Problem 1(Accept of Reject an Order)

Selling Price per Unit

Less Variable Cost per unit:
Materials
Labor
Factory overhead (25%)
Contribution margin per unit
Units to be sold
Total Contribution Margin

Product A Product B
P1.20
P1.40
0.50
0.70
0.20
0.24
0.10
0.14
0.80
1.08
0.4
21,000 units30,000 units
P8,400
P9,600

Required: Which Order Should be Accepted?

Product B should be accepted because it has a higher co

r Should be Accepted?
ccepted because it has a higher contribution margin compared to Product A

Problem 2 ( Eliminate or Retain a Product Line)

Requirement 1
No, production and sale of the round trampolines should not be discontinued.
Contribution margin lost if the round trampolines
Less fixed costs that can be avoided:
Advertising traceable
Line supervisors salaries
Decrease in net operating income for the company as a whole

41,000.00
6,000.00

The depreciation of the special equipment represents a sunk cost, and therefore it is not relevant to the decision.
The general factory overhead is allocated and will presumably continue regardless of whether or not the round trampolines
Requirement 2
If management wants a clear picture of the profitability of the segments, the general factory overhead should not be allocated.
It is a common cost and therefore should be deducted from the total product-line segment margin.

Sales
Less variable expenses
Contribution margin
Less fixed expenses:
Advertising traceable
Depreciation of special equipment
Line supervisors salaries
Total traceable fixed expenses
Product-line segment margin
Less common fixed expenses
Net operating income (loss)

Total
P1,000,000
410,000
590,000
216,000
95,000
19,000
330,000
260,000
200,000
P 60,000

(80,000.00)

47,000.00
(33,000.00)

elevant to the decision.

hether or not the round trampolines are discontinued; thus, it is not relevant.

ory overhead should not be allocated.

Trampoline
Round
Rectangular
Octagonal
P140,000
P500,000
P360,000
60,000
200,000
150,000
80,000
300,000
210,000
41,000

110,000

65,000

20,000

40,000

35,000

6,000

7,000

6,000

67,000

157,000

106,000

P 13,000

P143,000

P104,000

Problem 3 (Product Mix)

Requirement 1
Product Line
A
Selling price per unit
Variable cost per unit
Contribution margin / unit
Divided by no. of hours required for each unit
Contribution per hour

B
P30
25
P5

C
P25
10
P15

D
P10
5
P 5

P8
4
P4

5 hrs.
P1

10 hrs.
P1.5

4 hrs.
P1.25

1 hr.
P4

Product ranking:
1.D

2. B

3. C

4. A

Based on the above analysis, first priority should be given to Product D. The company should use 4,000 out of the available 9
The remaining 92,000 hrs. should be used to produce 9,200 units of Product B. Hence, the best product combination is 4,000
Requirement 2

If there were no market limitations on any of the products, the company should use all the available 96,000 hours in producin
Contribution margin of combination (1)
Product D (4,000 x P 4.00)
Product B (9,200 x P15.00)
Total contribution margin of D and B
Less contribution margin of D only
(96,000 x P4)
Difference, excess over profit in combination (1)

P 16,000
138,000
P154,000
384,000
P230,000

,000 out of the available 96,000 hrs. to produce 4,000 units of product D.
oduct combination is 4,000 units of Product D and 9,200 units of Product B.

e 96,000 hours in producing 96,000 units of product D only.

Problem 4 (Accept or Reject a Special Order)

Requirement 1
The company should accept the special order of 4,000 @ P10 each because this selling price is still higher than the additional
Whether or not variable marketing expenses will be incurred, the decision is still to accept the order.
(a)

(b)

Assume no additional variable marketing cost will be incurred.

Selling price per unit
Less variable manufacturing costs:
Direct materials
Direct labor
Variable overhead
Contribution margin/unit
Multiplied by number of units of order
Total increase in profit
Assume additional variable marketing cost will be incurred.
Selling price per unit
Less variable costs (P8.75 + P0.25)
Contribution margin / unit
Multiplied by number of units of order
Total increase in contribution margin

P10.00
P5.00
3
0.75

8.75
P 1.25
4,000
P5,000
P10.00
9.00
P 1.00
4,000
P4,000

Requirement 2
P8.75, the total variable manufacturing cost.
Requirement 3
Direct materials
Direct labor
Variable factory overhead
Total cost of inventory under direct costing

P5.00
3.00
0.75
P8.75

Requirement 4
Present contribution margin
[10,000 units x (P15 - P9)]
Less proposed contribution margin
[(P14 - P9) x 11,000 units]
Decrease in contribution margin

P60,000
55,000
P 5,000

The company should not reduce the selling price from P15 to P14 even if volume will go up because total contribution margin

s still higher than the additional variable cost to be incurred.

units

units

ecause total contribution margin will decrease.

Problem 5 (CVP Analysis used for Decision Making)

Requirement A:

Units sold per

month
4,000
5,000
6,000

No. of months

Probability
6
15
9
30

20%
50%
30%
100%

Requirement B:
Production
4,000 units
5,000 units
Sales
P40)

(4,000 x

Less
costs

variable

Production
@ P25

cost

P160,000

P160,000

P160,000

100,000

125,000

150,000

Purchase cost @
P45
Total
Contribution
margin

Sales (5,000 x
P40)
Less
variable
costs
Production cost
@ P25
Purchase cost @
P45
Total
Contribution
margin

6,000 units

P100,000

P125,000

P150,000

P 60,000

P 35,000

P 10,000

P200,000

P200,000

P200,000

100,000

125,000

150,000

45,000

P145,000

P125,000

P150,000

P 55,000

P 75,000

P 50,000

Sales (6,000 x
P40)
Less
variable
costs
Production cost
@ P25
Purchase cost @
P45
Total
Contribution
margin

P240,000

P240,000

P240,000

100,000

125,000

150,000

90,000

45,000

P190,000

P170,000

P150,000

P 50,000

P 70,000

P 90,000

Requirement C:
Sales Order

Contribution Margin

4,000
5,000
6,000
Average Contribution Margin

Probability

Expected
Value

P35,000

0.2

P 7,000

75,000
70,000

0.5
0.3

37,500
21,000
P65,500

Problem 6 (Pricing)
Requirement A:

Sales
Less Variable cost
Contribution
margin
Less Fixed cost

Net income (loss)

Oerating Result at Full

Capacity

2005
P 100,000
130,000

2006
P 400,000
520,000

(P 30,000)

(P120,000)

(P144,000)

40,000

40,000

40,000

(P 70,000)

(P160,000)

(P184,000)

P 480,000
624,000

The company had been operating at a loss because it has been selling at a negative contribution margin.
So the more unit is sold the higher the loss will be.

Requirement B: P60.14

Requirement C: P74.29
Requirement D: P56.58

Problem 7( Make or Buy)

Required:
Cost of
Making
Outside purchase
Direct materials
Direct labor
Variable manufacturing
overhead manufacturing
Fixed
overhead*
Total cost

Cost of
Buying
P90,000

P15,000
30,000
10,000
15,000
P70,000

P90,000

P 20,000

The annual advantage to make parts is P 20,000