50 questions theories

 A principal difference between variable costing and absorption costing centers on:
Answer: whether variable manufacturing cost should be included in product costs
 The cost assigned to units in inventory are typically lower under variable coting than
under absorption costing:
Answer: true
 Difference in income under absorption and variable costing can often be reconciled by
multiplying the change in inventory (in units) by the variable manufacturing overhead
cost per unit:
Answer: false
 Which of the following conditions would cause absorption costing income to be higher
than variable costing income:
Answer: units sold were less than units produced
 When sales are constant but the production level fluctuates net income determined
using absorption costing method will:
Answer: tend to fluctuates in the same direction as fluctuations in the level of
production.
 Garcia’s inventory increased during the year. On the basis of this information, income
reported under absorption costing:
Answer: will be higher than reported under variable costing
 Under variable costing, fixed manufacturing overhead is:
Answer: expensed immediately when incurred
 Net income computed using variable costing would exceed net income computed using
absorption costing if:
Answer: units sold exceed units produced
 Under variable costing, fixed manufacturing overhead is:
Answer: expensed immediately when incurred
 For external reporting purposes, generally accepted accounting principles requird net
income be based on variable costing:
Answer: false
 The underlying differences between absorption costing and variable costing lies in the
treatment of:
Answer: fixed manufacturing overhead
 Which of the following statements pertain to both variable costing and absorption
costing?
Answer: variable selling cost are expensed outright during the accounting period.
 Fixed administrative expense would be treated differently under absorption or variable
costing:
Answer: True
 Absorption costing is used for external financial reporting:
Answer: true
 Which of the following statements is true for a firm that uses variable costing?
Answer: profits fluctuates with sales
 Which of the following situations would cause variable costing income to be lower that
absorption costing income?
Answer: units sold equaled 39,000 and units produced equaled 42,000
 All of the following are expensed under variable costing except:
Answer: variable manufacturing overhead
 Under absorption costing, it is possible to defer a portion of the fixed manufacturing
overhead costs of the current period to future periods through the inventory account:
Answer: true
 When units sold exceed units produced, absorption costing income will be lower than
variable costing income:
Answer: true
 When sales are constant, but the production level fluctuates net income determined by
the variable costing method will:
Answer: fluctuate in direct proportion to changes in production
 Cost of goods sold in an absorption costing income statement includes fixed costs:
Answer: false
 A variable costing income statement discloses a firms contribution margin:
Answer: true
 Under absorption costing, fixed manufacturing overhead costs:
Answer: are always treated as period costs
 Under variable costing fixed manufacturing overhead cost in __ treated as a product
cost:
Answer: false
 The amount of variable selling and administrative cost is the same on absorption costing
or variable costing income statements:
Answer: true
 Under variable costing:
Answer: inventory costs will always be lower than under absorption costing
 Variable manufacturing overhead is part of a unit’s cost when variable costing is used:
Answer: true
 When the number of units in work in process and finished goods inventories decrease,
absorption costing net operating income will typically be greater than variable costing
net operating income:
Answer: false
 Absorption costing is required for taxation purposes:
Answer: true
 A variable costing income statement discloses a firm’s gross margin:
Answer: true
 All of the following are inventoried under variable costing except:
Answer: fixed manufacturing overhead
 Under absorption costing, fixed factory overhead costs:
Answer: are deferred in inventory when production exceeds sales
 Yearly income reported under absorption costing will differ from income reported under
variable costing if production and sales volumes differ:
Answer: true
 Net operating income is affected by the number of units produced when absorption is
used:
Answer: true
 Under variable costing, product costs consist of direct material, direct labor and variable
manufacturing overhead:
Answer: true
 The costing method that treats all fixed cost as period costs is:
Answer: direct costing
 Under variable costing, product cost does not contain any fixed production cost:
Answer: true
 Which of the following conditions would cause absorption costing income to be lower
than variable costing income?
Answer: units sold exceeded units produced
 All of the following are inventoried under absorption costing except:
Answer: fixed manufacturing overhead
 BTS company computes net income under both the absorption costing approach and
the variable costing approach. For a given year, the absorption costing net income was
greater than variable costing net income. This fact suggest that:
Answer: more units were produced during the year than were sold
 Under variable costing, which of the following is not expensed in its entirely in the
period in which it is incurred?
Answer: variable manufacturing overhead
 In the long run, total income reported under absorption costing will often be close to
that reported under variable costing:
Answer: true
 Variable costing is consistent with contribution margin reporting and cost- volume-
profit analysis:
Answer: true
 The principal difference between variable costing and absorption costing:
Answer: whether fixed manufacturing costs should be included as product costs
  Fixed manufacturing overhead is not inventoried under absorption costing:
Answer: false
 Which of the following statements pertain to variable costing?
Answer: variable selling and administrative cost becomes part of unit’s cost
P1A- if there were no variances, what is the company’s absorption costing income?
Answer: P208,000
P1B- if there were no variances, what is the company’s variable costing income?
Answer: P190,000
P2A- what is the company’s cost of ending inventory using absorption costing?
Answer: P75,000 FORMULA= (40,000)UNITS PRODUCED – (37,000)UNITS SOLD= (3000) END
INV, HENCE (25X3000)= 75,000 END INV.
P2B- what is the company’s cost of ending inventory using variable costing?
Answer: P 78,000 FORMULA END INV. X VC PER UNIT (3,000X26)
P3A- what is the profit under absorption costing?
Answer: P18,000
P3B- profit variable
Answer: P9,000
P4- variable income
Answer: P55,000 FORMULA GAAP INCOME OF SALES – COGS= GROSS PROFIT – OPERATING
EXPENSES = NET OPERATING INCOME
P5- if there were no variances, income under absorption costing would be:
Answer: P115,000 formula SALES=OPERATING INCOME + FC +VC
P6 Requirements:
1. assuming the use of VC compute the cost of websters ending inventory finished goods
inventory.
Answer: a variable production cost total ( 1,080,00 (240,000+480,000+360,000) or 18
per unit (1,080,000/60,000 units. Since 3,000 units remain in inventory (0+60,000 –
(60,000x95%) the ending finished goods totals 54,000 (3,000x18)

