kilo
B ₱110,000 ₱13 per kilo
C ₱ 20,000 ₱32 per kilo
D ₱ 3,000 ₱ 5 per kilo
Required: Which product or products should be sold at the split-off point and which product, or
products should be processed further?

9. CAPACITY CONSTRAINT. Paper Products, Inc., produces table napkins and facial tissues. The
manufacturing process is highly mechanized; both products are produced by the same
machinery by using different settings. For the coming period, 200,000 machine hours are
available. Management is trying to decide on the quantities of each product to produce. The
following data are available (for napkins, one unit is one package of napkins; for facial tissues,
one unit is one box of tissues):
Napkins Tissues
Machine hours per unit 1.00 0.50
Unit selling price ₱2.50 ₱3.00
Unit variable cost ₱1.50 ₱2.25
Because of market conditions, the company can sell no more than 150,000 packages of napkins
and 300,000 boxes of facial tissues.

Required:
1. Determine the units of each product that should be produced in order to maximize profits.
2. How would your answer change if there is no market limitation on any of the products?

10. AB Manufacturing can produce either of two products, Product A and Product B, with its existing
machinery. Making either product requires the use of grinding machines. AB has 10 grinding
machines, each of which can be operated 200 hours per month. Following are the comparative
per-unit data for the two products:

Product A Product B
Selling price ₱11.00 ₱17.50
Variable cost ₱ 7.00 ₱10.00
Grinding time, hours 2 2.5
Market limit - units 0 500
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REQUIRED:
Considering the given constraints, how many units of each product should AB
Manufacturing produce to maximize profit?

11. Product mix, Limited Resource. Putol Engineering makes cutting tools for metalworking
operations. It makes two types of tools: REG, a regular cutting tool, and HIPRE, a high-precision
cutting tool. REG is manufactured on a regular machine, but HIPRE must be manufactured on
both the regular machine and a high-precision machine. The following information is available.

REG HIPRE
Selling price ₱ 100 ₱ 150
Variable manufacturing cost per unit 60 100
Variable marketing cost per unit 15 35
Budgeted total fixed overhead costs 350,000 550,000
Hours required to product one
unit on the regular machine 1 hour 0.5 hour

Additional information includes the following:

a. Putol faces a capacity constraint on the regular machine of 50,000 hours per year.
b. The capacity of the high-precision machine is not a constraint.
c. Of the ₱550,000 budgeted fixed overhead costs of HIPRE, ₱300,000 are lease
payments for the high precision machine. This cost is charged entirely to HIPRE
because Putol uses the machine exclusively to produce HIPRE. The lease agreement
for the high-precision machine can be canceled at any time without penalties.
d. All other overhead costs are fixed and cannot be changed.

REQUIRED:
1. What product mix—that is, how many units of REG and HIPRE—will maximize Putol’s
operating income?

2. Suppose Putol can increase the annual capacity of its regular machines by 15,000
machine-hours at a cost of ₱150,000. Should Putol increase the capacity of the regular
machines by 15,000 machine hours? By how much will Putol’s operating income
increase?

12. CONTINUE OR SHUT DOWN OPERATIONS. Theena Company normally produces and sells
40,000 units of its product each month. The selling price is ₱25 per unit and variable costs are
₱15 per unit. Fixed costs amount to ₱220,000 per month.

The area where the companies that purchase the bulk the Theena Company’s product was
locked down because some people in the area tested positive with Covid-19. This has caused
Theena Company’s sales to temporarily drop to only 10,000 units per month. Theena Company
estimates that the lockdown will last for about three months, after which time, sales of Theena
Company’s product would return to normal. Due to the current low level of sales, however,
Theena Company is thinking about closing down its own plant during the three months that the
lockdown is on. If Theena Company does close down its plant, it is estimated that fixed costs
can be reduced by ₱50,000 per month. Start-up costs at the end of the shutdown period would
total ₱12,000. Since Theena Company uses just-in-time (JIT) production methods, no
inventories are on hand.

REQUIRED: 1. Assuming that the strikes continue for three months, would you recommend
that Theena Company close its own plant?

2. At what level of sales (in units) for the three-month period should Theena
Company be indifferent between closing the plant or keeping it open?
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13. PROBABILITY ANALYSIS A firm produces Product A. The total costs (TC) for this product
can be estimated by the equation:

Product A TC = ₱800,000 + (₱20 x Sales Volume)

The firm believes there is a 25% chance for the sales volume of Product A to equal 20,000
units and a 75% chance that it will be equal to 40,000 units. The selling price of Product A is
₱50.

Compute the expected profit from Product A.

14. Uncertainty and expected costs. Surekaba Corp, a retail giant, is considering implementing
a new business to business (B2B) information system for processing purchase orders. The
current system costs Surekaba ₱200,000 per month and ₱50 per order.

The new B2B system is a fully automated system and will have a fixed cost of ₱800,000 and
a variable cost of ₱10 per order.

Based on data from the last two years, Surekaba has determined the following distribution on
monthly orders:

Monthly Number of Orders Probability

35,000 10%
40,000 25%
55,000 30%
65,000 20%
80,000 15%

REQUIRED:
1. What are the expected costs of the present system and the fully automated B2B
system? Should Surekaba shift to the fully automated B2B system?
2. In addition to the information systems costs, what other factors should Surekaba
consider before deciding to implement a new B2B system?

15. The probabilities shown in the table represent the estimate of sales for a new product:
Sales (units) Probability
0 - 200 20% 100 20
201 - 400 30% 300 90
401 - 600 40% 500 200
601 - 800 10% 700 70
380
What is the best estimate of the expected sales of the new product?

16. A company uses two major material inputs in its production. To prepare its manufacturing
operations budget, the company has to project the cost changes of these material inputs. The
cost changes are independent of one another. The purchasing department provides the
following probabilities associated with projected cost changes:

Cost Change Material 1 Material 2

3% increase 0.5 0.1
5 % increase 0.2 0.4
10% increase 0.3 0.5

What is the probability that there will be a 10% increase in the cost of both Material 1 and
Material 2?

