Chapter 9

Short-term non-routine decisions

431
Other variable cost per unit
4.50
3.0
0
Lease cost per year
75,000
30,000
Maintenance cost per year
15,000
6,000
The cost indifference point is
A.
At 3,300 units.
C. At 6,000 units.
B.
At 3,000 units.
D. At 6,300 units.
(rpcpa)
98.
C
?
The indifference point between i
nstalling a complete automation and semi
-
automation system.

Indifference point is where the net results between or among the alternatives is the
same. Applied in business, it is the point where the net profit or where the total
costs between or among al
ternatives is the same. The given data of the problem
could be re
-
tabulated as follows:
Complete
Sem
-
i
Automation Automated
Unit variable cost
(12 + P3 + P4.50)
P 19.50
(P10.50 + P15 + P3)
P 28.50
Total fixe
d costs
(P75,000 + P15,000)
P 90,000
(P30,000 + P 6,000)
P36,000
Assuming both alternatives have the same unit sales price, then there
indifference point is where their total costs are equal. Total costs could be
expressed as:
Total c
osts = Fixed costs + Variable Costs
or:
TC = FXC + VC
if:
x = units sold
then:
TC1 = P90,000 + P19.50x (for complete automation)
TC2 = P36,000 + P28.50x (for semi
-
automation)
At indifference point:
TCI = TC2
P90,0
00 + P19.50x = P36,000 + P28.50x
P90,000
–
P36,000 = P28,50x
-
P19.50x
P54,000 = P9.0x
x = P54,000/9
x =
6,000 units
At 6,000 units sold, the total costs between alternatives is the s
ame at
P207,000 [i.e., 90,000 + 19.50 (6,000)] and therefore is at indifference point.
99.
Eat N Eat Shop operates sandwiches on the go in shopping malls. The average
selling price of a sandwich is P100. And the average cost of each sandwich is P60.
A new
mall is opening where Eat N Eat wants to locate a shop but the location
manager is not sure about the rent method to accept. The mall operator offers two
options for shop rentals as follows:
Chapter 9
Short
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432
1.
paying a base rent of P40,000 plus 8% of revenue received, or
2.
p
aying a base rent of P20,000 plus 20% of revenue received up to a maximum
of P80,000
Eat N Eat will be indifferent between options 1 and 2 when its level of sales is (in
thousands)
A.
P1,000
C. P 900
B.
P 750
D.
P3,333
(rpcpa)
99.
B
?
T
he indifference level in sales between options 1 and 2.

Indifference level is where the result in profit between or among alternatives would
be the same. Using the equation method, we may say:
Let x = Amount of sales
If:
Option 1 =
P40,000 + .08x
Option 2 = P20,000 + P80,000
Then:
P40,000 + .08x = P100,000
x = P60,000/.08
x =
P750,000
To prove: Option 1 = P40,000 + .08(P750,000) = P100,000
Option 2 = P20,000 + P80,00
= P100,000
Miscellaneous topics
100.These data pertain to Belle Corp.’s Product X
Direct labor
P32.25
Direct materials
2.50
Fixed manufacturing overhead
5.50
Variable manufacturing overhead
6.00
Variable selling expenses
5.75
Fixed selling expenses
0.80
Variable distribution expense
4.25
Fixed distribution expense
12.10
Total unit cost
P99.15
Unit selling price
P134.00
Since the plant has excess capacity, production had developed Product
Y with the
same cost structure as Product X. Marketing believes this new product can be sold
for P80.00 per unit. It will be logical for Belle Corp. to do this in the short run:
A.
Do not market Product Y. because the company will lose.
B.
Market Product Y if t
he price can be increased to at least P99.15.
C.
Produce Product Y and market at P80.00 if the fixed selling and distribution
expenses can be eliminated.
D.
Produce Product Y and market at P80.00 if the fixed selling and distribution
expenses cannot be
eliminated.
(rpcpa)
100.C
?
To determine whether
a company should market and produce a new product or not.
Chapter 9
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433