DM = 4 (240,000/60,000) DM = 4 (240,000/60,000)000) VMOH = 6 (360,000/60,000)

VS&A = 3 = P21( VC product cost)
P21 * (60,000*.05) P21 * 3,000 (ending inventory) =P63,000
 2. compute the company’s contribution margin would webster disclose the contribution
margin on a variable costing income statement or AC statement.
Answer: sales revenue (60,000 units x 95% x 50) = 2,850,000
Less: variable cost of goods sold
(60,000 units x 95% x 18) 1,026,000
Variable S &A 180,000 1,206,000
CM 1,644,000
3. assuming the use of AC how much fixed selling and administrative cost would Webster
include in the ending finished goods inventory?
Answer: none all F S&A cost is treated as period cost and expensed against revenue.
4. Compute the companys gross margin
Answer: the cost of a unit would increase by 10 ( 600,000/60,000 units) because of
the addition of fixed manufacturing overhead thus:
Sales revenue 2,850,000
COGS (60,000 units x 95% x28) 1,596,000
GM 1,254,000
P7 requirement
1. How many units did kim plan to produce during the year.
Answer: sales(35,000 units + ending finished goods inventory (12,000 units) =
production (47,000 units) note: there is no beginning finished goods inventory.
2. How much fixed manufacturing overhead did the company apply to each unit produced?
Answer: since planned and actual production figures are the same, kim applied P3
to each unit (P141,000/47,000 units)

