NON-ROUTINE DECISION MAKING

(LECTURE NOTES)

Decision Making – it is the determination of a specific action among alternatives

which is considered to be the best option.

TYPES OF DECISIONS:

1. Routine Decisions – ones that is being made on a regular basis. Usually,

these are pertaining to the normal operating cycle of an entity which occurs
on a daily basis, hence there are already set of policies addressing such
situation minimizing the discretion of the decision maker. Examples include
what to sell, how much to sell, what to buy, how much to buy, etc.
2. Non-Routine Decisions – these are pertaining to situations that are uncommon
and will be made under the discretion of the decision maker. Usually non-
routine decisions arise from events that managers have never dealt with
before.

SCIENTIFIC APPROACH IN DECISION MAKING

1. Set the Objectives: usually it id to maximize the benefits and/or minimize

the cost.
2. Identify the Alternatives: The different options available in order to
attain the objectives
a. Make or Buy (Outsourcing Decision)
b. Accept or Reject (Special Orders)
c. Drop or Maintain (Segments with Determination of Shutdown Point)
d. Sell or Process Further (Joint Processing of Products)
e. Prioritization (Environment with Bottlenecks or Constrained Resources)
f. Replace or Not (Old Machines and Equipments)
3. Gather data
a. Relevant Data – those that should be considered in the decision making
process.
b. Irrelevant Data – those that should be ignored and not included in the
analysis.
4. Evaluate alternatives based on data gathered: Determination of the
advantages and disadvantages for each alternative.
5. Make a Conclusion: select the alternative that will best achieve the
objective.

RELEVANT versus IRRELEVANT

1. Relevant Revenues and Cost – those that will change when the decision had
been made.
a. Differential Revenues – those revenues that will either increase or
decrease if the decision will be made.
i. Incremental Revenue – additional revenue that will be earned that
is attributable to the alternative selected.
ii. Opportunity Costs – the revenue/profit foregone when a particular
alternative is selected.
b. Differential Costs – those cost that will either increase decrease if
the decision will be made.
i. Incremental Cost – additional cost that will be incurred that is
attributable to the alternative selected.
ii. Avoidable Cost – costs that will be prevented when a particular
alternative is selected.
2. Irrelevant Revenues and Cost – those that will not differ no matter what
alternative will be chosen.
a. Sunk Costs – past costs that have already been incurred and nothing
can be done to change it.
b. Committed Costs – those future costs and revenues that will remain the
same regardless of the decision to be made.
MAKE OR BUY

 Also called outsourcing decision

 General Objective: Whichever of the two options results in the lower cost
(cost minimization).
 Consideration:
o If currently making and considering to buy the component:
Avoidable manufacturing cost
less incremental purchasing costs
plus any incremental revenue for the idle facility.
(+) Advantage of buying; if (-) Disadvantage of buying
o If currently buying and considering to make the component:
Avoidable purchasing costs
less incremental manufacturing costs
less any lost revenue for the facility that will be used in
manufacturing
(+) Advantage of making; if (-) Disadvantage of making
o Watch out for: Avoidable fixed overhead, if nothing was indicated,
assume that fixed overhead is a committed cost. Depreciation is always
a sunk cost, hence, irrelevant.

ACCEPT OR REJECT

 A special order is a one-time or first-time order that is not considered

part of the company’s normal ongoing business.
 General Objective: if accepting the order would result to a higher profit
for the company.
 Consideration:
Incremental Revenue (using the discounted price)
less Incremental manufacturing and selling costs
less any opportunity cost (lost contribution margin due to the
shortage of capacity).
(+) Advantage of Accept; if (-) Disadvantage of Accept which means the
order should be rejected.
 Watch out for: Idle capacity computation (Total Capacity less Current Sales)
and if instead of sacrificing regular sales, the company will be paying for
the additional capacity which is an incremental cost.

DROP or MAINTAIN

 General Objective: As long as the segment can contribute in covering common

cost, it should not be closed.
 Consideration:
Avoidable Fixed Costs
Less: Lost Contribution margin of the Segment that will be dropped.
Less: Shutdown Cost (Separation pay, Disconnection fee, Contact
penalties)
Less: Lost CM from Complimentary Products
Add: Additional CM from Substitute Products
(+) Advantage of Dropping; if (-) Disadvantage of Dropping hence it
should be maintained.
 Watch out for: Fixed cost being labelled as Direct/Traceable (means
Committed/Unavoidable)

SHUTDOWN POINT

 Objective: The indifference point between temporarily closing and continuing

operation at a loss.
 This is applicable for companies with products that have seasonal, cyclical
or random variation in demand. It is also applicable to those companies that
are in the process of restructuring its operation.
  Consideration: Indifference point when to close and to say open.
 Computation: Shutdown Point (In Units to be Sold):

Shutdown Point = Avoidable Fixed Cost – Shutdown Cost

Contribution Margin per Unit

SELL or PROCESS FURTHER

 A joint production process results in the commingled manufacture of two or

more products, called joint products. The products become identifiable from
each other at the split-off point.
 Objective: When deciding to further process a product the goal is always to
have a higher profit than what is being earned now.
 Consideration:
Incremental Revenue (Difference between SP @ Split-off Point and SP
after further processing)
Less: Incremental Cost (Further Processing Cost)
(+) Advantage of Further Processing; if (-) Disadvantage of Further
Processing hence, it should be sold immediately.
 Watch out for: Joint costs incurred prior to split-off are not relevant when
making the sell-at-split-off or process-further decision, because these
costs will be incurred regardless of the alternative selected.

