MAS.

2 QUIZ 4 (REVIEWER)
FINANCIAL STATEMENT ANALYSIS

CURRENT RATIO customers to accommodate the special order

Incremental Contribution Margin P xxx
Current Assets ÷ Current Liabilities Lost Contribution Margin (xxx)
ACCEPT OR REJECT A SPECIAL SALES Net Incremental Profit P xxx
ORDER
Better alternative: Accept if there is an incremental
Total Per Unit profit. Reject if there is an incremental loss.
Sales P xxx P xx
Less: Variable Costs and SELL-AS-IS OR PROCESS FURTHER A
xxx xx
Expenses PRODUCT
Contribution Margin P xxx P xx
Less: Fixed Costs and Incremental Sales (units produced & sold P xxx
xxx x unit sales price)
Expenses
Operating Income P xxx Incremental Costs (xxx)
Increase (Decrease) in Profit P xxx

No alternative use of capacity Incremental Contribution Margin [(unit

Incremental Sales P xxx sales price – unit variable costs) x units P xxx
sold]
Incremental Costs (xxx) Incremental Fixed Costs (xxx)
Incremental Profit (Loss) P xxx Incremental (Decremental) Profit P xxx

Minimum Sales Price

Capacity may be rented out to others Unit sales price at split-off point P xxx
Incremental Contribution Margin P xxx Unit variable cost of subsequent
xxx
Rent Income (xxx) processing
Incremental fixed costs (fixed cost/units
Net Advantage of Accepting xxx
P xxx sold)
(Rejecting) the Special Order Minimum sales price after further
P xxx
processing
Can use the idle capacity to produce a new
product Better alternative: Process further if there is an
Incremental Contribution Margin P xxx increase in profit (IS > IC). Should be sold at
Contribution Margin from a new split-off point if there is a decrease in profit (IS <
(xxx)
product IC).
Net Advantage of Accepting
P xxx
(Rejecting) the Special Order Note: Total joint productions costs (or common
costs) and all other costs of preceding processes
If special order is accepted, regular sales is are considered irrelevant cost.
expected to be lost
Incremental Contribution Margin P xxx
Contribution Margin lost from regular SCRAP OR REWORK A DEFECTIVE
(xxx) UNIT
sales (CM/unit x Lost Sales)
Net Increase (Decrease) in Profit
P xxx Scrap Rework
from Accepting the Special Sales
Incremental Revenue P xxx P xxx
Corporation has sacrifice some of its regular Incremental Cost (xxx) (xxx)
 Incremental Profit P xxx P xxx Contribution margin per hour Px
Net Advantage of
Reworking/Scrapping
(if higher) (if higher)
(difference between the IP of No market limit
Scrap & Rework) P xxx P xxx
A B
Better alternative: Whichever has the higher Unit sales price P xx P xx
incremental profit. Unit direct materials cost (xx) (xx)
Direct Labor (xx) (xx)
Note: Variable Factory Overhead (xx) (xx)
(1) The manufacturing costs or other past costs of Unit Contribution Margin P xx P xx
producing the product are irrelevant costs.
/No. of hours per unit xx hrs. xx hrs.
(2) The differential cost between the incremental
profit of scrap and rework are the opportunity Contribution margin per hour P xx P xx
cost. Rank (from highest to lowest
1st 2nd
CM per hour)
INDIFFERENCE POINT
With market limits (prioritize Rank 1)
Sample Solution:
Rank 1 (units x hours per unit) = Total Hours of A
Rank 2 [(total hours – total hours of A)/ hours per unit] = Units
Let x = units sold
350,000x = total sales
Sensitivity analysis (change in unit direct material
Commission 1 = 8% (350,000x) cost)
= 28,000x Same computation above.
Commission 2 = 2% (350,000x) + 210,000*
= 7,000x + 210,000
*210,000 = P7,000/month x 30 sales personnel