Joint probability = 0.3 x 0.5 = 15%

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ITEMS 17 to 19 ARE BASED ON THE FOLLOWING INFORMATION:

The local chapter of JPIA is planning to conduct a fund raising project by selling roses on
Valentine’s Day. The roses, which can be purchased from a nearby supplier at ₱5 each, will be
sold to the students for ₱15 each. Any unsold roses at the end of the day will be discarded.

The estimated numbers of roses that can be sold on such day, as well as their probabilities, as
follows:
Units of Roses Probability
600 0.20
800 0.30
1,000 0.40
1,200 0.10

17. What is the estimated sales of roses (in units) using an expected value approach?
a. 880 c. 900
b. 1,000 d. 400

18. What is the estimated unit sales of roses on Valentine’s Day using a deterministic approach
based on the most likely outcome?
a. 880 c. 900
b. 1,000 d. 400

19. What is the conditional profit of purchasing 1,000 units of roses but selling only 800 units?
a. P7,000 c. P2,100
b. P8,000 d. P2,800

17. B Units of Roses Probability Weighted Units

600 0.20 120
800 0.30 240
1,000 0.40 400
1,200 0.10 120
Estimated sales, expected value approach 880 units

18. B In a deterministic approach, it is assumed that a value is known with certainty. Per the
requirement, the value is based on the most likely outcome. Thus estimated sales is 1,000 units,
the estimate with the highest probability (40%).

19. A Sales (800 units x P15) ₱12,000

Less cost (1,000 x P5) 5,000
Conditional profit ₱ 7,000

DECISION TREE

20. Arbor Company needs a component part for the production of a new product. The component
part is available from local suppliers, but the company can make it with the use of a special
equipment which it can rent for P18,000 per month.

Each new product requires one component part. Thus, production requirement for the part is
the same as the demand for the new product, which could be high (5,000 units per month),
with probability of 60%, or low (2,000 units per month).

The contribution margin per unit of the new product is P15 if the company will make the part,
and P12 if the part is purchased from local suppliers.

The company’s management accountant prepared the following decision tree to help
management select the better alternative:
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Decision Demand Payoff (Contribution)

5,000 units (60%) ₱60,000 ₱36,000
Buy the component part
2,000 units (40%) 24,000 9,600 ₱45,600

5,000 units (60%) 57,000 34,200

Make the component part

2,000 units (40%) 12,000 4,800 39,000

Should the company make, or buy the part? Buy. Expected value is P45,00; (vs. 39,000)

LINEAR PROGRAMMING

21. XY Company has two products, Product X and Product Y, that it manufactures through its
production facilities. The contribution margin for Product X is ₱15 per unit, whereas Product
Y’s contribution margin is ₱25 per unit. Each product uses Materials A and B. Product X uses
3 kilos of Material A, and Product Y uses 6 kilos. Product X requires 6 feet of Material B and
Product Y uses 4 feet.

The company can only purchase 600 kilos of Material A and 880 feet of Material B.

REQUIRED:
a. Formulate the objective function and all of the constraints in order to maximize
contribution margin.

b. How many units of each product (X and Y) should be produced to maximize the total
contribution margin?
c. Calculate the contribution margin at the optimal solution.

PRACTICE PROBLEMS:

1. Nice Box Company manufactures jewelry cases. The firm is currently operating at 80% of its
capacity of 7,500 direct labor hours per month. The sales manager has been looking for special
orders to increase the use of capacity. Rings Company has offered to buy 10,000 cases at P7.50
per case provided the delivery is within two months. Per case cost data for the order are as
follows:
Materials P2.50
Direct labor (1/2 hour at P6) 3.00
Manufacturing overhead 2.00
Total unit cost P7.50
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Variable manufacturing overhead is P1.50 per direct labor hour and the company allocates fixed
manufacturing overhead to units of product based on their direct labor time. Without the order,
Nice Box has enough business to operate at 6,000 direct labor hours (80% of 7,500) in each of
the next two months. The normal selling price of the jewelry case is P10.50. Rings would put its
own label on the case. The production manager is concerned about the labor time that making
10,000 cases would require. She cannot schedule more than 7,500 hours per month because
Nice Box has a policy about overtime. Thus, the company would have to reduce some regular-
price sales of the jewelry case if it accepts the order. Rings Company would not take fewer than
10,000 cases.

REQUIRED:
1. Determine whether Nice box should accept the order. Reject: profit will decrease by P4,500
2. Determine the price per case for the order that would make Nice Box indifferent between
accepting and rejecting the order (the price that would give Nice Box the same profit under
both alternatives. P7.95
1. Income will fall by P4,500. Critical to the analysis is determining the lost
sales at the normal price.

Lost regular sales:

Maximum capacity for two-month period (7,500 x 2 x 2) 30,000 cases
Special order 10,000
Available for regular sales 20,000
Expected sales (6,000 x 2 x 2) 24,000
Lost regular sales if order accepted 4,000 cases

The analysis proceeds as follows. Variable cost is P6.25 per case.

Materials P2.50
Direct labor 3.00
Variable overhead (1/2 hour x P1.50) 0.75
Total variable cost P6.25

Contribution margin on the special order is therefore P1.25 (P7.50 - P6.25)

and P4.25 on regular sales (P10.50 - P6.25).

Contribution margin on special order (10,000 x P1.25) P12,500

Contribution margin on lost regular sales (4,000 x P4.25) 17,000
Net loss on special order (P 4,500)

An alternative is
Gain in revenue from special order:
Revenue from special order (10,000 x P7.50) P75,000
Lost revenue from 4,000 cases (4,000 x P10.50) 42,000
Net gain in revenue 33,000
Incremental costs of special order:
Cost of operating at capacity for two months
15,000 cases x 2 months x P6.25 per case P187,500
Cost of operating at expected sales level
12,000 cases x 2 months x P6.25 150,000
Net additional cost 37,500
Net loss (P33,000 - P37,500) P 4,500

2. P7.95. A simple way to find this is to divide the loss of P4,500 by the 10,000
units of the special order and add the P0.45 (P4,500/10,000) to the original price of
P7.50. Another approach uses the basic idea of target pricing from Chapter 2.