3. Compute kim’s COGS

Answer: sales revenue P770,000
GM 210,000
COGS P560,000
4. How much variable cost did the company attach to each unit manufactured?
Answer: kim attached P13 to each unit. This figure can be derived by analyzing cost
of goods sold
COGS P560,000
Fixed cost in COGS (35,000 units x P3) 105,000
VC of goods sold P455,000
P455,000/35 units = P13
The same p13figure can be obtained by studying the ending finished-good inventory:
Ending finished goods inventory P192,000
Fixed cost (120,000 units x P3) 36,000
Variable cost P156,000
P156,000/12,000 units = P13
P8 requirements:
Answer: In given question net operating income was greater than its variable
costing net by $5,500 ($80000 - $74500), it must have deferred $5,500 of fixed
manufacturing overhead costs in inventory under absorption costing.
Closing inventory unit = $5,500/$5 per unit = 1,100 units
Sale last year = Opening inventory + produced unit - closing Inventory
= 0 + 21,500 - 1,100 = 20,400
P9 requirements
Answer: Absorption costing net income = Variable costing net income − fixed
manufacturing overhead costs released from inventory= $96,300 − [2,600 × $1] = $96,300 −
$2,600 = $93,700

P10 requirements

P11 requirements
AC
Sales (5,900x 95) 560,500
Les COGS
Big inv 0
+ COGM (6,200 x 81) 502,200
TGAS 502,200
--END INV (300X81) 24,300 477,900
GM 82,100
LESS O.E
VS&A( 5,900 X 5) 29,500
FS&A 35,400 64,900
PROFIT 17,200
VC
SALES (5900 X 95) 560,000
COGM (5900X 76) 448,400
CM 111,600
LESS FC
FOH 62,000
FSA 35,400 97,400
PROFIT 14,200
P20 Requirements
AC
SALES (10X98,000) 980,000
COGS
BI 0
COGM( 100,000X 7) 700,000
TGAS 700,000
END INV (2000X7) 14,000 686,000
GM 294,000
O.E
VSA(2X98000) 196,000
FSA 50,000 246,000
PROFIT 48,000
VC
SALES (10X98000) 980,000
COGM ( 7X98000) 686,000
CM 294,000
LESS
FOH 200,000
FSA 50,000 250,000
PROFIT 44,000
P18 requirement
AC
SALES (100X19,000) 1,900,000
GOGS
BI 0
COGM (20,000X65) 1,300,000
TGAS 1,300,000
END IINV (1000X65) 65,000 1,235,000
GM 665,000
O.E
VSA (2X19000) 38,000
FSA 600,000 638,000
PROFIT 27,000
VC
SALES (100X19000) 1,900,000
COGM (42X19,000) 798,000
CM 1,102,000
LESS: FC
FOH 500,000
FSA 600,000 1,100,000
PROFIT 2,000

P16 REQUIREMENTS
What would be the change in the pesoamount of ending inventory if variable costing was used
instead of absorption costing?
b. P200 decrease FORMULA 100x8=800 ; 100x6=600; 600-800=-200

P13 requirements
P22 REQUIREMENTS
 P21 REQUIREMENTS
Hopkins Company manufactures a single product. The following data
pertain to the company's operations last year:

Hopkins Company manufactures a single product. The following data pertain to the
company's operations last year:

Selling price per unit................................. $24

Variable costs per unit:
Production.............................................. $8
Selling and administration..................... $2
Fixed costs in total:
Production.............................................. $48,000
Selling and administration..................... $36,000

At the beginning of the year there were no units in inventory. A total of 12,000 units
were produced during the year, and 10,000 units were sold.

