STRATEGIC COST MANAGEMENT

PROBLEM SOLVING QUIZ- November 11, 2020

INSTRUCTIONS: Answer the given problem. Show your solutions.

PROBLEM 1 (15 POINTS)

A number of costs are listed below that may be relevant in a decision faced by the management of
Pauloleng Company. Pauloleng normally runs at capacity and the old model CY1000 machine is the
company’s constraint. Management is considering purchasing a new machine, Model CZ4000 and the
old one, CY1000 will be sold. The new machine is more efficient and can produce 20% more units than
the old one. Demand for Pauloleng’s product is greater than what they can supply. Maintenance costs
however the new machine is very costly and the company will need to borrow money in order to make
the purchase. The increase in volume will be large enough to require increases in fixed selling expense,
but general and administrative expenses will remain unchanged.

For each cost listed, determine whether the cost or relevant or irrelevant to the decision to replace the
CY1000.
1. Sales revenue
2. Direct materials
3. Direct labor
4. Variable Manufacturing overhead
5. Rent on the factory building
6. Janitorial salaries
7. President’s Salaries
8. Book value of CY1000
9. Cost of CY1000
10. Cost of CZ4000
11. Interest on money borrowed to make purchased
12. Shipping costs
13. Market value of old machine CY1000
14. Salaries paid to personnel in sales office
15. Depreciation of CY1000

PROBLEM 2 (4 POINTS)
Loleng Pogi builds custom homes in Cincinnati. Loleng Pogi was approached not too long ago by a client
about a potential project, and he submitted a bid of P483, 800, derived as follows:

Land P 80,000
Construction materials 100,000
Subcontractor labor costs 120,000
Construction overhead: 25% of direct costs 75,000
Allocated corporate overhead 35,000
Total cost P410, 000
Loleng Pogi adds an 18% profit margin to all jobs, computed on the basis of total cost. In this client's
case the profit margin amounted to P73, 800 (P410, 000 x 18%), producing a bid price of P483, 800.
Assume that 70% of construction overhead is fixed.

Required:
1.Suppose that business is presently very slow, and the client countered with an offer on this home
of P390, 000. Should Loleng Pogi accept the client's offer? Why?
2.If Loleng Pogi has more business than he can handle, how much should he be willing to accept
for the home? Why?

PROBLEM 3 (6 POINTS)
Pauloleng Company produces 2,000 parts per year, which are used in the assembly of one of its
products. The unit product cost of these parts is:
Variable manufacturing cost P64
Fixed manufacturing cost 36
Unit production cost 100

The part can be purchased from an outside suplier at P80 per unit. If the part is purchased from the
outside supplier, two-thirds of the fixed manufacturing costs can be eliminated and one-fourth of the
variable manufacturing costs will continue regardless of the decision. Also, the freed space can be
rented out for a fee amounting to P500 per month.

Required:
1. What is the total advantage/ disadvantage if Pauloleng will decide on buying the part from the
outside supplier?
2. What is the maximum purchase price the Pauloleng will be willing to accept before it can decide
to buy from the outside supplier?
3. What will be the total advantage/ disadvantage if Pauloleng accepted the offer of the outside
supplier of buying the parts for P72 but Pauloleng will be incurring delivery expense amounting
to P50 per delivery of 100 parts?

PROBLEM 4 (8 POINTS)
A Manufacturer who sells its product at P150 per unit has the following costs based on full capacity
operation of 10,000:
Direct materials P20
Direct labor 30
Overhead( 60% fixed) 50
Selling and administrative 20
A special order for 2,000 units was received. It was anticipated that the additional selling costs that shall
be incurred is P6 for shipping.
Required:
1. The manufacturer has more than the sufficient capacity to manufacture the special order. What
could be the minimum price to be considered by the manufacturer in the negotiation?
2. What is the total advantage/disadvantage if the manufacturer accepted the special order at a
discounted price of P85?
3. What is the manufacturer is currently able to sell 9,000 units, what should be the minimum price
to be considered by the manufacturer?
4. Assume the company has 500 units of this product left over from last year that are vastly
inferior to the current model. The units must be sold through regular channels at reduces prices.
What is the minimum selling price for these units?

PROBLEM 5 (6 POINTS)
Papa P's Pizza store no. 16 has fallen on hard times and is about to be closed. The following figures are
available for the period just ended:

Sales P205,000
Cost of sales 67,900
Building occupancy costs:
Rent 36,500
Utilities 15,000
Supplies used 5,600
Wages 77,700
Miscellaneous 2,400
Allocated corporate overhead 16,800

All employees except the store manager would be discharged. The manager, who earns P27,000
annually, would be transferred to store no. 19 in a neighbouring suburb. Also, no. 16's furnishings and
equipment are fully depreciated and would be removed and transported to Papa Fred's warehouse at a
cost of P2,800.

Required:
1. What is store no. 16's reported loss for the period just ended?
2. Should the store be closed? Why?
3. Compute for shutdown point.
PROBLEM 7 (6 POINTS)

Pauloleng has been producing burgers for a number of years now. A regular burger can already be sold
at P100.00 or it can be further processed into a cheese burger which sells for P150.00, a Big Mac which
sells for P180.00, and the famous Mushroom Melt which can be sold for P240.00. a regular burger can
be produced at a total per unit cost of P80.00.
Cheese Burger Big Mac Mushroom Melt
Additional Processing costs P40.00 P120.00 P90.00
Current Unit Sales 5,000 3,000 2,000

Required:
a. What products should be processed further?
b. By how much was the company losing for further processing unprofitable product line?
c. If the unprofitable product line will be dropped and all units sales of such will be transferred to
the most profitable product line, by how much would the company’s net income
increase/decrease?

PROBLEM 8
Data for the four products are given below:
North South East West
Selling Price P13 P20 P5 P25
Variable costs P5 P7 P2 P16
Allocated fixed costs P4 P8 P1 P3
Units produced per hour 4 2 10 3
Maximum Sales limit 5,000 5,000 10,000 No limit

Total Capacity is 6,000 hours. Marketing has provided a “best estimate” of maximum sales expected for
each product.

Required:
1. Compute the amount of contribution margin that will be obtained per hour of time spent on each
product.(2 POINTS)
2. Choose the best product combination (4 POINTS)