Under the short
-
term profit analysis, the company should market or produce a new
product if its selling price is greater than its unit in
cremental costs and unit lost
contribution margin. The analysis is given below:
Unit sales price
P 80.00
Unit direct materials
(22.50)
Unit direct labor
(32.25)
Unit variable overhead
( 6.00)
Unit variable selling expenses
( 5.75)
Unit varia
ble distribution expenses
( 4.25)
Unit profit margin
P 9.25
There is excess capacity to produce the additional units. Expenses are not
expected to change. There are no opportunity costs given (e.g., lost profit from
regular sales, possible rental i
ncome, savings additional production, ROI of
increase in investment) and to be considered in the analysis.
Hence, choice
-
letter “c” is correct because at P80 per unit, the company earns
at 9.25 per unit.
102.Bolsa Company estimates that 60,000 special zip
pers will be used in the
manufacture of industrial bags during the next year. Sure Zipper Company has
quoted a price of P6 per zipper. Bolsa would prefer to purchase 5,000 units per
month but Sure is unable to guarantee this delivery schedule. In order to
ensure
the availability of these zippers, Bosla is considering the purchase of all 60,000
units at the beginning of the year. Assuming that Bolsa can invest cash at 12% the
company’s opportunity cost of purchasing the 60,000 units at the beginning of the
y
ear is
A.
P21,600
C. P19,800
B.
P43,200
D. P 9,900
102.D
?
The opportunity cost of purchasing the 60,000 units at the beginning of the year.

The company has two options of buying the materials (e.g., special zippers): buy
all the 60,000
units at the start of the year or buy the zippers in a monthly lot of
5,000 units for 12 months. The materials cost per zipper is P6.00. Buying all the
zippers at the beginning of the year means that more cash will be used in inventory
operations than if t
he zippers were bought on a monthly basis and such released
cash may be invested to earn 12% return. The opportunity cost of buying the
60,000 units at the beginning of the year is P19,800 as determined below:
Average inventory at 60,000 units (60,000/
20)
30,000 zippers
Less: Average inventory at 5,000 units (5,000/2)
2,500
zippers
Excess inventory
27,500
zippers
Average excess inventory (27,000 x ½ x P6)
P82,500
x Return on Investment Rate
12%
Opportunity costs if the zippers are
bought all at the start of the year
P 9,900
103. American Coat Company estimates that 60,000 special zippers will be used in the
manufacture of men’s jackets during the nex
t year. Reese Zipper Company has
Chapter 9
Short
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434
quoted a price of P.60 per zipper. American would prefer to purchase 5,000 units
per month, but Reese is unable to guarantee this delivery schedule. To ensure
availability of these zippers, American is considering the purch
ase of all 60,000
units at the beginning of the year. Assuming American can invest cash at 8%, the
company’s opportunity cost of purchasing the 60,000 units at the beginning of the
year is.
A.
P1,320
C. P2,640
B.
P1,440
D. P2,880
(cma)
103.
A
?
The opportunity cost of purchasing the 60,000 units at the beginning of the year.

The company has options to buy the 60,000 zippers at the beginning of the year or
buy the zippers at 5,000 units per month. If the company decides to purchase
60,000 zippers at the beginning of the year, some of its money would be tied up in
inventory and would loose its chance of earning 8% a year. The relevant
quantitative analysis is presented as follows:
Inventory at the beginning of the year if 60,000
zippers are purchased (60,000 units x P0.60)
P36,000
-
Inventory at the beginning of the year if
zippers are purchased monthly (5,000 units x P0.60)
3,000
Excess inventory at the beginning of the year
33,000
x Average factor
½
Average excess inventory in a year
16,500
x Rate of possible earning
8%
Income lost if zippers are purchased all at the beginning
of the year (opportu
nity cost)
P 1,320
104.Vince Inc. has developed and patented a new laser disc reading device that will be
marketed internationally. Which of the following factors should Vince consider in
pricing the device?
I.
Quality of new device.
II.
Life of the new
device.
III.
Customer’s relative preference for quality compared with price.
A.
I and II only.
C. II and III only
.
B.
I and III only.
D. I, II, and III.
(aicpa)
104.D
?
Factors that are considered in pricing a device.

Choice
-
letter “d” is correct t
hat in pricing a device it includes the quality, life and
customer’s relative preference for quality compared with price. Aside for those,
pricing is also affected by competition, preference over substitute product, costs,
place of product and customer, ma
croeconomic factors, technology, supply and
demand level, market control, branding, and goodwill.
105. Briar Co., signed a government construction contract providing for a formula price
of actual cost plus 10%. In addition, Briar was to receive one
-
half o
f any savings
resulting from the formula price’s being less than the target price of P2.2 million.
Chapter 9
Short
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435
Briar’s actual cost incurred were P1,920,000. How much should Briar receive from
the contract?
A.
P2,060,000
C. P2,156,000
B.
P2,112,000
D. P2,200,000
(aicpa)
105. C
?
The contractor’s amount receive from the contract.