      62. Under variable costing, the unit product cost is:

            A)      $8.00
            B)      $10.00
            C)      $12.00
            D)      $14.00
           
            Ans:  A    

            Solution:

            Production cost = $8

      63. Under absorption costing, the unit product cost is:

            A)      $8.00
            B)      $10.00
            C)      $12.00
            D)      $15.00
           
            Ans:  C    

            Solution:

            Unit fixed manufacturing overhead = $48,000 ÷ 12,000 = $4

            Unit product cost = $8 + $4 = $12

      64. The net operating income under variable costing would be:

            A)      $64,000
            B)      $60,000
            C)      $56,000
            D)      $52,000
           
            Ans:  C     LO:  2    

            Solution:
           
Sales revenue ($24 × 10,000)................................ $240,000
Variable costs:
Variable cost of goods sold ($8 × 10,000)......... $80,000
Variable selling and administrative ($2 ×
10,000)............................................................  20,000  100,000
Contribution margin.............................................. 140,000
Fixed costs:
Fixed manufacturing overhead.......................... $48,000
Fixed selling and administrative........................  36,000    84,000
Net operating income............................................ $ 56,000

      65. The net operating income under absorption costing would be:

            A)      the same as the income under variable costing.
            B)      $8,000 greater than the income under variable costing.
            C)      $12,000 greater than the income under variable costing.
            D)      $8,000 less than the income under variable costing.
           
            Ans:  B     LO:  2    

            Solution:
           
Unit fixed manufacturing overhead × Change in number of units in ending inventory =
$4 × (12,000 − 10,000) = $4 × 2,000
= $8,000 greater than the income under variable costing since inventory increased

P14 REQUIREMENTS
 A- 18,000 UNITS
B- P 236,000
C- 11,500 UNITS

STRATEGIC COST MANAGEMENT   JPFranco

 MIDTERM EXAMINATION in AE23
STRATEGIC COST MANAGEMENT
First Semester, AY 2021-2022

Problem 1
In 2021, the company’s sales was P500,000. Its fixed costs amount to P100,000 per year. In
2022, sales was 20% higher, while profit was P30,000 higher than the 2021 figures. For 2023,
the company expects to have sales that is twice as much as the 2021 sales. The expected increase
in production to meet the sales demand in 2023 will not require the company to exceed its
normal capacity.

Problem 2
A company is making plans for next year, using cost-volume-profit analysis as its planning tool.
Next year’s sales data about its product are as follows:
Selling price P60.00
Variable manufacturing costs per unit P22.50
Variable selling and administrative costs P  4.50
Fixed operating costs (60% is manufacturing cost) P148,500
Income tax rate 30%

Problem 3
A company is making plans for next year, using cost-volume-profit analysis as its planning tool.
Next year’s sales data about its product are as follows:
Selling price P60.00
Variable manufacturing costs per unit P22.50
Variable selling and administrative costs P  4.50
Fixed operating costs (60% is manufacturing cost) P148,500
Income tax rate 30%
Assume that the company’s management learned that a new technology that will increase the
quality of its product is available. If implemented, its projections for next year will be changed:
1. The selling price of the product will increase to P75 per unit.
2. Fixed manufacturing costs will increase by 20%.
3. Additional advertising costs will be incurred to promote the higher-quality product. This
will increase fixed non-manufacturing cost by 10%.
4. The improved product will require a new material that will increase direct materials cost
by P4.50.

Problem 4
Meliodas only has one product with a contribution margin per unit of P55. Non-variable costs
associated with the production and sales of this product amounts to P742,500. To improve the
quality of this product, the company’s management will:
a. Replace a component part that costs P5 higher than the one presently being used; and
 b. Acquire an equipment that costs P200,000. If acquired, it will be depreciated over a 10-
year period with no estimated salvage value. The straight-line method of depreciation
will be used.
Meliodas pays corporate income tax of 30% on net taxable income.

Problem 5
Gongjin Corporation developed the following annual flexible budget formulas for both its
manufacturing and non-manufacturing costs:

Manufacturing cost = P200,000 + 3X; where X = production in units

Non-manufacturing cost = P160,000 + 2Y; Y = sales in units

The flexible budget formula was based on the normal capacity level of 200,000 units per year. At
the end of the first six months, the company was able to produce 120,000 units of the product,
one-half (1/2) of which was sold during the same period for P8 per unit.

