Problem 1

The Bora Division of Philippine Entertainment has been experiencing operational losses
in the last 5 years in the months of August and September. Its typical monthly income statement
during this period is as follows:

Sales (900 visitors) P 360,000

Variable Costs and Expenses ( 158,400)
Fixed Costs and Expenses ( 500,000)
Net Loss P ( 298,400)

If the company temporarily shuts down its operations in the months of August and September, it
fixed costs and expenses would go down by P 293,000. Restart-up costs before the resumption of
regular operations in October are expected to be P 90,000. During the shut-down period, the
company would have a chance of renovating some of its facilities and would cost the firm a total
of P 250,000 and it would have to incur additional monthly security costs of P 45,000.

Required:
1. From the data given, identify the irrelevant costs in making a decision to shut-down or
not.
2. Compute the shut-down point
3. Should the company shut-down or continue its operations in the months of August and
September?

Problem 2

Gusher Company produces three products Kerosene, Gasoline, and Fuel Oil. Each product
may be sold at the point of split-off or processed further. Additional processing requires no
special facilities, and the production costs of further processing are entirely variable and
traceable to the products involved. In 2019, these products were processed beyond split-off.
Joint production costs for the year were P60,000. Sales values and costs needed to evaluate
Gusher's 2019 production policy follow:
Additional Costs
and Sales Values
if Processed Further
Gallons Sales Values Sales Added
Product Produced at Split-Off Values Costs
Kerosene ............................................ 6,000 P25,000 P42,000 P12,000
Gasoline ............................................. 4,000 41,000 45,000 6,000
Fuel Oil .............................................. 2,000 24,000 32,000 8,000

Joint costs are allocated to the products based on the percentage of the individual product's sales
value to the total sales value of all products.
Required:
a. Could the company increase net income by processing all the products after
split-off? If so, what would be the expected overall net income?
b. Which products should be processed further and which should be sold at split-
off? How much is overall net income?
c. Based on your decision in letter (b) how much would be the overall net income

Problem 3

Crispy Clean Household Products Co. is a diversified household cleaner processing company.
The company’s Paoay Plant produces two products: a glass cleaner and a metal cleaner from a
common set of chemical inputs(TLC). Each week 1,000,000 ounces of chemical input are
processed at a cost of P 200,000 into 750,000 ounces of metal cleaner and 250,000 ounces of
glass cleaner. The metal cleaner has no market value until it is converted into a polish with the
trade name Shiny Metal. The additional processing cost for this conversion amount to P 270,000.
Shiny Metal sells at P 15 per 25-ounce bottle.
The glass cleaner can be sold for P 24 per 25-ounce bottle. However, the glass cleaner
can be converted into two other products by adding 250,000 ounces of another compound (MST)
to the 250,000 ounces of glass cleaner. This joint process will yield 250,000 ounces each of
plastic cleaner (PC) and plastic polish (PP). The additional processing costs for this process
amount to P 140,000. Both plastic products can be sold for P 20 per 25-ounce bottle.
The company decided not to process the glass cleaner into PC and PP based on the
following analysis.

At Split-Off Process Further

Glass Cleaner Plastic Plastic Polish Total
Cleaner (PC) (PP)
Production in ounces (250,000) (250,000) (250,000)

Revenue P 240,000 P 200,000 P 200,000 P 400,000

Costs
TLC Cost 50,000* 40,000 40,000 80,000**
MST cost 0 70,000 70,000 140,000
Total Cost 50,000 110,000 110,000 220,000
Weekly Gross Profit P 190,000 P 90,000 P 90,000 P 180,000

*If the glass cleaner is not processed further, it is allocated ¼ of the P 200,000 of TLC cost,
which is equal to ¼ of the physical output.
** If the glass cleaner is processed further, total physical output is 1,250,000 ounces. PC and PP
combined account for 40% of the total physical output and are each allocated 20% of the TLC
cost.

Required:
1. Determine if management made the correct decision to not process the glass cleaner further by
doing the following.
a. Calculate the company’s total weekly gross profit assuming the glass cleaner is not
processed further
b. Calculate the company’s total weekly gross profit assuming the glass cleaner is processed
further.
c. Compare the resulting net incomes and comment on management’s decision.
2. Using incremental analysis, determine if the glass cleaner should be processed further.