The contractor is to receive formula price plus one
-
half of savings computed as
target price less the formula price. The amount received from the contract is:
Formula price (P1,920
,000 x 110%)
P2,112,000
½ of savings [(P2,200,000
–
P2,112,000) x ½]
44,000
Actual amount received
P2,156,000
Questions 106 through 108 are based on the following information. Ignore taxes
when answering these questions. ABC company pro
duces and sell a single
product called Kleen. Annual production capacity is 100,000 units. It takes 1
machine hour to produce a unit of Kleen, Annual demand for Kleen is expected to
remain at 80,000 units, The selling price is excepted to remain at P10 p
er unit.
Cost data for producing and selling Kleen are as follows:
Variable cost (per unit)
Direct materials
P1.50
Direct labor
2.50
Variable overhead
0.80
Variable selling
2.00
Fixed costs (per year)
Fixed overhead
P100,000,00
Fixed selling and administrative
50,000,00
106.ABC Company has 2,000 units of Kleen that were partially damaged in storage. It
can sell these units through regular channels at reduced prices. Sales of these
units will not affect regular sa
les. The relevant unit cost for determining the
minimum selling price for these units is
A.
P6.80
C. P4.00
B.
P6.00
D. P2.00
(cia)
106.
D
?
The relevant unit cost for determining the minimum selling price for damaged units.

The relevant u
nit cost in determining the minimum selling price for the damaged
units is the variable cost which shall be incurred when the units are sold. The
production costs, variable or fixed, are sunk costs, already incurred and will not
change whether the damaged
merchandise is sold or not.
Choice
-
letters “a”, “b”, and “c” are all incorrect because they include production
costs which are considered irrelevant in this decision.
107.MNO Company offers to make and ship 25,000 units of Kleen directly to ABC
Company’s
customers. If ABC Company accepts this offer, it will continue to
produce and ship the remaining 55,000 units. ABC’s fixed factory overhead will
drop to P90,000. Its fixed selling and administrative expenses will remain
unchanged. Variable selling expe
nses will drop to P0.80 per unit for the 25,000
Chapter 9
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436
units produced and shipped by MNO company. What is the maximum amount per
unit that ABC Company should pay MNO Company for producing and shipping the
25,000 units?
A.
P6.80
C. P5.60
B.
P6.40
D. P5.20
(cia)
107.B
?
The maximum amount per unit that ABC Company should pay MNO Company for
producing and shipping the 25,000 units.

The maximum amount that ABC Company should pay MNO Company for the
25,000 units is the incremental cost of manufacturin
g the units as follows:
Unit variable costs (P1.50 + P2.50 + P0.80)
P4.80
Avoidable fixed overhead
(P100,000
–
P90,000) / 25,000 units]
0.40
Unit variable selling expense (P2.00
–
P0.80)
1.20
Incremental cost per unit
P6.40
108.ABC C
ompany receives a one
-
time special order for 5,000 units of Kleen.
Acceptance of this order will not affect the regular sales of 80,000 units. Variable
selling costs for each of these 5,000 units will be P1.00. What is the differential
cost to ABC Compan
y of accepting this special order?
A.
P39,000
C. P30,250
B.
P34,000
D. P29,000
(cia)
108.D
?
The differential cost of accepting a special order for 5,000 units.

Differential cost (or incremental costs) are those that change from an alternat
ive to
another. In accepting the special order, the variable production cost of 4.80 (i.e.,
P1.50 + P2.50 + P0.90) and unit variable expense of P1.00 will be incurred. The
total differential costs shall be:
Variable production costs (5,000 units x P4.8
0)
P24,000
Variable selling costs (5,000 x P1.00)
5,000
Total differential cost of accepting the special order
P29,000
109.CGW Corporation sells product T at a unit price of P5 deriving annual gross sales
of P50,000. The variable cost to produce T
is P4.50 per unit and total fixed costs is
P10,000. If CGW increases T’s unit price to P8 a decrease of sales to only 4,000
units would result. The effect of the price increase on CWG’s net income from the
sales of product T will be a:
A.
9,000 increase.
C P4,000 increase.
B.
P18,000 decrease.
D. No effect.
(rpcpa)
109.
A
?
The effect of the price increase on net income from the sales of product T.