Required contribution margin [4,000 x (P10.50 - P6.25)] P17,000

Divided by volume on special order 10,000
Equals per-unit required contribution margin P1.70
Plus variable cost per case 6.25
Equals required price P7.95

2. Intel Chemical Co. recently received an order for a product it does not normally produce. Since
the company has excess production capacity, management is considering accepting the order.
In analyzing the decision, the assistant controller is compiling the relevant costs of producing the
order. Production of the special order would require 8,000 kilograms of theolite. Intel does not
use theolite for its regular product, but the firm has 8,000 kilograms of the chemical on hand
from the days when it used theolite regularly. The theolite could be sold to a chemical wholesaler
MAS 9207 MANAGEMENT ACCOUNTING CONCEPTS AND TECHNIQUES
FOR DECISION MAKING Page 12 of 24

for P14,500. The book value of the theolite is P2 per kilogram. Intel could buy theolite for P2.40
per kilogram.

REQUIRED: 1. What is the relevant cost of theolite for the purpose of analyzing the special order
decision? P14,500
2. Intel’s special order also requires 1,000 kilograms of genatope, a solid chemical
regularly used in the company’s products. The current stock of genatope is 8,000
kilograms at a book value of P8.10 per kilogram. If the special order is accepted,
the firm will be forced to restock genatope earlier than expected, at a predicted
cost of P8.70 per kilogram. Without the special order, the purchasing manager
predicts that the price will be P8.30, when normal restocking takes place. Any
order of genatope must be in 5,000 kilograms.

What is the relevant cost of genatope? (1,000 x 8.70) + [4,000 x (8.7-8.3)] = 10,300

3. The Air Sole Shoe Company manufactures various types of shoes for sports and recreational
use. Several types of shoes require a built-in air pump. Presently, the company makes all of the
air pumps it requires for production. However, management is presently evaluating an offer from
Air Supply Co. to provide air pump at a cost of P3 each. Air Sole management has estimated
that the variable production costs of the air pump are P2.50 per unit. The firm also estimates
that it could avoid P20,000 per year in fixed costs if it purchased rather than produced the air
pumps.

REQUIRED: 1. If Air Sole requires 25,000 pumps per year, should it make them or buy them
from Air Supply Co.? Buy advantage – P7,500
2. If Air Sole requires 60,000 pumps per year, should it make them or buy them?
Make advantage – P10,000
3. Assuming all other factors are equal, at what level or production would the
company be indifferent between making and buying the pumps? 40,000

4. Zobel Corporation produces cleaning compound and solutions for industrial use. While most of
its products are processed independently, a few are related. Grit 337, a coarse cleaning powder
with many industrial uses, costs P1.60 a kilo to make and sells for P2 a kilo. A small portion of
the annual production of this product is retained for further processing in the Mixing Department,
where it is combined with several other ingredients to form a paste, which is marketed as silver
polish selling for P4 per jar. This further processing requires ¼ kilo of Grit 337 per jar. Costs of
other ingredients, labor, and variable overhead associated with this further processing amount
to P2.50 per jar. Variable selling costs are P0.30 per jar. If the decision were made to cease
production of the silver polish, P5,600 of Mixing Department fixed costs could be avoided. Zobel
has limited production capacity for Grit 337, but unlimited demand for the cleaning powder.

REQUIRED: 1. Calculate the minimum number of jars of silver polish that would have to be sold
to justify further processing of Grit 337. 5,600/0.7 = 8,000
2. Assume that Zobel has unlimited production capacity for Grit 337, but limited
demand for the cleaning powder. Calculate the minimum number of jars of silver
polish that would have to be sold to justify further processing of Grit 337.
5,600/0.8 = 7,000

5. Andretti Company has a single product called a Dak. The company normally produces and sells
60,000 Daks each year at a selling price of P32 per unit. The company’s unit costs at this level
of activity are given below:

Direct materials P10.00

Direct labor 4.50
Variable manufacturing overhead 2.30
Fixed manufacturing overhead 5.00 (P300,000 total)
Variable selling expenses 1.20
Fixed selling expenses 3.50 (P210,000 total)
Total cost per unit P26.50

A number of questions relating to the production and sale of Daks follow. Each question is
independent.
MAS 9207 MANAGEMENT ACCOUNTING CONCEPTS AND TECHNIQUES
FOR DECISION MAKING Page 13 of 24

1. Assume that Andretti Company has sufficient capacity to produce 90,000 Daks each year
without any increase in fixed manufacturing overhead costs. The company could increase its
sales by 25% above the present 60,000 units each year if it were willing to increase the fixed
selling expenses by P80,000. Would the increased fixed expenses be justified? Increase in profit-
P130,000
2. Assume again that Andretti Company has sufficient capacity to produce 90,000 Daks each
year. A customer in a foreign market wants to purchase 20,000 Daks. Duties on the Daks
would be P1.70 per unit, and costs for permits and licenses would be P9,000. The only selling
costs that would be associated with the order would be P3.20 per unit shipping cost. You have
been asked by the president to compute the per unit break-even price on this order. P22.15

3. The company has 1,000 Daks on hand that have some irregularities and are therefore
considered to be “seconds.” Due to the irregularities, it will be impossible to sell these units at
the normal price through regular distribution channels. What unit cost figure is relevant for a
selling a minimum selling price? P1.20

4. Due to a strike in its supplier’s plant, Andretti Company is unable to purchase more material
for the production of Daks. The strike is expected to last for two months. Andretti Company
has enough material on hand to continue to operate at 30% of normal levels for the two-month
period. As an alternative, Andretti could close its plant down entirely for the two months. If
the plant were closed, fixed overhead costs would continue at 60% of their normal level during
the two-month period; the fixed selling costs would be reduced by 20% while the plant was
closed. What would the peso advantage or disadvantage of closing the plant for the two-
month period? P15,000

5. An outside manufacturer has offered to produce Daks for Andretti Company and to ship them
directly to Andretti’s customers. If Andretti company accepts this offer, the facilities that it uses
to produce Daks would be idle; however, fixed overhead costs would be reduced by 75% of
their present level. Since the outside manufacturer would pay for all the costs of shipping, the
variable selling costs would be only two-thirds of their present amount. Compute the unit cost
figure that is relevant for comparison to whatever quoted price is received from the outside
manufacturer. P20.95

6. Leland Manufacturing Company uses 10 units of part KJ37 each month in the production of
radar equipment. The cost of manufacturing one unit of KJ37 is the following:

Direct material P 1,000

Material handling (20% of direct material cost) 200
Direct labor 8,000
Manufacturing overhead (150% of direct labor) 12,000
Total manufacturing cost P21,200

Material handling represents the direct variable costs of the Receiving Department that are applied
to direct materials and purchased components on the basis of their cost. This is a separate charge
in addition manufacturing overhead. Leland’s annual manufacturing overhead budget is one-third
variable and two-third fixed. Scott Supply, one of Leland’s reliable vendors, has offered to supply
part number KJ37 at a unit price of P15,000.

