Exercise (Identifying Relevant Cosis) |A number of costs ere listed below that may be relevant decisions faced by the management of Amarillo Co, a furniture manufseturer Case | Case 2 Wor Nor tem Relevant Relesant Relevant Relevant Sales reveous, bb Direot materials Direct bor Variable manuftctring overhead © Book value Mtoce! E7000 sachin “ © Disposal value~ Model £7000 smathine on Depreciation ~ Model E7000 machine enn Market value ~Moaet F5000 machine (est, xed manufacturing overhead (general oe Variable sling expen... K. Fixed selling expense. General adminis ‘overhead, Required Copy the information above onto your answer sheet and place an X in the ‘appropriate column to indicate whether each item is relevant or not relevant in the following situations. Requirement | relates to Case | above, and quirement 2 relates to Case 2, Consider the two eases independently. 1. The company chronically runs at capacity ard the old Mode! E7000 ‘machine ts the company's constriint.. Management is considering the Purchase of a new Model F500) machine to use in addition to the The old Model £7000 machine will continue to be used to capacity as before, with the new Model F5000 being used to expand production. ‘Tho inercase in volume will be large enough to require increases in fixed selling expenses and in general administrative overhead, but not in the general fixed manufacturing overhead. 2. The old Mode! £7000 machine is nat the company’s constraint, but management is considering replacing it with a new Model F500 machine because of the potential savings in direct materials cost with the new machine, The Model E7000 machine would be sold. This change will have no effeet on production or sales, other than some savings in firect materials costs due to less waste.Exercise 2 (Identification of Relevant Costs) Ingrid Yee purchased a used automobile for P10,000 at the beginning of last year and incurred the following operating costs: Depreciation (P 10,000 + 5 years). P2,000 Insurance... : P960 Garage rent P480 Automobile tax and license. P60 Variable operating cost... 8¢ per km. The variable operating costs consist of gasoline, oil, retires, maintenance, and Tepairs. Ingrid estimates that at her current rate of usage, the car will have zero value in five years, so the annual straight-line depreciation is P2,000. The car is kept in a garage for a monthly fee. Required: 1. Ingrid drove the car 10,000 kms. last year. Compute the average cost per km. of owning and operating ‘the car, 2. Ingrid is unsure about whethpr she should use her own car or rent a car to go on an extended country trip for two weeks during summer break What costs above are relevant in this decision? Explain, 3. Ingrid is thinking about buying an expensive sports car to replace the ear she bought last year. She would drive the same number of kms. irrespective of which car she owns and would rent the same parking space. The sport car’s variable operating costs would be roughly the same as the variable operating costs of her old car. However, her insurance and automobile tax and license costs would go up. What costs are relevant in estimating the incremental cost of owning the more expensive car? Explain.Exercise 3 (Make or Buy a Component) Cafiada Inc., manufactures @ variety of heating and air-conditioning units The company is currently manufacturing all of its own component parts. An outside supplier has offered to sell a thermostat to Cafiada for P200 per unit. To evaluate this offer, Cafiada, Inc., has gathered the following information relating to its own cost of producing the thermostat internally: Per 15,000 Units Unit per Year Direct material P60 P.-900,000 Direct labor. 3 80 1,200,000 Variable manufacturing overhead.s..sursne 10 150,000 Fixed manufacturing overhead, traceable......... 50* 750,000 Fixed manufacturing overhead, common, but allocated sii 100 _1,500,000 Total cost. P300 4,500,000 * 40% supervisory salaries; 69% depreciation of special equipment (no resale value). Required: |. Assuming that the company has no alternative use for the facilities now being used to produce the thermostat, should the outside supplier’s offer be accepted? Show all computations. 2. Suppose that if the thermostats were purchased, Cafiada, Inc., could use the freed capacity to launch a new product. The segment margin of the new product would be P650,000 per yeag Should Cafiada, Inc., accept the offer to buy the thermostats from the outside supplier for P200 each? Show computations,Exercise 4 (Evaluating Special Order) Glamour Jewelers is considering a special order for 10 handcrafted gold bracelets to be given as gifis to members of a wedding party. The normal selling price of a gold bracelet is P3,899.50 and its unit product cost is P2,640.00 as shown below: Materials... P1,430.00 Direct labor. 860.00 Manufacturing overhead 350.00 Unit product cost..... P2,640.00 Most of the manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period. However, P70 of the overhead is variable with respect to the number of bracelets produced, ‘The customer who is interested in the special bracelet order would like special filigree applied to the bracelets, This filigree would require additional materials costing P60 per bracelet and would also require acquisition of a special tool costing P4,650 that would have no other use once the special order is completed. This order would have no effect on the company's regular.sales and the order could be fulfilled using the company’s existing capacity without affecting any other order. Required: What effect would accepting this order have on the company’s net operating income if a special price of P3,499.50 is offered per bracelet for this order? Should the special order be accepted at this price?Exercise 5 (Utilization of a Constrained Resource) Jaycee Company produces three products: X,Y, and Z. The selling price, variable costs, and contribution margin for one unit of each product follow: Product 6 x ¥ Zi Selling price ... P60 P90. P80, Less variable costs: Direct materials, 27 4 40 Direct labor .. iden 12 32 16 Variable manufacturing overhead | 3) _8 4 Total variable cost. 42 54 60 Contribution margin P1g P36 Contribution margin ratio... 