CONSTRAINED RESOURCES

 Constraints – limitations or bottlenecks under which a company must operate,

such as limited available machine time or raw materials, which restrict the
company’s ability to satisfy demand.
 Objective: To maximize profit in a constrained environment by prioritizing
products that will yield the highest.
 Consideration: When only one limited resource is present, a company should
focus on products that have the greatest amount of contribution margin per
unit of the scarce resource.
 Computation Guide:
o Identify the constraint
o Compute the CM/unit for each of the product line
o Compute the contribution margin per constrained resources
o Highest CM/constraint would be prioritize or rank 1
 Effects of Market Limitations
o If the product line with the highest contribution margin has a maximum
market demand limit, other resources may be devoted to the other
product line.
o If all the product line has a minimum requirement, this should be
prioritized regardless of the ranking, then proceed to the ranking
based on the contribution margin per constrained resource.
 NON-ROUTINE DECISION MAKING
(Illustrative Problems)

Problem 1: (Relevant Costs) Identify whether the following costs are relevant or
irrelevant, if it is relevant, indicate if it is a differential revenue or a
differential cost, if it is irrelevant, classify such as either sunk or committed
cost:

1. Research and development costs incurred in the prior months.

2. Lost Contribution Margin due to the decrease in regular sales for accepting
a special order.
3. Alternative usage of plant space that will be idle when the decision to buy
instead of making is made. (rentals to others for fee, production of new
products, etc.)
4. Cost of inventory acquired several years ago.
5. Joint production cost incurred
6. Depreciation of equipment used in production
7. Salary of a manager of a product line that is being considered to be
dropped.
8. Rental costs of additional for the production of a new product.
9. Cost of a special device that is necessary if a special order is accepted.
10. Direct materials, direct labor and variable overhead incurred on units
produced last period.
11. Further processing costs.
12. Allocated main office expenses to different departments.
13. Prime costs of the units ordered by one-time customers if such will be
accepted.
14. Current market value of the old equipment being considered for
disposal
15. Rental of factory being used by the company for regular production in
which special orders will likewise be produced.

Problem 2 (Relevant Cost): Bacolod Company, which manufactures and sells a single
product for P15.00, is operating at full capacity of 20,000 units per month. The
following unit costs relate to the manufacture of this product:

Manufacturing:
Direct Materials P 2.00
Direct Labor 4.00
Variable overhead 1.00
Fixed overhead 1.80
Selling and Adminitrative:
Variable 3.00
Fixed 1.20

The company has 1,000 units left over from last year’s production which have
small defects and which will have to be sold at a reduced price as part of a
clearance sale provided that it will be refurbished at a cost of P1.50 per unit
and there will be a need to purchase a special tool costing P 2,000 which will
have no other use other than the refurbishing. Also, 50% of variable selling and
administrative costs would have to be incurred to sell the defective units. The
sale of the left over might affect the company’s regular sale which may decrease
by 500 units. Another option that Bacolod has is to simply sell the 1,000 units
at its scrap value of P3.00 per unit.

Required:

1. How much should be the minimum price per unit of the refurbished units?
2. If the refurbished units can be sold for P10 each, which will be more
advantageous for Bacolod to refurbish or to sell the units at its scrap, and
how much is the total advantage?
 3. In relation to the previous item, assuming that refurbished units can be
sold for P10 each, how much should be the scrap value of the old units for
Bacolod to be indifferent?

Problem 3 (Make or Buy): Cebu Corporation makes steel blades for lawn mowers that
it heat, treat, and assemble. The cost accounting system gives the following
data:

Direct Materials P 50,000

Direct Labor 30,000
Variable Factory Overhead 60,000
Fixed Factory Overhead 90,000
Units produced 100,000 units

Cebu has an opportunity to purchase its 100,000 blades from an outside supplier
at a cost of P2.20 per blade. Inspection of the purchased blades will cost an
additional P 5,000 in the quality assurance department. Certain leased equipment,
which costs P 30,000 and is included in the fixed overhead, can be avoided if the
blades are purchased.

Required:

a. Should Cebu buy the blades from the outside supplier? What is the maximum
purchase price acceptable?
b. Should Cebu buy the blades from the outside supplier if the released space
could be used to make a part that is not purchased, which would net Cebu a
savings of P 56,000?
c. What is the maximum purchase price acceptable?

Problem 4 (Make or Buy): Manila Company has traditionally made a subcomponent of

its major product. Annual production of 30,000 subcomponents results in the
following costs:

Direct Materials P 250,000

Variable Handling Costs (20%) 50,000
Direct Labor 200,000
Variable Manufacturing Overhead 190,000
Fixed Manufacturing Overhead 120,000

Manila has received an offer from an outside supplier who is willing to provide
the 30,000 units of the subcomponent each year at a price of P 28 per unit.
Manila knows that the facilities now being used to manufacture the subcomponent
could be rented to another company for P80,000 per year if the subcomponent were
purchased from the outside supplier, however, direct cost relating to the rent
will amount to P 20,000 per year. About 1/3 of Manila’s fixed manufacturing
overhead are depreciation, while the other 1/3 represents the salary of the
production supervisor which will be transferred to another department if the
production of the subcomponents will be phased out. The remaining 1/3 of the
fixed manufacturing overhead refers to costs traceable to the subcomponent. The
variable handling costs pertains to the cost of the receiving department whenever
Manila purchased anything.
Required:

1. If Manila decides to purchase the subcomponent from the outside supplier,

what would be the impact on the company’s net operating income for the year?
2. At what price per unit charged by the outside supplier would Manila be
economically indifferent between making the subcomponent and buying it from
outside?
3. Disregarding the rental income of P 80,000 per year and the direct cost of
rent of a P 20,000, how much was the net rental income if Manila decided to
buy the subcomponent from the outside supplier due to an advantage or a P
50,000?

Problem 5 (Make or Buy): Laguna Corporation developed a new auto cleaning

machine. The system requires a motor that the company does not currently produced
but is available from suppliers. The best bid is from Sta. Rosa Corporation at
P25 per unit subject to a 20% discount if purchases will be 50,000 units or more
however, Laguna will need to spend an additional cost of P 200,000 per year for
inspection and other ordering costs. Laguna’s production manager believes that
the motor can be made in house, although additional space and machinery would be
required. The firm now leases for P 80,000 per year, space that could be used to
make the new motors. However, another subsystem is now assembled in this space.
Laguna would have to lease additional space which rents for P 175,000 per year
for the assembly process, since the new space is more suitable for assembly work
but not for motor production. Laguna will also rent additional equipment for
P200,000 per year. The controller has developed the following unit costs based on
the expected demand of 100,000 units per year:

Prime cost P 14.00

Rent for space .80
Machinery rental 2.00
Variable Fixed overhead 4.00
Allocated Fixed overhead 6.00
TOTAL COSTS P 26.00
Required:

1. Should Laguna make or buy the motors and how much is the advantage of the
said better alternative?
2. How much is the maximum gross selling price that Sta. Rosa should offer for
the required motor for Laguna to be indifferent?
3. Sta. Rosa Corporation reduced the offer price for the motors, if Laguna
accepted the offer of Sta. Rosa due to a perceived advantage of P 80,000,
how much was the new offer price?