If the unit sales price of product T is increased from P5 to P8, the quantity sold is
reduced fr
om 10,000 units to 4,000 units. The original unit contribution margin is
P0.50 (i.e., P5.00
–
P5.40). The effects on net income would be as follows:
Chapter 9
Short
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437
Increase in USP (P3 x 4,000 units)
P12,000
Decrease in volume (P0.50 x 6,000 units)
(3,000)
Net incre
ase in profit
P 9,000
Questions 110 through 112 are based on the following information. Camiling Ski
Company recently expanded its manufacturing capacity, which will allow it to
produce up to 15,000 pairs of cross
-
country skis of the mountaineering
model or
the touring model. The Sales Department assures management that it can sell
between 9,000 pairs and 13,000 pairs of either product this year. Because the
models are very similar, Camiling Ski will produce only one of the two models.
The follow
ing information was compiled by the Accounting Department.
Per
-
Unit (Pair) Data
Mountaineering Touring
Selling price
P 88.00
P 80.00
Variable costs
52.80 52.80
Fixed costs will total
P369,600 if the mountaineering model is produced but will be
only P316,800 if the touring model is produced. Camiling Ski is subject to a 40%
income tax rate.
110.The total sales revenue at which Camiling Ski Company would make the same
profit or loss re
gardless of the ski model it decided to produce.
A.
P880,000
C. P924,000
B.
P422,400
D. P686,400
110.A
?
The total sales revenue at which Camiling Ski Company would make the same
profit or loss regardless of the ski model it decided to produce.

Profit equals contribution margin less fixed costs. The units to be sold for Touring
Model would be 110% (i.e., 88/80) that of Mountaineering Model. The profit
expressions for the two models to arrive at the same total revenue would be as
follows:
P
= CM
-
FC
If
:
m
= mountaineering
t
= touring
Then
:
P(m)
=
(P88
–
P52.80) x
–
P369,600
P(t)
=
(P80
–
P52.80) 1.1x
–
P316,800
If
:
P(t)
=
P(m)
Then: P35.20x
–
P369,600
=
(P27.20) 1.1x
–
P316,800
5.28x
=
P52,800
x
=
10,000
(Mountaineering)
1.1x
=
11,000
(Touring)
To check:
Sales (t)
=
11,000 x P80
=
P880,000
Sales (m)
=
10,000 x P88
=
P880,000
ALTERNATIVELY:
If
:
x = Sales in pesos
P = CM
–
FC
And
:
P(m) = 0.40x
–
P369,600
P(
t) = 0.34x
–
P316,800
Chapter 9
Short
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438
Then
:
0.40x
–
P369,600 = 0.34x
–
P316,800
X =
P880,000
111.If the Camiling Ski Company sales department could guarantee the annual sale of
12,000 pairs of either model, Camiling Ski would
A.
Produce 12,000 pairs of touring
skis because they have a lower fixed cost.
B.
Be indifferent as to which model is sold because each model has the same
variable cost per unit.
C.
Produce 12,000 pairs of mountaineering skis because they have a lower
breakeven point.
D.
Produce 12,000 pairs of mount
aineering skis because they are more profitable.
111.D
?
The option to be undertaken if the sales department could guarantee a sales of
12,000 units for either model.

The option to be undertaken shall be the one that gives the higher increment in
profi
t which is measured by the increase in contribution margin. In short,
whichever model has a higher unit contribution margin shall be prioritized. In this
case, mountaineering model shall be produced because its unit contribution margin
(i.e., P35.30) is
higher than touring model of P27.20.
112.If Camiling Ski Company desires an after
-
tax net income of P24,000, how many
pairs of touring model skis will the company have to sell?
A.
13,118 pairs
C. 13,853 pairs
B.
12,529 pairs
D. 4,460 pairs
112.A
?
The number of pairs of touring model to sell if a net income is P24,000.

The number of units to sell with profit shall be:
Sales (units) = (FC + IBIT) / UCM
= [P316,800 + (P24,000 / 60%] / P27.20 =
13,118
units
113.
Data covering QMB Co
rporation’s two product lines are as follows:
Product “W”
Product “Z”
Sales
P36,000
P25,200
Income before income tax
15,936
(8,388)
Sales price per unit
30.00
14.00
Variable cost per unit
8.50
15.00
The total units sold of “W” was 2,400 and that “Z”
was 3,600 units. If product “Z” is
discontinued and this results in a 400 units decrease in sales of Product “W”, the
total effect on income will be:
A.
P13,600 decrease.
C.
P8,600 decrease.
B.
No effect.
D.
P5,000 decrease.
(rpcpa)
113.D
?
The eff
ect to income if product Z is discontinued.