All fixed costs are budgeted and incurred uniformly throughout the year and all fixed costs
incurred coincide with the budget. Over- and under- applied fixed manufacturing costs are
deferred until year-end.

Problem 6
Chief Hong’s records for the year 2021 show the following data:
Net sales (6,000 units) P21,000
Cost of goods manufactured (7,000 units):
Variable P  9,450
Fixed     4,725
Operating expenses:
Variable P  1,470
Fixed     2,100
There was no finished goods inventory at the beginning of the period. Neither was there any
work-in process inventory at the beginning and end of the year.

Problem 7
A company produces a single product. Production is done only when orders are received from
customers. Thus, no inventory is kept at the end of the period. For the last period, the following
data were available:
Sales P32,000
Materials     7,240
Labor     4,840
Rent (90% factory, 10% office)     2,400
Depreciation (80% factory, 20% office)     2,000
 Supervision (2/3 factory, 1/3 office)     1,200
Salesmen’s salaries and commission     1,040
Insurance (60% factory, 40% office)       960
Office supplies       600
Advertising       560

Problem 8
Bisikleta Corporation has just increased its manufacturing capacity to enable it to introduce new
models of bicycles which it could not produce in the past due to capacity constraints.

For the coming period, Bisikleta Corporation is planning to start production of a new model,
which could either be the Pambundok Bikel or the Pangkarera Bike.

A recently concluded feasibility study o the two models showed the following results:
Pambundok Bike Pangkarera Bike
Selling price P4,400 P4,000
Variable costs P2,640 P2,640
Total fixed costs:
    If only Pambundok is P3,696,000
produced
    If only Pangkarera is produced P3,168,000
Projected sales per year Between 4,500 to 6,500 of either model

Problem 9
A company sells two products: A and B. The sales mix consists of a composite unit of 5 units of
A for every 3 units of B. Fixed costs amounts to P202,500. Th unit contribution margins are
P4.80 for A and P10 for B.

Problem 10
Dusik produces and sells a single product. In 2021, its first year of operation, planned and actual
production was 80,000 units. It sold 75,000 of these units for P30 per unit. 

Planned and actual costs in 2021 were as follows:

Manufacturing Non-manufacturing
Variable P480,000 P400,000
Fixed   320,000   240,000

Problem 11
The following information pertains to Cam Company’s two products (which is sold as a
package):
Digicam Videocam
Break-even point in 360 240
units
Selling price P4,500 P14,250
Variable costs P2,250 P  5,000

Problem 12
Your classmates elected you as the chairman of the Junior Philippine Institute of Accountants
(JPIA). One of the major activities under your direction is the After-Board Dinner and Dance for
your class. Renting the hall at the nearby four-star hotel will cost P3,000. The hall will seat up to
300 people. Decorations for the head table, which will seat 16 people, will cost P300.
Decorations for each table will cost P50, and each table will seat up to 8 people. For 350, you
can hire the choir director from one of the local high schools to play the piano and sing softly
during the dinner. The dance band (a prominent college student group) will cost P1,000.
Typesetting and printing at least 300 copies of the program costs, P410. The caterer offered a
full-course meal for P200 per person, but you must guarantee one week in advance. To help
serve the meals, you have arranged for the voluntary services of the other officers of JPIA. These
people will be given a meal for their trouble. You expect 25 people to help serve. 

At the time the guarantee was required, you had 205 confirmed people attending the dinner,
including non-reviewee special guests who will be seated on the head table, but not including
servers. You guarantee 224 people plus the servers. The servers will eat in an adjoining room,
which is furnished free of charge.