Problem 6 (Accept or Reject): BATANGAS Corporation manufactures and sells a type

of knife. The company has never been able to sell all it can produce (which is
50,000 knives, meaning it has enough excess capacity). The cost sheet for the
knife appears below:

Direct material P 6.00

Direct labor P 7.00
Overhead @ 100% of direct labor P 7.00
TOTAL COST P 20.00
Variable overhead is P 1.00 per unit and variable selling and administrative
expense is P1.50 per unit. The company received a special price of P18.00 instead
of the regular price of P 25.00

Required:

1. Based on the foregoing information, how much is the net advantage

(disadvantage) if the company accepts the special order?
2. Assuming that the special order requires a special tool worth P 10,000 that
will have no other use after the order has been served, how much is the net
advantage (disadvantage) of accepting the special order?
3. What if the company is currently able to sell 47,500 knives tom its regular
customers, should the company accept the special order? What is the minimum
selling price acceptable?

Problem 7 (Accept or Reject): The Muntinlupa Company produces a single product,

product C. Muntinlupa has the capacity to produce 70,000 units of Product C each
year. If Muntinlupa produces at capacity, the per unit costs tom produce and sell
one unit of product C are as follows:

Per Unit Data

Direct Materials P 20.00

Direct Labor 17.00
Variable Manufacturing Overhead 13.00
Fixed Manufacturing Overhead 14.00
Variable Selling Expense 12.00
Fixed Selling Expense 8.00
The regular selling price of one unit of product C is P100. A special order has
been received by Muntinlupa from Mandaluyong Company to purchase 7,000 units of
product C during the upcoming year. If this special order is accepted, the
variable selling expense will be reduced by 75%. Total fixed manufacturing
overhead and fixed selling expenses would be unaffected except that Muntinlupa
will need to purchase a specialized machine to engrave the Mandaluyong name on
each unit of product C in the special order and need to spend P1.50 per unit. The
machine will cost P10,500 and will have no use after the special order is filled.

Required:

1. Assume that Muntinlupa expects to sell 60,000 units of product C to regular

customers next year. At what selling price for the 7,000 units would
Muntinlupa be economically indifferent between accepting and rejecting the
special order from Mandaluyong?
2. Assume Muntinlupa expects to sell 70,000 units of product C to regular
customers next year and can increase its capacity to 75,000 units by paying
an additional P10,000 in fixed overhead. If Mandaluyong company offers to
buy the special units at P90 per unit, the effect of accepting the special
order on Muntinlupa’s net operating income for the next year will be:
3. Refer to the previous item, what will be the, minimum price that Muntinlupa
will be willing to accept for the special order of Mandaluyong?

Problem 8 (Accept or Reject): In a month, Albay Company normally produces and

sells 8,000 units of its product for P20. Variable manufacturing cost per unit is
P10. Total fixed manufacturing costs (up to the maximum capacity of 10,000 units)
are P 38,000. Variable operating costs is P1 per unit and fixed operating costs
total 10,000. A customer placed a special order for 1,500 units for 15 each. The
customer is willing to shoulder the delivery costs; hence the business will not
incur additional variable operating costs however, the customer requires an
additional feature in the product which will require Albay to buy a new machine
costing P5,000, which will not have no other use after the order, and P1.00 in
additional variable manufacturing cost.

Required:

1. Should the company accept or reject the special order, and by how much would
be the advantage?
2. If Albay can already sell 9,000 units, should the company accept or reject
the special order, and by how much would be the advantage?
3. In relation to the previous item, how much should the minimum selling price?

Problem 9 (Drop or Maintain): Condensed monthly operating income data for Bataan
Corporation for May follow:
Urban Store Suburban Total
Store
Sales revenue P 80,000 P 120,000 P 200,000
Less: Variable expenses 32,000 84,000 116,000
Contribution Margin 48,000 36,000 84,000
Less: Direct fixed costs 20,000 40,000 60,000
Segment margin 28,000 (4,000) 24,000
Less: Common fixed costs 4,000 6,000 10,000
Operating Income 24,000 (10,000) 14,000
Additional information regarding Bataan’s operations follows:
 One-fourth of each store’s direct fixed costs would continue if either the
store is closed.
 Bataan allocates common fixed cost to each store on the bases of sales
revenues.
 The operating results for May are representative of all months.

Required:
 1. A decision by Bataan to close Sursuban Store would result in a monthly
increase (decrease) in Bataan’s operating of?
2. In closing Sursuban Store will require Bataan to incur shutdown cost of P
5,000, should Bataan close Sursuban Store?
3. What if Bataan’s decision to close Sursuban Store would result to a 30%
increase in sales of Urban store, should Bataan close Sursuban Store?
4. What if closing Sursuban Store would result to a 20% decrease in Urban
Store’s sales, should Bataan close Sursuban Store?

Problem 10 (Drop or Maintain): Unitah Company produces three products: A, B, and

C. An income statement, with amounts given as follows:
A B C TOTAL
Sales revenue P 700,000 P 1,800,000 P 200,000 P 2,700,000
Less: variable expenses 350,000 1,000,000 140,000 1,490,000
Contribution Margin 350,000 800,000 60,000 1,210,000
Less: Fixed Manftg. Exp. 100,000 300,000 70,000 470,000
Segment Margin 250,000 500,000 (10,000) 740,000
Less: Fixed Adm. Exp. 120,000 120,000 120,000 360,000
Net Income 130,000 380,000 (130,000) 380,000
Product C appears to be closing money. Fixed manufacturing expenses for the
product C include P 10,000 for depreciation on equipment used in making the
product, P 40,000 for the product C manager’s salary, and P 20,000 for C’s share
of plant-wide overhead costs like factory rent and property taxes. If product C
will be dropped this will cause for the product A’s sales to increase by 20% and
its contribution to increase to 55% while product B’s sales will decrease by 10%.
Termination costs and other shutdown cost will total P30,000.

Required:

1. Given these data, the elimination of Product C will result in an over-all

increase/ (decrease) in company income of?
2. If the product C will dropped, Unitah can produce a new product, product D
that can generate a contribution margin totalling P 200,000 but will have
direct fixed cost of P 150,000, what will be the net advantage/
(disadvantage) of dropping product C?
3. Disregarding the previous item, for Unitah to be indifferent in the decision
of dropping Product C, how much should be the decrease in Fixed
administrative expenses (if there will be any)?

