Management Advisory Services – Acctg 143

Relevant Costing
Assignment
Instruction: Write your answers (final answer and solution) in a clean white paper. Box your final answer for every
questions. Scan and save your paper as PDF.

1. MAKE OR BUY
The Honda motors executive is trying to decide whether the company should continue to produce an engine
component or buy it from Toyota at P100 each. Demand for the coming year is expected to be the same as for the
current year, 200 units. Data for current year follows:
Direct materials P 10,000
Direct labor 4,000
Variable factory overhead 2,000
Fixed factory overhead 5,000
TOTAL 21,000
If Honda makes the components, the unit costs of direct materials will increase by 20%.

If Honda buys the components, 30% of the fixed costs will be avoided. The other 70% will continue regardless of
whether the components are manufactured or purchased. Assume that variable overhead varies with output volume.
REQUIRED:
a. Assuming that the capacity now used to make the components will become idle if the components are
purchased, should Honda make or buy the components?
b. Assume that the capacity in question can be rented to another firm for P2,500 for the coming year, should
the company make or buy?

2. SPECIAL ORDER DECISIONS

Nokia Corporation produces sells Nokia N73 at a price of P27,000 per unit. N90’s cost per unit are:
Direct materials P 7,500
Direct labor 3,900
Variable manufacturing overhead 4,500
Fixed manufacturing overhead 6,600
TOTAL P 22,500
A special order for 1,000 units was received from Smart Co. Additional shipping costs for this sale are P 3,000 per
unit.
REQUIRED:
What is the minimum selling price per unit that should be set for Nokia’s order if:
a. Nokia is operating at full capacity?
b. Nokia has excess capacity?

3. ADD OR DROP PARTS OF OPERATIONS

George Products sells three products A, B and C, uses common facilities to produce and sell all three. Neither
product affects sales of the others. Pertinent data on the three products follow:
A B C Total
Sales volume per month 800 1,000 600
Unit sales price P 30 P 20 P 40
Sales revenue P 24,000 P 20,000 P 24,000 P 68,000
Unit variable cost P 22 P 14 P 35
Fixed cost per month P 4,800 P 4,000 P 4,800 P 13,600
Income ??? ??? ??? ???
Management has asked the accounting department to allocate fixed costs to each product so it can evaluate how well
each product is doing. Total fixed costs is 20% of total peso sales, so the accountant charged fixed cost to each
product at 20% of the product sales.
When a product line income statement was prepared the report showed an apparent loss for product C. the company
sales manager argued, “ We should drop Product C. We incur losses from this product.”
REQUIRED:
a. Do you agree with the sales manager that the product C be dropped? Why
b. If the product C is dropped, by how much would the company’s overall profit decrease?
c. If the selling price of Product B declined to 40%, should the product segment be dropped?
 Management Advisory Services – Acctg 143
Relevant Costing
Assignment

4. SELL OR PROCESS FURTHER

MILO Company produces four products for a joint cost of P20,000. The products are currently processed beyond the
split off point, and the final products are sold as follows:
Products Sales Additional Processing Cost
M P 36,000 P 22,000
I 26,400 12,000
L 10,400 8,000
O 2,400 3,00
The firm could sell the products at the split-off point for the following amounts:
M P 16,000
I 7,200
L 2,000
O 0
REQUIRED:
a. Determine which products the firm should sell at split-off point.
b. Determine what firm’s profit would be if it takes the most profitable action.

5. CONTINUE OR SHUTDOWN OPERATION

The North Company expects that the volume of sales will drop below the current level of 5,000 units per month. an
operating statement for the monthly sales of 5,000 units show the following:
Sales (5,000 @ P 3) P 5,000
Less:
Variable costs (5,000 @P 2 P 10,000
Non-variable costs 5,000 15,000
Net income 0
If plant operations are suspended, a shutdown cost of P2,000 per month will remain as incurred. Since there is no
immediately possibility of profit under present conditions, the problem of the company is just how to minimize the
loss.
REQUIRED:
a. Shutdown point in units and in pesos
b. Should the company shutdown operations if the company expect demand to be
1) 4,000 units
2) 2,000 units

6. PRODUCT COMBINATION DECISION

Data concerning four product lines are as follows:
A B C D
Selling price P 60 P 50 P 26 P 16
Variable cost per unit 50 20 10 8
Hours required for 1 unit 10 20 8 2
Market limit (units) 12,000 None 5,000 4,000
Total fixed costs P 100,000
Total hours available 180,000
The full amount of fixed costs shall be incurred regardless of the specific types of product produced.
REQUIRED:
a. Assume that there is no market limitation:
1. Which product(s) would have to be produced and sold
2. how many units can be produced?
3. how many units is the company’s’ profit?
b. Assume that there are market limitations, determine the best product combination.
c. How much is the profit associated with the best product combination?