At indifference point:
Commission 1 = Commission 2 REPLACE OR RETAIN AN ASSET
28,000x = 7,000x + 210,000
Solution 1
x = [210,000/ (28,000 – 7,000)]
x = 10 units Savings [(VOPEX Old – New) x life in P xxx
years]
Total Sales: Salvage Value of old equipment xxx
Total Sales = P 350,000 x 10 units Total Cash Inflows P xxx
= P 3,500,000 Purchase Price of new equipment
(xxx)
(Total Cash Outflows)
To prove the indifference point of sales:
Net Cash Inflows (Outflows) P xxx
Commission 1 = 8% (P 3,500,000) = P 280,000
Commission 2 = {[2% (P 3,500,000)] + P 210,000} = P 280,000 Solution 2
Income from vending machine (sales
OPTIMIZATION OF SCARCE per month x 140% x 15%)
P xxx
RESOURCES Income from cafeteria operations:
CM per hour computation: Contribution margin (sales per month x
CM per unit) P xxx
Unit contribution margin Px Less: Fixed costs (xxx) xxx
/Hours per unit x hrs.
Net Advantage (Disadvantage) of
Contribution margin per hour Px P xxx
vending machine

Unit contribution margin Px Better alternative: Replace if the net cash flow is
x Units per hour x units positive (CIF > COF). Retain if the net cash flow
is negative (CIF < COF).
 Shutdown Cost P xxx
Note: The book value of the old equipment is a
sunk cost. Shutdown point computation:
Total fixed cost (annual fixed costs x no.
P xxx
of months/12)
BID PRICE
Shutdown cost xxx
Minimum Bid Price /Unit contribution margin [unit sales
Direct Materials P xxx price – (unit variable costs + unit variable xxx
expenses)]
Direct Labor xxx Shutdown Point P xxx
Overhead:
Supervisor’s salary xxx To prove:
Fringe benefits on direct labor xxx Contribution margin (shutdown point x
P xxx
Incremental Costs/ unit CM)
P xxx/unit
Minimum Bid Price Less: Fixed costs and expenses xxx
Loss from continuing the operations xxx
Note: The depreciation and rent expenses are Shutdown Costs P xxx
unavoidable/irrelevant costs.

Solution 2 Continue or Shutdown?

Food P xxx Contribution margin (normally decline
P xxx
units x months shutdown x units CM)
Labor xxx Less: Fixed costs and expenses xxx
Variable Overhead xxx Loss from continuing the operations P xxx
Incremental Costs/ Less: Shutdown costs xxx
P xxx/unit
Maximum Bid Price
Advantage (Disadvantage) of
P xxx
continuing the operations
Note: Salary is irrelevant cost.
CONTINUE OPERATIONS OR SHUT CONTINUE OR DROP AN
DOWN ORGANIZATIONAL SEGMENT

Where: Pro-forma
Loss from continuing = Loss from discontinuing Marginal Income Statement
Loss from continuing = (CM – FC) Sales P xxx
Loss from discontinuing = (0 – Shutdown costs) Less: Variable costs xxx
Manufacturing margin P xxx
At shutdown point:
Less: Variable expenses xxx
CM – FC = (0 – SDC) where: Contribution margin P xxx
CM = contribution margin
FC = fixed costs Less: Controllable direct fixed costs
QS (UCM) – FC = (0 – SDC) SDC = shutdown costs xxx
UCM = unit contribution margin
and expenses
QS (UCM) = FC – SDC QS = quantity sold Controllable margin P xxx
Less: Non-controllable direct fixed
Therefore, shutdown point equals: xxx
costs and expenses
Segment (direct) margin P xxx
FC−SDC Less: Indirect (allocated) fixed costs
QS= xxx
UCM and expenses
Operating income P xxx
Shutdown cost computation:
Allocated fixed costs (annual fixed costs Segment margin computation:
P xxx
x no. of months/12 x fixed cost rate)
Contribution margin P xxx
Security and insurance (security &
xxx Less: Avoidable fixed costs and
maintenance x no. of months) xxx
Restart-up cost xxx expenses
Controllable Segment Margin P xxx

Better alternative: If the segment margin is

positive, continue the division. Otherwise,
discontinue or drop.

SELL NOW OR LATER

Sell Sell
Now Later
Sales P xxx P xxx
Storage costs (xxx) (xxx)
Incremental Profit P xxx P xxx
Net Advantage (difference (if higher) (if higher)
between the IP of SN & SL) P xxx P xxx

Better alternative: Whichever has the higher

incremental profit.

Note: The costs of producing products, variable

and fixed, are irrelevant costs.