Problem 11 (Shutdown Point): BATAAN Corporation manufactures and sells a single

product. At normal capacity of 100,000 units per annum, the unit cost of
manufacturing the product is:

Direct Materials P 2.20

Direct Labor P 2.80
Variable Manufacturing Overhead P 1.20
Fixed Manufacturing Overhead P 2.00
Total production Cost per unit P 8.20
Variable selling and administrative expenses amount to P 0.80 per unit. Fixed
selling and administrative costs are P 40,000 annually. Due to the increasing
competition, the company expects to be able to sell only 40,000 units at a
reduced selling price of P 10.00 each, next year. The company is re-organizing
its operations to be able to regain competitive position. In the meantime,
management is faced with the problem of whether to shut down completely or
continue limited operations at a loss. In the event of a shutdown, it is expected
that all fixed costs can be reduced by about ¼. Additional costs of shutting down
the plant for one year are estimated at P15,000.

Required:

1. What would be the net advantage (disadvantage) to the company if management

decides to shutdown?
2. What if the company can only sell 14,000 units, should the company continue
or shutdown?
 3. Using the original data, compute for the shutdown point in units.

Problem 12 (Shutdown Point): Asian paints manufacture 10,000 tin of paints when
working at normal capacity. It incurs the cost of P16 in manufacturing one unit.
The details of this cost are given below:

Direct Materials P 7.50

Direct Labor P 2.00
Variable Overhead P 2.50
Fixed Overhead P 4.00
Production Cost (per unit) P16.00

Each unit of product is sold for P20 with variable selling and administrative
expenses of P 0.50 per unit of production while fixed selling and administrative
is P 2,000 per month. During the next 3 months, only 500 units can be produced
and sold. Management plans to close down the factory estimating that the fixed
manufacturing cost can be reduced by 80% for the quarter while totally avoiding
fixed selling and administrative. When the plant is operating, the fixed overhead
costs are incurred at a uniform rate throughout the year. Additional cost of
plant shut down for the three month is estimated at P 2,800.

Required:

1. How much will be the advantage (disadvantage) if the factory will be

shutdown?
2. What is the shutdown point?

Problem 13 (Sell or Process Further): McDonalds has been producing burgers for a
number of years now. A regular burger can already be sold at P 50.00 or it can be
further processed into a cheese burger which sells for P 75.00, a mushroom melt
burger which sells for P 90, and the famous Big Mac which can be sold for P 120.
A regular burger can be produced at a total per unit cost of P 40.00. Additional
cost incurred for the other burgers are as follow:

Cheese Burger P 20.00

Mushroom Melt Burger P 45.00
Big Mac P 60.00

Required: Which of the following three products should be processed further?

Problem 14 (Sell or Process Further): Dunkin Corporation produces donuts with

total joint production costs of P40,000. It is contemplating the following
options:

Option 1: Sell the 20,000 units of donuts for P10 each and incurs selling cost of
P2 per unit.
Option 2: Further processed the donuts to flavoured donuts and sell as follows:
 Chocolate flavour: 5,000 units; Selling price P15 and additional
processing costs of P3 each.
 Strawberry flavour: 8,000 units; selling price P14 and additional
processing costs of P4 each.
 Bavarian flavour: 7,000 units; selling price P13 and additional
processing costs of P3 each.
Option 3: Further processed the 20,000 donuts into 80,000 munchkins with selling
price of P3 each and further processing costs totalling P 130,000.

Required:
1. How much will be the net advantage/ (disadvantage) if Dunkin will choose
option 2 rather than option 1?
2. Of the three options, which will the most advantageous and by how much?
3. How much should be the further processing cost of option n3, for management
to be indifferent between option 3 and the best option?

Problem 15 (Sell or Process Further): Julius International produces 15,000 units

of product Red and 30,000 units of Blue for which P 800,000 common variable costs
are incurred. These two products can be sold as is or processed further. Further
processing of either product does not delay the production of subsequent batnches
of the joint products. Below are some other information:

Red Blue
Unit selling price without further processing P 24 P18
Unit selling price with further processing P 30 P 22
Total separate weekly variable costs further processing P 30,000 P 10,000
% of output units lost during further processing 10% 15%
Required:

1. Which of the two products should be processed further?

2. For the product that will have to be sold immediately, how much should be
the decrease in its further processing cost for Julius to be indifferent in
its decision to sell immediately or process further?
3. In relation to the product that will be processed further, how much should
be the decrease in its unit selling price with further processing for Julius
to be indifferent in its decision to sell immediately or process further?

Problem 16 (Constrained resources): Wriggly Company is a small family business

that produces wooden plaques and trophies:

Plaques Trophies
Selling price per unit P18 P15
Variable cost per uni P12 P 8
The company only has one machine, a sender, to sand the wood that is used for the
plaques or the trophies. Generally, the wood require for each plaque takes 0.25
hour to sand, while the wood required for each trophy takes 0.50 hour to sand.
Required:
1. Based on the constraint related to the machine time, which product should be
emphasized if only limited machine time is available?
2. If the available machine time is 100 hours, disregarding any market
requirements and limitations, how many of each product will be produced?
3. If the available machine time is 100 hours, but Plaques has a market limit
of 300 units, how many units of each product will be produced?
4. If the available machine time is 150 hours and Plaques has a market limit of
300 units, but Wriggly is required to produce at least 100 units of each
products every period. How many units of each product will be produced?

Problem 17 (Constrained Resources): LAGUNA Corporation has the following data for
the year:

WAN TOO TRI

Selling Price P10 P15 P18
Variable cost 6 10 16
Units produced per hour 2 units 1 unit 4 units
Market Limit 10,000 units 10,000 units 8,000 units

Required: The Company only has 15,000 in production time available for the
current period.
1. What could be the maximum profit that LAGUNA Corporation can earn given the
limitation in production time?
2. What will be the maximum amount that LAGUNA will be willing to pay for
additional capacity?
3. Given the following minimum requirement, what could be the maximum profit
that LAGUNA Corporation can earn given the limitation in production time?