Problem 13
The owners of Pahirap Mini-Mart have been looking for ways to improve sales at the store. One
of the proposals is to have a weekly raffle with a total prize of P10,000 per week. For every P50
worth of goods purchased, the customer shall receive a numbered ticket for the raffle. The
variable cost to print and distribute the tickets has been estimated at five pesos. Promotions and
other fixed costs in connection with the raffle, likewise, have been estimated at P15,000 per
week. The current weekly operating results of Pahirap Mini-Mart are given below: 
Sales P1,000,000
Variable costs     700,000
Fixed cost for the week     120,000

Problem 14
Leni Corporation uses an absorption costing system for internal reporting purposes. At present,
however, it is considering to use variable costing system.

Following are some data gathered from Leni Corporation’s budgeted and actual operations for
the calendar year 2021:
Costs Budgeted Actual
Materials P  25,200 P23,400
Labor     18,480   17,160
Variable factory overhead       8,400     7,800
Fixed factory overhead     10,640   10,000
Variable selling expenses     16,800   15,000
Fixed selling expenses     14,700   14,700
Variable administrative expenses       4,200     3,750
Fixed administrative expenses       6,300     6,375
P104,720 P98,185

Units Budgeted Actual

Beginning finished goods   280   280
Production 1,120 1,040
Sales 1,120 1,000
The budgeted costs were computed based on the budgeted production and sales of 1,120 units,
the company’s normal capacity level. Leni Corporation uses a predetermined factory overhead
rate for applying manufacturing overhead costs to its product. The denominator level used in
developing the predetermined rate is the firm’s normal capacity. Any over- or under- applied
overhead cost is closed to cost of goods sold at the end of the year.

There is no work in process inventories at either the beginning or end of the year. The actual
selling price was the same as the amount planned, P130 per unit.

The previous year’s planned per unit manufacturing costs were the same as the current planned
unit manufacturing cost. The beginning inventory of finished goods for absorption costing
purposes was valued at such per unit manufacturing cost.

Problem 15
Bongbong produces a single product. Variable manufacturing costs is P20 per unit and fixed
manufacturing costs is P150,000. Bongbong uses a normal activity of 5,000 units to set its
standards. Bongbong began the year with no inventory, produced 5,500 units and sold 5,250
units. 

Problem 16
Ping has planned and actually produced 100,000 units of its only product in 2021, its first year of
operations. Variable production costs were P60 per unit of product. Planned and actual fixed
production costs were P800,000 and marketing and administrative costs totaled P500,000 in
2021. Ping sold 80,000 units of the production in 2021 at a selling price of P80 per unit.
Problem 17
Pacman produces and sells boxed chocolate cookies. There are 100 pieces of cookies per box.
The following income statement shows the results of Pacman’s first year of operations. This
income statement was the one included in the company’s annual report to the stockholders:
Sales (600 boxes at P25 per box) P15,000
Less: Cost of goods sold (600 boxes at P16 per box)     9,600
Gross margin P  5,400
Less: Selling and administrative expenses     2,400
Income P  3,000
Variable and selling administrative expenses is P1.80 per box. 
During the year, Pacman produced 750 boxes. Variable production costs is P10.50 per box and
fixed manufacturing overhead costs totaled P4,125.

Problem 18
Isko produces a product which it sells for P150 per unit. The product’s costs are as follows: 
Variable manufacturing costs P60 per unit
Fixed manufacturing overhead P240,000 per quarter
Fixed selling and administrative P870,000 per quarter
Isko’s normal capacity is 24,000 units per quarter. During the first quarter, 23,000 units were
produced and 21,000 units were sold. There was no beginning inventory for the quarter

==

Problem 19
The following information pertains to the product produced by Stone Division:
Selling price P150 per unit
Manufacturing costs:
Prime costs P  75 per unit
Variable factory overhead     15 per unit
Fixed factory overhead (Total is P80,000)       8 per unit
Selling and administrative costs:
Variable P  18 per unit
Fixed (Total is P60,000)       6 per unit
During the period, Stone Division produced 10,000 units and sold 9,000 units, both as budgeted.
There was no beginning and ending work in process inventories, and there was no beginning
finished goods inventory during the period.