REQUIRED: 1. If Leland purchases the KJ37 units from Scott, the capacity Leland used to
manufacture these parts would be idle. Should Leland decide to purchase the
parts from Scott, the unit cost of KJ37 would increase or decrease by what
amount? P4,800
2. Assume Leland Manufacturing is able to rent out all the idle capacity for P25,000
per month. If Leland decides to purchase the 10 units from Scott Supply, Leland’s
monthly cost for KJ37 would increase or decrease by what amount? P23,000
3. Assume Leland Manufacturing does not wish to commit to a rental agreement but
could use its idle capacity to manufacture another product that would contribute
P52,000 per month. If Leland elects to manufacture KJ37 in order to maintain
quality control, what is the net amount of Leland’s cost from using the space to
manufacture part KJ37? P4,000
MAS 9207 MANAGEMENT ACCOUNTING CONCEPTS AND TECHNIQUES
FOR DECISION MAKING Page 14 of 24

7. “In my opinion, we ought to stop making our own drums and accept that outside supplier’s offer,”
said Wim Niewindt, managing director of Antilles Refining Co. “At a price of P18 per drum, we
would be paying P5 less than it costs us to manufacture the drums in our own plant. Since we
use 60,000 drums a year, that would be an annual cost savings of P300,000.” Antilles Refining’s
present cost to manufacture one drum is given below (based on 60,000 drums per year):
Direct material P10.35
Direct labor 6.00
Variable overhead 1.50
Fixed overhead (P2.80 general company
overhead, P1.60 depreciation, and P0.75
supervision) 5.15
Total cost per drum P23.00

A decision about whether to make or buy the drums is especially important at this time since the
equipment being used to make the drums is completely worn out and must be replaced. The
choices facing the company are:

Alternative 1: Purchase new equipment and continue to make the drums. The equipment would
cost P810,000; it would have a six-year useful life and no salvage value. The
company uses straight-line depreciation.
Alternative 2: Purchase the drums from an outside supplier at P18 per drum under a six-year
contract.

The new equipment would be more efficient than the equipment that Antilles Refining has been
using and, according to the manufacturer, would reduce direct labor and variable overhead costs
by 30%. The old equipment has no resale value. Supervision cost (P45,000 per year) and direct
materials cost per drum would not be affected by the new equipment. The new equipment’s
capacity would be 90,000 drums per year. The company has no other use for the space being
used to produce the drums. The company’s total general company overhead would be
unaffected by this decision.

REQUIRED: 1. To assist the managing director in making a decision, prepare an analysis showing
what the total cost and the cost per drum would be under each of the two
alternatives given above. Assume that 60,000 drums are needed each year.
Which course of action would you recommend to the managing director? Buy (Buy
cost – P18, Make cost – P18.60)

2. Would your recommendation in (1) above be the same if the company’s needs
were:
a. 75,000 drums per year - indifferent
b. 90,000 drums per year – Make, with cost of P17.60

8 Polaski Company manufactures and sells a single product call a Ret. Operating at capacity, the
company can produce and sell 30,000 Rets per year. Costs associated with this level of
production and sales are given in the next page. The Rets normally sell for P50 each. Fixed
manufacturing overhead is constant at P270,000 per year within the range of 25,000 through
30,000 Rets per year.

Unit Total
Direct materials P15 P450,000
Direct labor 8 240,000
Variable manufacturing overhead 3 90,000
Fixed manufacturing overhead 9 270,000
Variable selling expense 4 120,000
Fixed selling expense 6 180,000
Total cost 45 P1,350,000
REQUIRED:
1. Assume that due to a recession, Polaski Company expects to sell only 25,000 Rets through
regular channels next year. A large retail chain has offered to purchase 5,000 Rets if Polaski
is willing to accept a 16% discount off the regular price. There would be no sales commissions
on this order; thus, variable selling expenses would be slashed by 75%. However, Polaski
Company would have to purchase a special machine to engrave the retail chain’s name on
MAS 9207 MANAGEMENT ACCOUNTING CONCEPTS AND TECHNIQUES
FOR DECISION MAKING Page 15 of 24

the 5,000 units. This machine would cost P10,000. Polaski Company has no assurance that
the retail chain will purchase additional units any time in the future. Determine the impact on
profits next year if this special order is accepted. Increase in profit P65,000

2. Refer to the original data. Assume again that Polaski Company expects to sell only 25,000
Rets through regular channels next year. One organization would like to make a one-time only
purchase of 5,000 Rets. The organization would pay a fixed fee of P1.80 per Ret, and in
addition it would reimburse Polaski Company for all costs of production (variable and fixed)
associated with the units. Since the organization would pick up the Rets with its own trucks,
there would be no variable selling expenses of any type associated with this order. If Polaski
Company accepts the order, by how much will profits be increased or decreased for the year?
Increase in profit – P54,000

3. Assume the same situation as that described in (2) above, except that the company expects
to sell 30,000 Rets through regular channels next year. Thus, accepting the organization’s
order would require giving up regular sales of 5,000 Rets. If the organization’s order is
accepted, by how much will profits be increased or decreased from what they would be if the
5,000 Rets were sold through regular channels? Decrease in profit – P46,000

- end –

SELF-TEST
1. Ma-De Corporation’s Store No. 10 reported the following results of operations for the period just
ended:
Sales P2,500,000
Less: Variable expenses 1,000,000
Contribution margin P1,500,000
Less: Fixed expenses
Salaries and wages P750,000
Insurance on inventories 50,000
Depreciation of equipment 325,000
Advertising 500,000 1,625,000
Net income (loss) P( 125,000)

The management is contemplating the dropping of Store No. 10 due to the unfavorable
operational results. If this would happen, one employee will have to be retained with an annual
salary of P150,000. The equipment has no resale value. Store No. 10 should:
a. not be dropped due to foregone overall income of P350,000.
b. be dropped due to overall operational loss of P325,000.
c. not be dropped due to foregone overall income of P25,000.
d. be dropped due to overall operational loss of P25,000.