WAN TOO TRI

1,000 units 2,000 units 2,000 units

Problem 18 (Constrained Resources): Bulacan Corporation is currently producing

three (3) products: Rose, Dahlia, & Sampaguita. Data pertaining to the three
products follows:
 Rose Dahlia Sampaguita
Selling Price P10 P20 P15
Direct Materials (P2/kilo) 4 8 5
Direct Labor (10/hr.) 2 5 3
Market Limit 5,000 units No Limit 8,000 units

Currently, Bulacan is having trouble acquiring direct materials due to

environment factors. The available direct materials that can be supplied to
Bulacan is only 40,000 kilos. Total fixed cost amounted to P 100,000.
Required:
1. Given the said constraint, how much is the maximum profit that Bulacan can
earn?
2. What will be the maximum amount that Laguna will be willing to pay for
additional capacity if the normal sale of Dahlia is 4,000 units?
3. How much will be the maximum profit of Bulacan if aside from the market
limit provided, the company is required to supply at least 2,000 units of
each product?

NON-ROUTINE DECISION MAKING

(Practice TheoryQuizzer)

1. Sunk costs
a. Are substituted for opportunity cost
b. Are relevant to long-term decisions but not to short-term decisions
c. Are relevant to decision making
d. In and themselves are not relevant to decision making
2. Johnson waits two hours in line to buy a ticket to an NCAA Final Four
Tournament. The opportunity cost of buying the P200 ticket is
a. Johnson’s best alternative use of the 200.
b. Johnson’s best alternative use of the two hours it took to wait in
line.
c. The value of the P200 to the ticket agent.
d. Johnson’s best alternative use of both the P200 and the two hours
spent in line.
3. An opportunity cost is
a. The difference between in total costs which results from selecting one
choice instead of another.
b. The profit foregone by selecting one choice instead of another.
c. A cost that may be saved by not adopting an alternative.
d. A cost that may be shifted to the future with little or no effect on
current operations.
4. In deciding whether to manufacture a part or buy it from an outside vendor,
a cost that is irrelevant to the short-run decision is
a. Variable Overhead
b. Fixed overhead that will be avoided if the part is bought from an
outside vendor
c. Direct Labor
d. Fixed overhead that will continue even if the part is bought from an
outside vendor.
5. An architecture firm currently offers services that appeal to both
individuals and commercial clients. If the firm decides to discontinue
services to individuals because of ongoing losses, which of the following
costs could the company likely avoid?
a. General corporate overhead that was allocated to individual clients.
b. Building depreciation
c. Insurance
d. Variable operating costs
6. In a sell or process further decision, which costs below is (are) not
relevant in a decision regarding whether the product should be processed
further?
a. A variable production cost incurred prior to split-off
b. A variable production cost incurred after spli-off
c. An avoidable fixed production cost incurred after split-off
d. Both B and C
7. A company that is operating at full capacity should emphasize those products
and services that have the:
a. Lowest total per-unit costs
b. Highest contribution margin per unit
 c. Highest contribution margin per unit of scarce resource
d. Highest operating income
8. Freestone Company is considering renting Machine Y to replace Machine X. It
is expected that Y will waste less direct materials than does X. If Y is
rented, X will be sold on the open market. For this decision, which of the
following factors is (are) relevant
a. Cost of direct materials used only
b. Resale value of Machine X only
c. Both cost of direct materials and resale value of Machine X
d. Neither cost of direct materials used nor resale value of Machine X
9. A company wants to know if it should sell now or processed further. Under
what conditions should the company process further rather than sell now?
a. If incremental revenues are greater than the cost incurred to date of
the original units
b. If variable processing costs exceed fixed processing costs
c. If there are only incremental variable costs, and no incremental
revenue
d. None of the above
10. A farmer grows potatoes for sale to wholesalers and to individual customers.
The farmer currently digs up the potatoes and sells them in 20kg sacks. He
is considering a decision to make a change to this current approach. He
thinks that washing the potatoes and packaging them in 2kg cartons might be
more attractive to some of his individual customers. Which of the following
is irrelevant to his decision?
a. The sales value of the dug potatoes
b. The cost per kg of growing the potatoes
c. The cost of washing and packaging the potatoes.
d. The sales value of the washed and packaged potatoes
11. Under what conditions might a manufacturing firm sell a product for less
than its regular price?
a. When the price offered for a short-term order is less than the
contribution margin.
b. If a firm has excess capacity that is sitting idle, and it can recover
its incremental costs.
c. When a company wants to obtain greater market share, even if the
differential costs exceed differential revenue.
d. If the incremental revenue exceeds the total variable costs
12. Relevant costs are
a. Unavoidable, future and measured by cash
b. Avoidable, future and measured by cash
c. Avoidable, future and measured by profit
d. unavoidable, future and measured by profit
13. Lakewood Industries is considering outsourcing a paint-spraying operation
that is performed in manufacturing auto parts. The company has painting-
equipment with a book value of P 100,000. If the operation is outsourced,
the equipment will be scrapped for an amount equal to the cost of removing
the equipment. Ignoring income taxes, is the book value of P 100,000
relevant to the outsourcing decision?
a. Yes, because it can be sold
b. No, because it is an incremental cost savings
c. Yes, because it is a sunk cost
d. No, because it is not differential
14. If an unprofitable product is eliminated,
a. Net income will always increase
b. Variable expenses of the eliminated product will have to be absorbed
by other segments.
c. Fixed expenses allocated to the eliminated segment will not likely be
avoidable
d. The company will lose its opportunity costs.
15. Given the following list of costs, which one should be ignored in a decision
to produce additional units of product for a factory that is operating at
less than 100% capacity, and the additional business will not use up the
remainder of the plant capacity?
a. Fixed administrative expenses
b. Variable factory overhead
c. Per hour cost of direct labor
d. Variable selling expenses

NON-ROUTINE DECISION MAKING

 (Quizzer)