The focus in deciding whether to drop or continue a segment (i.e., product,
department or process) is in the segment margin (or departmental margin).
Chapter 9
Short
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term non
-
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439
Normally, if the direct margin is positive, the segment has
to be continued because
discontinuance of the segment would mean elimination of the its positive segment
margin and a decrease in the overall profit of the business.
Segment margin is the difference between contribution margin and direct fixed
costs and e
xpenses. The UCM of the products are as follows:
Product W
Product Z
Unit sales price
P30.00
P14.00
Unit variable costs
P(8.50)
(15.00)
Unit contribution margin
P21.50
P(1.00)
Product Z is a candidate for elimination because it has a negative UCM.
Ad
ditionally, we have to consider that dropping product Z would mean a loss of 400
units in the sales of product W. The analysis is presented below:
Effects to profit
Elimination of negative CM
-
product Z
(3,600 units x P1,000)
P3,600.00
Lost CM
–
pro
duct W (400 x P21.50)
(8,600.00)
Net decrease in profit
P(5,000.00)
114.KXM Bottling Corporation makes and sells two softdrinks COLA and ORANGE.
The comparative data for the two shows:
Cola
Orange
Selling price, per bottle
P9.50
P9.80
Variable co
st
6.50
7.20
Production capacity per hour
250 bottles
300 bottles
There are 500 available production hours per month. Based on the above
information
A.
Orange and Cola unit contribution margin is the same hence, it is equally
profitable to produce either.
B.
It is more profitable to produce Orange.
C.
Cola’s contribution margin is higher than that of Orange hence more profitable
to produce.
D.
It is more profitable to produce Cola.
(rpcpa)
114.B
?
The product that is more profitable.

The compar
ative profitability of products shall be based on their contribution margin
on limited resource. The limited resource here is the production hours and their
respective contribution per hour is as follows:
Cola = (P9.50
–
P6.50) x 250 bottles =
P75
0
per hour
Orange = (9.80
–
P7.20) x 300 bottles =
P780
per hour
Choice
-
letter “b” is correct, it is more profitable to produce product orange.
115.LXQ Turo
-
Turo Stores are open for 15 hours a day (from 6:00 A.M to 9:00 P.M. It
sells package meals
at a price of P40 per meal. Variable cost per meal is P30 while
total fixed costs for operation of all the stores amounted to P200,000 monthly. It is
thinking to reduce its store hours to only 12 hours a day as this would reduce fixed
costs (utilities and
wages) by P60,000 a month. It is expected that the reduced
Chapter 9
Short
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440
store hours would result in a loss of 1,500 packed meals in monthly sales. The
reduction in store hours would result in:
A.
A prospective increase in monthly operating income of P45,000.
B.
A prospect
ive decrease in monthly operating income.
C.
A prospective increase in monthly operating income of P60,000.
D.
No change in monthly operating income.
(rpcpa)
115.A
?
The effect to operating income if the store hours are reduced from 15 to 12 hours a
day.

Reducing the store hours would have twin effects of reducing the number of
amounts sold and reducing the fixed costs, as follows:
Effect in profit
Decrease in fixed cost
P60,000
Lost contribution margin (1,500 x P10)
(15,000)
N
et increase in profit
P45,000
The unit contribution margin is P 10 (i.e., P 40
–
P 30).
116.QXY Computers Inc. has unutilized plant capacity which it could use to produce a
low
-
margin item. It should produce the low
-
margin item if the same can be
sold for
more than its
A.
Indirect costs plus fixed cost.
B.
Variable costs plus any opportunity cost of the unutilized plant capacity.
E.
Fixed costs plus variable cost.
D.
Variable cost.
(rpcpa)
116.B
?
The point when a low
-
margin item is produce
d in a plant with unused capacity.

Since the plan has unutilized capacity, there will be no lost contribution margin from
regular sales and fixed cost is expected to remain the same. Ergo, a product
(whether low
-
margin or high
-
margin) is to be produced
using the unutilized capacity
if such product can be sold higher than its incremental cost (variable costs and
variable expenses) plus any opportunity cost of the unutilized plant capacity.
Choice
-
letters “a” and “c” are incorrect because they include fixe
d cost; while
choice
-
letter “d” is incorrect because it disregards possible opportunity costs of the
unutilized plant capacity.