2. Department 1 of Jo Corporation is being evaluated for elimination. It has contribution to

overhead of P400,000. It receives an allocated overhead of P1 million, 10% of which cannot be
eliminated. The elimination of Division A would affect pre-tax income by:
a. P400,000 decrease c. P500,000 decrease
b. 400,000 increase d. 500,000 increase

3. In analyzing whether to build another regional service office, the salary of the Chief Executive
Officer (CEO) at the corporate headquarters is:
a. relevant because salaries are always relevant.
b. relevant because this will probably change if the regional service office is built.
c. irrelevant because it is a future cost that will not differ between the alternatives under
consideration
d. irrelevant since another imputed cost for the same will be considered.
MAS 9207 MANAGEMENT ACCOUNTING CONCEPTS AND TECHNIQUES
FOR DECISION MAKING Page 16 of 24

4. Mon, Inc. has an annual capacity of 2,800 units of output. Projected data for the coming year’s
operations are as follows:
Sales, (2,000 units at P760 each) P1,520,000
Manufacturing costs
Variable P 500 per unit
Fixed P 360,000
Marketing and administrative costs:
Variable (sales commissions) P 120 per unit
Fixed P 40,000

Assume there would be no effect on regular sales at regular prices and that the usual sales
commission will be reduced to half. Should the company accept a one-time-only special order
for 600 units at a selling price of P640 each?
a. Yes, due to incremental income of P48,000
b. Either one would do as the net effect would be the same
c. Yes, due to incremental income of P30,000
d. No, due to the resulting loss of P37,714.

5. The salaries you could be earning by working rather than attending college are an example of:
a. outlay costs c. sunk costs
b. misplaced costs d. opportunity costs

6. Among the costs relevant to a make-or-buy decision include variable manufacturing costs as well
as:
a. unavoidable costs. c. plant depreciation.
b. real estate taxes. d. avoidable fixed costs.
7. Kimdax Company is operating at 70% capacity. The plant manager is considering making Part
K01 now being purchased from outside suppliers for P110 each, a price that is projected to
increase in the near future. The plant has the equipment and labor force required to manufacture
Part K01. The design engineer estimates that each part requires P40 of direct materials and
P30 of direct labor. The plant overhead is 200% of direct labor peso cost, and 40% of the
overhead is fixed cost. A decision to manufacture Part K01 will result in a gain or (loss) for each
component of
a. P28 c. P(20)
b. 16 d. 4

8. Aileen Co. has a limited number of machine hours that it can use for manufacturing two products,
X and Y. Each product has a selling price of P160 per unit but product X has 40% contribution
margin and product Y has a 70% contribution margin. One unit of Y takes twice as many
machine hours to make as a unit of X. Assume either product can be sold in whatever quantity
is produced. Which product or products should the limited number of machine hours be used
for?
a. X c. Either X or Y
b. Both X and Y d. Y

9. Badette, Inc. has an opportunity to acquire a new equipment to replace one of its existing
equipments. The new equipment would cost P900,000 and has a five-year useful life, with a zero
terminal disposal price. Variable operating costs would be P1 million per year. The present
equipment has a book value of P500,000 and a remaining life of five years. Its disposal price now
is P50,000 but would be zero after five years. Variable operating costs would be P1,250,000 per
year. Considering the five years in total but ignoring the time value of money and income taxes,
Badette should
a. replace due to P400,000 advantage c. replace due to P350,000 advantage
b. not replace due to P150,000 disadvantage d. not replace due to P100,000 disadvantage.

10. Aragon, Inc. is along the highway leading to Chocolate Hills.. Jane has a stall which specializes
in hand-crafted fruit baskets that sell for P60 each. Daily fixed costs are P15,000 and variable
costs are P30 per basket. An average of 750 baskets are sold each day. Jane has a capacity
of 800 basket per day. By closing time yesterday, a bus load of stopped by Jane’s stall.

Collectively, they offered Jane P1,500 for 40 baskets. Jane should have:
a. rejected the offer since he could have lost P500.
MAS 9207 MANAGEMENT ACCOUNTING CONCEPTS AND TECHNIQUES
FOR DECISION MAKING Page 17 of 24

b. rejected the offer since he could have lost P900.

c. accepted the offer since he could have P300 contribution margin.
d. accepted the offer since he could have P700 contribution margin.

11. Gwen Co. produces Component X for use in one of its electronic gadgets. Normal annual
production for the item is 100,000 units. The costs per 100 units-lot of the component are as
follows:

Direct materials P 520

Direct labor 200
Manufacturing overhead:
Variable P240
Fixed 320 560
Total manufacturing costs per 100 units P1,280

Araña, Inc. has offered to sell Gwen all the 100,000 units it will need during the coming year for
P1,200 per 100 units. If Gwen accepts the offer from Araña, the facilities used to manufacture
Component X could be used in the production of Component Y. This change would save Gwen
P180,000 in relevant costs. In addition, a P200,000 cost item included in fixed overhead that is
specifically related to Component X would be eliminated. Gwen should:
a. buy Component X because of P300,000 savings
b. buy Component X because of P140,000 savings
c. continue producing Component X because of P40,000 savings.
d. continue producing Component X because of P60,000 savings

12. For the year just ended, Malot Corp. had direct costs of P1 million based on a production set up
for the period. If the alternative set up were adopted, direct costs could have been P850,000.
In addition, Malot’s fixed costs were P100,000. The incremental cost was
a. P250,000. c. P100,000.
b. P150,000. d. P 50,000.