1. What is the opportunity cost of a component part in a factory given no

alternative use of the capacity?
a. The total manufacturing cost of the component
b. Zero
c. The fixed manufacturing cost of the component
d. The variable manufacturing cost of the component
2. In considering a special order situation that will enable a company to make
sure use of presently idle capacity, which of the following costs would be
irrelevant?
a. Depreciation
b. Materials
c. Variable Overhead
d. Direct Labor
3. An increase or decrease in cost between alternatives is called
a. Variable cost
b. Differential cost
c. Sunk cost
d. Controllable cost
4. The salaries you could be earning by working rather than attending college
are an example of
a. Outlay cost
b. Sunk cost
c. Misplaced cost
d. Opportunity cost
5. In analyzing whether to build another regional service office, the salary of
the Chief executive officer (CEO) at the corporate headquarters
a. Relevant because salaries are always relevant
b. Relevant because this will probably change if the regional service
office is built.
c. Irrelevant because it future cost that will not differ between the
alternatives under consideration
d. Irrelevant since other imputed costs for the same will be considered
6. Among the costs relevant to a make-or-buy decision include variable
manufacturing costs as well as:
a. Unavoidable costs
b. Avoidable fixed costs
c. Plant depreciation
d. Real Estate Taxes
7. Opportunity cost are:
a. Costs irrecoverably incurred by past actions
b. The difference between actual and standard costs
c. Not recorded in the accounting records
d. Partly fixed costs and partly variable costs
8. In a make or buy decision,
a. Fixed costs that can be avoided in the future are relevant
b. Fixed costs that will continue regardless of the decision are relevant
c. Irrelevant costs may be included in the analysis
d. Only variable costs are relevant
9. In a decision to replace an old machine with a new machine, which of the
following is considered a relevant cost?
a. The book value of the old equipment
b. Depreciation expense on the old equipment
c. The loss on the disposal of the old equipment
d. The current disposal price of the old equipment
10. A cost that does not affect a decision is called an
a. Opportunity cost
b. Incremental cost
c. Avoidable cost
d. Irrelevant cost
11. Costs that change between alternatives are called
a. Fixed costs
b. Opportunity costs
c. Relevant cost
d. Sunk cost
12. A cost incurred in the past that cannot be changed by any future action is
a(an)
 a. Opportunity cost
b. Sunk cost
c. Relevant cost
d. Avoidable cost
13. Who generates the data used in incremental analysis?
a. Market analyst and engineers
b. Engineers and accountants
c. Market analyst, engineers, and accountants
d. Only the accountants
14. Which statement is true about relevant costs in incremental analysis?
a. All costs are relevant if they change between alternatives
b. Only fixed costs are relevant
c. Only variable costs are relevant
d. Relevant costs should be ignored
15. Canada Inc. determined that it must expand its capacity to accept a special
order. Which situation is likely?
a. Unit variable cost will increase
b. Fixed costs will not be relevant
c. Both variable and fixed costs will be relevant
d. The company should accept the order
16. It costs Lannon Fields P14 of variable cost and P6 of allocated fixed costs
to produce an industrial trash can that sells for P30. A buyer in Mexico
offers to purchase 3,000 units at P18 each. Lannon Fields has excess
capacity and can handle the additional production. What effect will
acceptance of the offer have on net income?
a. Decrease P6,000
b. Increase P6,000
c. Increase P54,000
d. Increase P12,000
17. A factory is operating at less than 100% capacity. Potential additional
business will not use up the remainder of the plant capacity. Given the
following list of costs, which one should be ignored in a decision tom
produced additional units of product?
a. Variable selling expenses
b. Fixed factory overhead
c. Direct labor
d. Contribution margin of additional units
18. A company contemplating the acceptance of a special order has the following
unit cost behaviour, based on 10,000 units:
Direct Materials P4
Direct Labor P10
Variable Overhead P8
Fixed Overhead P6
A foreign company wants to purchase 1,000 units at a special unit price of
P25. The normal price per unit is P40. In addition, a special stamping
machine will have to be purchased for P2,000 in order to stamp the foreign
company’s name on the product. The incremental income (loss) from accepting
the order is
a. P 3,000
b. P 1,000
c. P (3,000)
d. P (1,000)
19. What is the nature of an opportunity cost?
a. It is always variable
b. It is potential benefit
c. It is included as part of cost of goods sold
d. It is a sunk cost
20. Wishnell Toys can make 1,000 toy robots with the following costs:
Direct Materials P 70,000
Direct Labor P 26,000
Variable Overhead P 15,000
Fixed Overhead P 15,000
The company can purchase the 1,000 robots externally for P 120,000. The
avoidable fixed costs are P5,000 if the units are purchased externally. What
is the cost savings if the company makes the robots?
a. P 1,000
b. P 5,000
c. P 10,000
d. P 4,000
21. Which one of the following does not affect a make-or-buy decision?
a. Variable manufacturing cost
b. Opportunity cost
c. Incremental revenue
d. Direct labor
22. Which decision will generally involve no incremental revenues?
a. Make-or-buy
b. Drop a product line
c. Accept a special order
d. Additional processing

Items 23 to 26 are based on the following info: Abel Company produces three
versions of baseball bats: wood, aluminium, and hard rubber. A condensed
segment of income statement for a recent period follows:

Wood Aluminium Hard Rubber

Sales P 500,000 P 200,000 P 65,000
Variable Expenses 325,000 140,000 58,000
Contribution Margin 175,000 60,000 7,000
Fixed Expenses 75,000 35,000 22,000
Operating Income 100,000 25,000 (15,000)