There was no difference between the total budgeted and actual fixed costs. Variable
manufacturing costs vary with production while variable selling costs vary with sales. Central
administration costs are allocated to the different divisions of the company. For this period,
central administration cost allocated to Stone Division amounted to P150,000.

Problem 20
Gibo Division is classified as an investment center. For the month of November, it had the
following operating statistics:
Sales P675,000
Cost of goods sold   400,000
Operating expenses   237,500
Total assets   750,000
Weighted-average cost of capital         4%
Gibo Division’s average shareholders’ equity is P300,000. It is subject to an income tax rate of
40%.

Problem 21
The Diokno Division is treated as an investment center for performance measurement purposes.
Selected financial information for such division last year is given below:
Net sales P200,000
Cost of goods sold   176,250
General and administrative expenses       3,750
Average working capital     31,250
Average plant and equipment     68,750
Desired rate of return           15%

Problem 22
Heart is the manager of the Beauty Care Products, Ltd. As a manager of an investment center,
Heart’s performance is measured using the residual income method.

For the coming year, Heart wants to achieve a residual income target of P100,000 using an
imputed interest charge of 20%. Other forecasted figures for the coming year are presented
below:
Working capital P     90,000
Plant and equipment     860,000
Cost and expenses   1,210,000

Problem 23
The following information pertains to Rastaman Corporation:
Earnings before interest and taxes P   800,000
Current assets     800,000
Non-current assets   3,200,000
Current liabilities     400,000
Non-current liabilities   1,000,000
Rastaman Corporation pays an income tax rate of 30%. Its weighted average cost of capital is
10%. 

Problem 24
The following year-end data pertain to Gloria Corporation:
Total assets P4,000,000
 Current liabilities     400,000
Non-current liabilities (8% interest rate)   1,000,000
Stockholders’ equity   3,000,000
The information above are book values which also reflect their fair values. During the year, the
company earned income before interest and taxes of P800,000. It pays income tax rate of 25%
and its cost of equity capital is 12%.

Problem 25
The Northern Division sells goods internally to the Southern Division of the same company. The
prevailing external price of Northern Division’s product is P500 per unit plus transportation. It
costs P100 per unit to transport the goods to Southern Division.

Northern Division incurs the following costs per unit in producing the goods:
Materials P250
Direct labor     75
Storage and handling     60
Total P385

Problem 26
Division One is currently operating at full capacity of 5,000 units. It sells all its production in a
perfectly competitive market for P250 per unit. Its variable cost is P170 per unit, while its total
fixed cost amounts to P300,000. Division Two wants to buy from Division One. 

Problem 27
Division A is currently operating at 70% of capacity. It produces a single product and sells all its
production to outside customers for P70 per unit. Variable cost is P30 per unit and fixed costs is
P20 per unit at the current production level. 

Division B, which currently buys the same product from an outside supplier for 65 per unit,
would like to buy the product from Division A. 

Division A will use one-half of its idle capacity if it decides to provide the requirements of
Division B.

Problem 28
Ong Company operates two stores in Luzon – one in San Isidro and another in San Antonio. The
operating results for October 2021, which are representatives of all months, are condensed as
follows:
San Isidro San Antonio
Store Store Total
Sales P400,000 P600,000 P1,000,000
Variable costs 160,000 420,000 580,000
Contribution margin P240,000 P180,000 P   420,000
 Direct fixed costs 100,000 200,000 300,000
Store margin P140,000 P(20,000) P   120,000
Allocated fixed costs* 20,000 30,000 50,000
Operating income P120,000 P(50,000) P     70,000

Additional information:
1. Thirty percent (30%) of each store’s direct fixed costs cannot be eliminated even if either
store is closed.
2. If the San Antonio store is closed, the San Isidro Store’s sales would decreased by 20%.
However, closing the San Isidro Store would not affect the San Antonio’s sales.