13. Eleonor Productions, Inc. owns and operates a chain of movie theaters. The theaters in the
chain vary from low volume, small town to high volume, big city/downtown theaters.
Management is considering installing machines that will make popcorn on the premises. This
proposed feature would be properly advertised and is intended to increase patronage at the
company’s theaters. These machines are available in two different sizes with the following
details:
Economy Popper Regular Popper
Annual capacity 50,000 boxes 120,000 boxes
Costs:
Annual machine rental P80,000 P110,000
Popcorn cost per box P1.30 P1.30
Cost of each box 0.80 0.80
Other variable costs per box 2.20 1.40

The level of output in boxes at which the Economy Popper and the Regular Popper would earn
the same profit (loss) is
a. 50,000 c. 37,500
b. 65,000 d. 40,000

14. Maco Foods operates a cafeteria for its employees. The operation of the cafeteria requires fixed
costs of P470,000 per month and variable costs of 40% of sales. Cafeteria sales are currently
averaging P1,200,000 per month. The company has the opportunity to replace the cafeteria
with vending machines. Gross customer spending at the vending machines is estimated to be
40% greater than the current sales because the machines are available at all hours. By replacing
the cafeteria with vending machines, the company would receive 16% of the gross customer
spending and avoid all cafeteria costs. A decision to replace the cafeteria with vending machines
will result in a monthly increase (decrease) in operating income of
a. P162,000 c. P(588,000)
b. 258,800 d. 18,800
MAS 9207 MANAGEMENT ACCOUNTING CONCEPTS AND TECHNIQUES
FOR DECISION MAKING Page 18 of 24

15. Sunk costs

a. are substitutes for opportunity costs.
b. are relevant to long-term decisions but not to short-term decisions.
c. are relevant to decision making.
d. in and of themselves are not relevant to decision making.

16. Lally Co. has the opportunity to increase annual sales by P1 million by selling to new riskier
customers. It has been estimated that uncollectible expenses would be 15% and collection
costs, 5%. The manufacturing and selling costs are 70% of sales, and the corporate tax rate is
35%. If the company pursues this opportunity, the after-tax profit will
a. increase by P35,000. c. increase by P65,000.
b. increase by P97,500. d. remain the same.

17. Myra, Inc. has its own cafeteria with following annual costs:
Food P 400,000
Labor 300,000
Overhead 440,000
Total P1,140,000

The overhead is 40% fixed. Of the fixed overhead, P100,000 is the salary of the cafeteria
supervisor. The remainder of the fixed overhead has been allocated from total company
overhead. Assuming the cafeteria supervisor will remain and that Myra will continue to pay said
salary, the maximum cost Myra will be willing to pay an outsider firm to service the cafeteria is:
a. P1,140,000. c. P700,000.
b. 1,040,000. d. 964,000.

18. Mac Corp. employs 45 sales personnel to market its Sedan cars. The average car sells for
P690,000, and a 6% commission is paid to the salesperson. It is considering changing the
scheme to a commission arrangement that would pay each salesperson a package of P30,000
plus a commission of 2% of the sales made by the person. The amount of total monthly car
sales at which Mac Corp. would be indifferent (answer may be rounded off) as to which plan to
select is:
a. P45,000,000. c. P33,750,000.
b. 37,500,000. d. 22,500,000.

19. The term relevant cost applies to all of the following decision situations, except the
a. acceptance of a special order. c. manufacture or purchase of a component part
b. determination of a product price. d. replacement of equipment.

20. Edna Co. manufactures engines for the military equipment on a cost-plus basis. The cost of a
particular engine the company manufactures is shown below:
Direct materials P400,000
Direct labor 300,000
Overhead:
Supervisor’s salary 40,000
Fringe benefits on direct labor 30,000
Depreciation 24,000
Rent 22,000
Total P816,000

If the production of this engine were discontinued, the production capacity would be idle, and
the supervisor will be laid off. Should there be a next contract for this engine, the company
should bid at a minimum price of
a. P816,000. c. P730,000.
b. P700,000. d. P770,000.
MAS 9207 MANAGEMENT ACCOUNTING CONCEPTS AND TECHNIQUES
FOR DECISION MAKING Page 19 of 24

21. Elda, Inc. manages five upscale townhouses in Marikina, Malabon, and Sampaloc areas. Shown
below are the summary income statements for each complex:
IN THOUSAND PESOS
One Two Three Four Five
Rental income 10,000 12,100 23,470 18,780 10,650
Expenses 8,000 13,000 26,000 24,000 13,000
Profit 2,000 ( 900) ( 2,530) ( 5,220) ( 2,350)

Included in the expenses is P12,000,000 of corporate overhead allocated to the townhouses

based on rental income. The complexes that the company should consider selling is (are):
a. Three, Four, and Five. c. Two, Three, Four, and Five.
b. Four and Five. d. Four.

22. Cris Inc. manufactures coolers that contain a freezable ice bag. For an annual volume of 10,000
units, fixed manufacturing costs of P500,000 are incurred. Variable costs per unit amount are:
Direct materials P80
Direct labor 15
Variable factory overhead 20

Ava Corp. offered to supply the assembled ice bag for P40 with a minimum order of 5,000 units.
If Cris accepts the offer it will be able to reduce variable labor and overhead costs by 50%. The
direct materials for the freezable ice bag will cost Cris P20 if it will produce it. Considering Ava’s
offer, Cris should
a. buy the freezable ice bag due to P150,000 advantage.
b. produce the freezable ice bag due to P25,000 advantage.
c. buy the freezable ice bag due to P50,000 advantage.
d. produce the freezable ice bag due to P225,000 advantage.

23. Part XY is a component that Mike Co. uses in the assembly of motors. The cost to produce one
XY is presented as follows:

Direct materials P 4,000

Materials handling (20% of direct materials) 800
Direct labor 32,000
Overhead (150% of direct labor) 48,000
Total manufacturing cost P84,800

Materials’ handling which is not included in manufacturing overhead represents the direct
variable costs of the receiving department that are applied to direct materials and purchased
components on the basis of their cost.

The company’s annual overhead budget is one-third variable and two-thirds fixed. Toyona Co.
offers to supply XY at a unit price of P60,000. Should the company buy or manufacture XY?
a. Buy, due to advantage of P24,800 per unit
b. Manufacture, due to advantage of P7,200
c. Manufacture, due to advantage of P19,200 per unit
d. Buy, due to advantage of P12,800 per unit.