23. Assume one of the fixed expenses for the hard rubber line is avoidable. What
will be the total net income if the line is dropped?
a. P 125,000
b. P 103,000
c. P 105,000
d. P 140,000
24. Assume all of the fixed expenses for the hard rubber line are avoidable.
What will be the total net income if the line is dropped?
a. P 125,000
b. P 103,000
c. P 105,000
d. P 140,000
25. What would have to occur for total net income to remain unchanged when the
hard rubber line is dropped?
a. Total net income could not remain the same if hard rubber is dropped.
b. The avoidable fixed expenses for hard rubber would have to be P 15,000
c. The unavoidable fixed expenses for hard rubber would have to equal its
contribution margin.
d. The avoidable fixed expenses for hard rubber would have to be P 7000.
26. If the total net income after dropping the hard rubber line is P 105,000,
hard rubber’s avoidable fixed expenses were
a. P 20,000
b. P 2,000
c. P 7,000
d. P 5,000
27. North division has the following information:
Sales P 900,000
Variable Expenses P 480,000
Fixed Expenses P 465,000
If the division is eliminated, the fixed expenses will be allocated to the
company’s other divisions. What is the incremental effect on net income if
the division is dropped?
a. P 45,000 increase
b. P 465,000 decrease
c. P 420,000 decrease
d. P 435,000 increase
28. A company decided to replace an old machine with a new machine. Which of the
following is considered relevant cost?
a. The book value of the old equipment
b. Depreciation expense of the old equipment
c. The loss on disposal of the old equipment
d. The current disposal price of the old equipment
29. A company is deciding whether or not to replace some old equipment with new
equipment. Which of the following is not considered in the incremental
analysis?
a. Annual operating cost of the new equipment
b. Annual operating cost of the old equipment
 c. Net cost of the new equipment
d. Book value of the old equipment
30. When a multi-product operates at full capacity, decisions must be made about
what products to emphasize. In making such decisions, products should be
ranked based on:
a. Selling price per unit
b. Contribution margin per unit
c. Contribution margin per unit of the constraining resources
d. Unit sales volume
31. In situations where management must decide between accepting or rejecting a
one-time-only special order where there is sufficient idle capacity to fill
the order, which one of the following in NOT relevant in making the
decision?
a. Absorption costing unit product cost
b. Variable costs
c. Incremental costs
d. Differential costs
32. Wenig Inc. has some material that originally cost P 73,500. The material has
a scrap value of P 45,600 as is, but if reworked at a cost of P6,000, it
could be sold for P58,100. What would be incremental effect on the company’s
overall profit of reworking and selling the material rather than selling it
as is as scrap?
a. –P 22,000
b. –P 67,600
c. P 51,500
d. P 5,900
33. Bosques Corporation has in stock 35,800 kg of material L that it bought five
years ago for P5.55 per kilogram. This raw material was purchased to use in
a product line that has been discounted. Material L can be sold as is for
scrap for P1.67 per kilogram. An alternative would be to use material L in
one of the company’s current products, Q08C, which currently requires 2
kilograms of a raw material that is available for P9.15 per kilogram.
Material L can be modified at a cost of P0.78 per kilogram so that it can be
used as a substitute for this material in the production of product Q08C.
However, after modification, 4 kilograms of material L is required for every
unit of product Q08C that is produced. Bosques Corporation has now received
a request from a company that could use material L in its production
process. Assuming that Bosques Corporation could use all of its stock of
material L to make product Q08C or the company could sell all of its stock
of material at the current scrap price of P1.67 per kilogram, what is the
minimum acceptable selling price of material L to the company that could use
material L in its own production process?
a. P 5.36
b. P 3.80
c. P 2.13
d. P 1.67
34. Mankus Inc. is considering using stocks of an old raw material in a special
project. The special project would require all 120 kilograms of raw material
that are in stock and that originally cost the company P816 in total. If the
company were to buy new supplies of this raw material on the open market, it
would cost P 7.25 per kilogram. However, the company has no other use for
this raw material and would sell it at the discounted price of P6.75 per
kilogram if it were not used in the special project. The sale of the raw
material would involve delivery to the purchaser at a total cost of P50.00
for all 120 kilograms. What is the relevant cost of the 120 kilograms of the
raw material when deciding whether to proceed with the special project?
a. P 810
b. P 870
c. P 760
d. P 816
35. Narciso Corporation is preparing a bid for a special order that would
require 880 litres of material R19S. The company already has 280 litres this
raw material in stock that originally cost P6.20 per litre. Material R19S is
used in the company’s main product and is replenished on a periodic basis.
The resale value of the existing stock of the material is P5.45 per litre.
New stocks of the material can be readily purchased for P6.20 per litre.
What is the relevant cost of the 880 litres of the raw material when
deciding how much to bid on the special order?
a. P 5,006
 b. P 4,796
c. P 5,456
d. None of the above
36. Yehle Inc. regularly uses material Y51B and currently has in stock 460
litres of the material for which it paid P 2,530 several weeks ago. If this
were to be sold as is on the open market as surplus material, it would fetch
P4.55 per litre. New stocks of the material can be purchased on the open
market for P5.45 per litre, but it must be purchased in lots of 1,000
litres. You have been asked to determine the relevant cost of 720 litres of
the material to be used in a job for a customer. The relevant of the 720
litres Y51B is:
a. P 3,924
b. P 5,450
c. P 3,510
d. P 3,276
37. Roddey Corporation is a specialty component manufacturer with idle capacity.
Management would like to use its extra capacity to generate additional
profits. A potential customer has offered to buy 2,900 units of component
GEE. Each unit of GEE requires 3 units of material R39 and 8 units of
material I59. Data concerning these two materials follow:
Material R39 I59
Units in stock 340 23,700
Original cost per unit P 4.70 P 8.20
Current market price per unit P 4.35 P 8.05
Disposal value per unit P 3.95 P 6.85
Material R39 is in use in many of the company’s products and routinely
replenished. Material I59 is no longer used by the company in any of its
normal products and existing stocks would not be replenished once they are
used up. What would be the relevant cost of the materials, in total, for the
purposes of determining a minimum acceptable price for the order for product
GEE?
a. P 224,605
b. P 196,765
c. P 228,204
d. P 193,285
38. Moyer Corporation is a specialty component manufacturer with idle capacity.
Management would like to use its extra capacity to generate additional
profits. A potential customer has offered to buy 2,300 units of component
TIB. Each unit of TIB requires 9 units of material F58 and 7 units of
material D66. Data concerning these two materials follow:

Material F58 D66

Units in stock 18,940 15,700
Original cost per unit P 4.40 P 6.10
Current market price per unit P 4.65 P 6.50
Disposal value per unit P 4.35 P 4.80
Material F58 is in use in many of the company’s product and is routinely
replenished. Material D66 is no longer used by the company in any of its
normal product s and existing stocks would not be replenished once they are
used up. What would be the relevant cost of the materials, in total, for
purposes of determining a minimum acceptable price for the order for product
TIB?
a. P189,890
b. P174,215
c. P168,533
d. P200,905
39. Teich Inc. is considering whether to continue to make a component or to buy
it from an outside supplier. The company uses 15,000 of the components each
year. The unit product cost of the component according to the company’s
absorption cost accounting system is given as follows:
Direct materials 7.90
Direct Labor 2.10
Variable Manufacturing Overhead 1.10
Fixed Manufacturing Overhead 4.00
Unit product cost
Assume that direct labor is a variable cost. Of is avoidable if the
component were bought from the outside supplier; the remainder is not
avoidable. In addition, making the component uses 3 minutes on the machine
that is the company’s current constraint. If the component were bought, this
 machine time would be freed up for use another product that requires 6
minutes on the constraining machine and that has contribution margin of
P8.10 per unit. When deciding whether to make or buy the component, what
cost of making the component should be compared to the price of buying the
component?
a. P15.55
b. P11.50
c. P19.15
d. P15.10
40. Jordan Company budgeted sales of 400,000 calculators at P40 per unit last
year. Variable Manufacturing Costs were budgeted at P16 per unit, and fixed
manufacturing cost at P10 per unit. A special order for 40,000 calculators
P23 each was received by Jordan in March. Jordan has sufficient plant
capacity to manufacture the additional quantity without any incurring any
additional fixed manufacturing costs; however, the production would have to
be done on an overtime basis at an estimated additional cost of P3 per
calculator. Acceptance of the special order would be incurred. What would be
the effect on net operating income if the special order were accepted?
a. P120,000 decrease
b. P240,000 decrease
c. P160,000 decrease
d. P280,000 decrease
41. Two products, LB and NH, emerge from a joint process. Product LB has been
allocated P30,800 of the total joint costs of P44,000. A total of 2,000
units of product LB are produced from the joint process. Product LB can be
sold at the split-off point for P13 per unit, it can be processed further
for an additional total cost of P14,000 and then sold for P15 per unit. If
product LB is processed further than and sold, what would be the effect on
the overall profit of the company compared with sale in its unprocessed from
directly after the split-off point?
a. P16,000 more profit
b. P20,800 more profit
c. P40,800 less profit
d. 10,000 less profit
Items 42 and 43 are based on the following information: Regis Company makes
the plugs it uses in one of its products at a cost of P36 per unit. This
cost includes P8 of fixed overhead. Regis needs 30,000 of these plugs
annually, and Orlan Company has offered to sell them to Regis at P33 per
unit. If Regis decides to purchase the plugs, P60,000 of the annual fixed
overhead will be eliminated, and then company may be able to rent the
facility previously used for manufacturing plugs.
42. If Regis Company purchases the plugs but does not rent the unused facility,
the company would:
a. Save P3.00 per unit
b. Save P6.00 per unit
c. Lose P6.00 per unit
d. Lose P3.00 per unit
43. If the plugs are purchased and the facility rented, Regis Company wishes to
realize P100,000 in savings annually. To achieve his goal, the minimum
annual rent on the facility must be:
a. P10,000
b. P40,000
c. P70,000
d. P190,000
Items 44 to 46 are based on the following information: Dockwiller Inc.
manufactures industrial components. One of its products, which is used in
the construction of industrial air conditioners, is known as D53. Data
concerning this product are given below:

Per Unit Data

Selling price .............................................P150
Direct materials...........................................P26
Direct labor...............................................P3
Variable manufacturing overhead............................P1
Fixed manufacturing overhead...............................P17
Variable selling expense...................................P2
Fixed selling and administrative expense...................P18
 The above per unit date are based on annual production of 8,000 units of the
component. Direct labor can be considered to be a variable cost.
44. The company has received a special, one-time-only order for 500 units of
component D53.There would be no variable selling expense on this special
order and the total fixed manufacturing overhead and fixed selling and
administrative expenses of the company would not be affected by the order.
Assuming that Dockwiller has no excess capacity and can fill the order
without cutting back on the production of any product, what is the minimum
price per unit on the special order below which the company should not go?
a. P26
b. P30
c. P150
d. P47
45. The company has received a special, one-time-only order for 300 units of
component D53.There would be no variable selling expense on this special
order and the total fixed manufacturing overhead and fixed selling and
administrative expenses of the company would not be affected by the order.
However, assume that Dockwiller has no excess capacity and this special
order would be used instead to produce products with a total contribution
margin of P1,800. What is the minimum price per unit on below which of the
company should not go?
a. P73
b. P36
c. P53
d. P6
46. Refer to the original data in the problem. What is the current contribution
margin per unit for component D53 based on its selling price of the P150 and
its annual production of 8,000 units?
a. P83
b. P118
c. P32
d. P120
47. Breegle Company produces three products (B-40, J-60, and H-102) from a
single process. Breegle uses the physical volume method to allocate joint
costs of P22,500 per batch to the product. Based on the following
information, which product(s) should Breegle sell at the split-off point in
order to maximize profit?
B-40 J-60 H-102
Physical units produced per batch 1,500 2,000 3,200
Sales value per unit at split-off P10.00 P4.00 P7.25
Cost per unit of further processing
after split-off 3.05 1.00 2.50
Sales value per unit after further processing 12.25 5.70 9.75
a. H-102 only
b. J-60 only
c. B-40 and H-102 only
d. J-60 and H-102 only
48. Following are the operating results of the two segment of Parklin
Corporation.
Segment A Segment B total
Sales P 10,000 P 15,000 P 25,000
Variable costs of goods sold 4,000 8,500 12,500
Fixed cost of goods sold 1,500 2,500 4,000
Gross Margin 4,500 4,000 8,500
Variable Selling 2,000 3,000 5,000
Fixed selling and Administrative 1,500 1,500 3,000
Operating income (loss) P 1,000 P (500) P 500

Fixed cost goods sold are allocated to each segment based on the number of
employees. Fixed selling and administrative expenses are allocated equally.
If segment B is eliminated, P1,500 fixed cost of goods sold would be
eliminated. Assuming Segment B is closed, the effect on operating income
would be
a. An increase of P500
b. An increase of P2,000
c. A decrease of P2,000
d. A decrease of P2,500
49. In the decision making process, differential cost is a(n)
a. Sunk cost of alternative courses of action.
 b. Fixed cost of alternative courses of action.
c. Opportunity cost of alternative courses of action.
d. Cost that change among alternative courses of action.
50. McCann Company can manufacture one of two special orders with their existing
capacity. Special order A is for 100,000 units and Special Order B is for
200,000 units. Cost and revenue data per unit are as follows:

Per Unit
Special order A B
Sales price P .7000 P .4500
Direct Material .4550 .2775
Direct Labor
Variable .1100 .0993
Fixed .0300 .0089
Manufacturing overhead
Variable .0430 .0330
Fixed .0370 .0523
Variable marketing cost, already incurred to
obtain the order .0900 .0912
Fixed marketing and administrative costs .0950 .0878

Based on the above information, which one of the following statements

correctly identifies the effect on pretax profit if the optimal decision is
made?
a. P 200 increase if special order A is taken.
b. P 9,200 increase if special order A is taken.
c. P 13,430 increase if Special order A is taken.
d. P 8,040 increase if Special Order B is taken.