24. Roger Corp., which has experienced excess production capacity, received a special offer for its
product B at P78 per unit for 100,000 units. It has been using the variable costing method and
has been pricing its product at P96 per unit based on a mark-up of 60% as follows:

Direct materials P30

Direct labor 20
Variable overhead 6
Variable selling & administrative 4
Total variable expenses P60
60% mark up 36
Selling price P96
MAS 9207 MANAGEMENT ACCOUNTING CONCEPTS AND TECHNIQUES
FOR DECISION MAKING Page 20 of 24

Assuming that this special offer will not affect the regular market for the product, should the
company accept the special offer?
a. Yes, since it will contribute P2.8 million margin.
b. No, since it will mean a loss of P1.8 million.
c. No, since it will mean a loss of P1.16 million.
d. Yes, since it will contribute P1.8 million margin.

25. Dess Technology manufactures a particular computer component. Currently, the costs per unit
are as follows:
Direct materials P 50
Direct labor 500
Variable overhead 250
Fixed overhead 400
Total P1,200

Lou, Inc. has contacted Dess with an offer to sell 10,000 units of the component for P1,100 per
unit. If Dess accepts the proposal, P2,500,000 of the fixed overhead will be eliminated. Should
Dess make or buy the component and why?
a. Make due to savings of P3,000,000. c. Buy due to savings of P1,000,000.
b. Buy due to savings of P2,500,000. d. Make due to savings of P500,000.

26. As part of the data presented in support of a proposal to increase the production of alarm clocks,
the sales manager of Ru-nald Co. reported the total additional cost required for the proposed
production level. The increase in total cost is known as:
a. controllable cost c. opportunity cost
b. differential cost d. decremental cost

27. An item whose entire amount is usually a differential cost is:

a. factory overhead c. conversion cost
b. direct cost d. period cost
28. The effect on a company’s profit of discontinuing a department with a contribution to overhead
of P16,000 and allocated overhead of P32,000, of which P14,000 cannot be eliminated, would
be to:
a. decrease profit by P2,000 c. increase profit by P2,000
b. decrease profit by P18,000 d. increase profit by P16,000

29. The use of expected value in evaluating alternative courses of action attempts to deal with:
a. centralization c. goal congruence
b. uncertainty d. motivation

30. Czar 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 select one of the following
alternatives: acquire new equipment for P80,000, or purchase the important parts from an
outside company at P4 per part. The company should analyze the alternative by comparing the
cost of manufacturing the parts:
a. plus P80,000 with the cost of buying the parts less P10,000.
b. with the cost of buying the parts less P10,000.
c. less P10,000 with the cost of buying the parts.
d. with the cost of buying the parts.

31. An investor can sell an investment now for P10,000. Another alternative is hold the investment
for three days, after which it can be sold, based on the following sales prices and probabilities:

Sales Price Probabilities

P 5,000 40%
10,000 20
12,000 30
30,000 10

Using probability theory, the most reasonable statement is:

a. hold the investment for three days because the expected value of holding exceeds the
current price.
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b. hold the investment for three days because the current sales price exceeds the expected
value of holding.
c. sell the investment now because the current sales price exceeds the expected value of
holding
d. sell the investment now because there is a 60% chance that the sales price will fall in three
days.

32. The measurable value of an alternative use of resources is referred to as:

a. opportunity cost c. differential cost
b. measurable cost d. sunk cost

33. An opportunity cost is usually:

a. relevant, but is not part of traditional accounting records
b. not relevant, but is part of traditional accounting records
c. relevant, and is part of traditional accounting records
d. not relevant, and is not part of traditional accounting records

34. Costs that do not appear in accounting records and do not require peso outlays, but do involve
a foregone opportunity by the entity whose costs are being measured.
a. conversion costs c. imputed costs
b. differential costs d. prime costs

35. In the development of accounting data for decision-making purchases, relevant costs are defined
as:
a. future costs which will differ under each alternative course of action.
b. the change in prime cost under each alternative course of action
c. standard costs which are developed by time-and-motion-study techniques because of their
relevance to managerial control.
d. historical costs which are the best available basis for estimating future costs.

36. A cost incurred in the past and hence, irrelevant for current decision-making is a:
a. fixed cost c. sunk cost
b. discretionary cost d. direct cost

37. Gie Company budgeted sales of P400,000 calculators at P40 per unit for 2011. Variable
manufacturing costs were budgeted at P16 per unit and fixed manufacturing costs at P10 per unit.
A special order offering to buy 40,000 calculators for P23 each was received by Gie in March 2011.
Gie has sufficient plant capacity to manufacture the additional quantity; however, the production
would have to be done on an overtime basis at an estimated additional cost of P3 per calculator.
Acceptance of the special offer would not affect Gie’s normal sales, and no selling expenses would
be incurred. What would be the effect on operating profit if the special order were accepted?
a. P120,000 decrease c. P 40,000 decrease
b. P160,000 increase d. P280,000 increase

38. Tina Company sells Product B at a selling price of P21 per unit. Tina’s cost per unit based on
the full capacity of 200,000 units is as follows:
Direct materials P 4.00
Direct labor 5.00
Overhead (two-thirds of which is fixed) 6.00
P15.00

A special order offering to buy 20,000 units was received from a foreign distributor. The only
selling cost that would be incurred for this order would be P3 per unit for shipping. Tina has
sufficient existing capacity to manufacture the additional units. In negotiating the price for the
special order, Tina should consider that the minimum selling price per unit should be:
a. P14 c. P16
b. 15 d. 18

39. Binuya Manufacturing Company has 5,000 obsolete celfones that are carried in inventory at a
manufacturing cost of P50,000. If the celfones were reworked for P20,000, they could be sold
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for P35,000. Alternatively, the celfones could be sold for P8,000 to a jobber located in a distant
city. In a decision model analyzing this alternative, the sunk cost would be:
a. P 8,000 c. P20,000
b. P15,000 d. P50,000

40. Dada Company manufactures Part D for use in its production cycle. The costs per unit for
10,000 units of Part D are as follows:
Direct materials P 3.00
Direct labor 15.00
Variable overhead 6.00
Fixed overhead 8.00
P32.00

June Company has offered to sell to Dada 10,000 units of Part D for P30 per unit. If Dada
accepts Jun’s offer, the released facilities could be used to save P45,000 in relevant costs in the
manufacture of Part J. In addition, P5 per unit of the fixed overhead applied to Part D would be
totally eliminated. What alternative is more desirable and by what amount is it more desirable?

Alternative Amount
a. Manufacture P10,000
b. Manufacture P15,000
c. Buy P35,000
d. Buy P65,000

41. The Blade Division of Oly Company produces hardened steel blades. One-third of the Blade
Division’s output is sold to Trimmer Products Division, the remainder is sold to outside
customers. The Blade Division’s estimated sales and standard cost data for the fiscal year
ending June 30, 2023 are as follows:
Ruby Products Outsiders
Sales P15,000 P40,000
Variable costs (10,000) (20,000)
Fixed costs ( 3,000) ( 6,000)
Gross margin P 2,000 P14,000

The Trimmer Products Division has an opportunity to purchase 10,000 identical quality blades
from an outside supplier at a cost of P1.25 per unit on a continuing basis. Assume that the
Blade Division cannot sell any additional product to outside customers. Should Oly allow its
Trimmer Products Division to purchase the blades from outside supplier? Why?
a. Yes, because buying the blades would save Oly Company P500.
b. No, because making the blades would save Oly Company P1,500.
c. Yes, because buying the blades would save Oly Company P2,500.
d. No, because making the blades would save Oly Company P2,500.

42. K Company has 2,000 obsolete light fixtures that are carried in inventory at a manufacturing cost
of P30,000. If the fixtures are reworked for P10,000, they could be sold for P18,000. Alternately,
the light fixtures could be sold for P3,000 to a jobber located in a distant city. In a decision model
analyzing these alternatives, the opportunity cost would be:
a. P 3,000 c. P13,000
b. P10,000 d. P30,000

43. Au Company plans to discontinue a department with a contribution to overhead of P24,000 and
allocated overhead of P48,000, of which, P21,000 cannot be eliminated. The effect of this
discontinuance on Raider’s pretax profit would be a(an):
a. decrease of P3,000 c. decrease of P24,000
b. increase of P3,000 d. increase of P24,000

44. The following standard costs pertain to a component part manufactured by Adel Company:

Direct material P 2.00

Direct labor 5.00
Overhead 20.00
P27.00
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Factory overhead is applied at P1 per standard machine hour. Fixed capacity is 60% of applied
factory overhead, and is not affected by any “make or buy decision”. It would cost P25 per unit
to buy the part from an outside supplier. In the decision to “make or buy”, what is the total
relevant unit manufacturing cost to be considered?
a. P 2 c. P19
b. 15 d. 17

45. In deciding whether to manufacture a part or buy from an outside vendor, a cost that is irrelevant
to the short-run decision is:
a. direct labor
b. variable overhead
c. fixed overhead that will be avoided if the part is bought from an outside creditor
d. fixed overhead that will continue even if the part is bought from an outside vendor

46. Kapayapaan, Inc. manufactures Product C and Product A which are processed as follows:
Type D Machine Type B Machine
Product C 6 hours 4 hours
Product A 9 hours 5 hours

The contribution margin is P12 for Product C and P7 for Product A. The available time daily for
processing the two products is 120 hours for Machine Type D and 80 hours for Machine type B.
How would the restriction (constraint) for Machine Type D be expressed?
a. 4C + 5A c. 6C + 9A < 120
b. 4C +5A < 80 d. 12C + 7A

47. Leodegaria Corporation produces a product in 100-gallon batches. The basic ingredients used
are material A costing P10 per gallon and Material B costing P20 per gallon. No more than 1
gallon of B can be used, and at least 15 gallons of A must be used.

How would the objective function (minimization of product cost) be expressed?

a. 20B + 10A c. B + 15A
b. 10B + 20A d. 20B +150A

48. The Katangalan Company plans to expand its sales force by opening several new branch offices.
Katangalan will consider opening only two types of branches: 20-person branches (Type A) and
10-person branches (Type B). Expected initial cash outlays are P1,300,000 for a Type A branch
and P670,000 for a Type B branch. Expected annual cash inflow, net of income taxes, id
P92,000 for a Type A branch and P38,000 for a Type B branch. Katangalan will hire no more
than 200 employees for the new branch offices and will open no more than 20 branch offices.
Linear programming will be used to help decide how many branch offices should be opened.
Katangalan had P10,400,000 in capital available for the new branch offices.

In a system of equations for a linear programming model, which of the following equations would
not represent constraint?
a. A + B < 20 c. P92,000A + P36,000B < P128,000
b. 20A + 10B < 200 d. P1,300,000A + P670,000B < P10.4M

49. The Kalakian Company makes toys A and B, each of which needs two processes: cutting and
wrapping. The contribution margin is P6 for Product A and P5 for Product B. The table below shows
the maximum number of units (constraint) of each product that may be processed in two
departments.
Maximum Capacities (In Product Units)
CUTTING WRAPPING
Product A 60 80
Product B 60 40

Considering the constraint in processing, which combination of Products Y and Z maximizes

the total contribution margin?
a. 40 units of A and 20 units of B d. 0 units of A and 40 units of B
b. 60 units of A and 0 units of B e. 0 units of A and 60 units of B
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c. 80 units of A and 0 units of B

50. In a system of equation for a linear programming model, what can be done to equalize an
inequality such as 6X + 4Y < 30?
a. Nothing c. add padding
b. add a slack variable d. multiply each element by -1

DIFFERENTIAL COST ANALYSIS

1. A 11. B 21. B 31. A 41. D

2. D 12. B 22. B 32. A 42. A
3. C 13. C 23. C 33. A 43. B
4. A 14. D 24. D 34. C 44. B
5. D 15. D 25. D 35. A 45. D
6. D 16. C 26. B 36. C 46. C
7. D 17. D 27. B 37. B 47. A
8. A 18. C 28. C 38. A 48. C
9. A 19. B 29. B 39. D 49. B
10. C 20. D 30. D 40. C 50. B