30% 40% Due to a strike in the plant of one of its competitors, demand for the company’s products far exceeds its capacity to produce. Management is trying to determine which product(s) to concentrate on next week in filling its backlog of orders. The direct labor rate is P8 per hour, and only 3,000 hours of labor time are available each week. Required: 1. Compute the amount of contribution margin that will be obtained per hour of time spent on each product. 2. Which orders would you recommend that the company work on next week ~ the orders for product X, product Y, or product Z? Show computations. 3. By paying overtime wages, more than 3,000 hours of direct labor time can be made available next week. Up to how much should the company be willing to pay per hour in overtime wages as long as there is unfilled demand to the three products? Explain,Exercise 6 (Sell or Process Further) Patrick Company manufactures three products from a common input in a Joint processing operation. Joint Processing costs up to the split-off point total P100,000 per year. The company allocates these costs to the joint Products on the basis of their total sales value at the split-off point. These Seles values are as follows: product A, 50,000; product B, P90,000; and | product C, P60,000, Each product may be sold at the split-off point or processed further. Additional processing requires no special facilities. The additional Processing costs and the sales value after further processing for each product “en an annual basis) are shown below: Additional Sales Product Processing Costs Value P35,000 P 80,000 40,000 150,000 12,000 75,000 Required: ' [Bich product or products should be sold at the split-off point, and which Product or products should be processed further? Show computations.Exercise 7 (Identification of Relevant Costs) Shin has just returned from salmon fishing, He was lucky on this trip brought home two salmon. Shin’s wife, CG, disapproves of fishing, and discharge Shin from further fishing trips, she has presented him with following cost data. The cost per fishing trip is based on an average of 1 fishing trips per year. Cost per fishing trip: Depreciation on fishing boat8 (annual depreciation of P1,500 = 10 trips) PISe) Boat moorage fees (annual rental of P1,200- 10 trips) 128) Expenditures on fishing gear, except for snagged lures (annual expenditures of P200 + 10 trips) 28 Snagged fishing lures 7 Fishing license (yearly license of P40 + 10 trips) = Tucl and upkeep on boat per trip Fa Junk food consumed during trip g Total cost per fishing trip PBS Cost per salmon (P334-+ 2 salmon) Pigg * The original cost of the boat was P15,000. It has an estimated useful life 10 years, after which it will have no resale value. The boat does not wear through use, but it does become less desirable for resale as it becomes older. Required: 1. Assuming that the salmon fishing trip Shin has just completed is typical. what costs are rejevant to a decision as to whether he should go om another trip this year? 2. Suppose that on Shin’s next fishing trip he gets lucky and catches three salmon in the amount of time it took him to catch two salmon on his last trip. How much would the third salmon have cost him to catch? Explain. 3. Discuss the costs that are relevant in a decision of whether Shin shoulé give up fishing,Exercise 8 (Dropping or Retaining a Segment) Paragon Senior Services is a nonprofit organization devoted to providing essential services to seniors who live in their own homes within the Pasig area. Three services are provided for seniors — home nursing. meals ot wheels, and housekeeping. In the home nursing program, nurses visit seniors on a regular basis to cheek on their general health and to perform tests ordered by their physicians. The meals on wheels program delivers @ het meal once @ day fo each senior enrolled in the program. The housekeeping service provides weekly housecleaning and maintenance services. Date ae revenue and expenses for the past year follow: Home Meals on Fonse~ Tora! Nursing “Wheels keeping es 900,000 P260,000 400,000 P3.40,000 le expenses 190.008 120,009 _210.000 __160,000 bution margin 410.000 “140.000 “190,000 — $0,900 expenses: Depreciation 68,000 8.000 40,000 2.000 Liabiliey insurance 42,000 20,000 7,000 Program administrators’ salsries 115,000 38,000 General administrative overhend* 180,000 — 20.000 fixed expenses 405,000 “165.000 Soperating income (loss) B_S.000 P.25,000 * Allocated on the basis of program revenues. The head administrator of Paragon Senior Services, Matsu Amamiya, is Soncerned about the organization’s finances and considers the net operatina income of P3,000 tast year to be razor-thin. (Last year's results were vers, girnilar to the results of previous years and ape representative of what would in the future.) She feels that the organization should be buildine rate in order to prepare for the next inevitable recession. After sccing. the above report, Ms. Amamiya, asked for More information about the financial advisability of perhaps discontinuing the housekeeping program jie depreciation in housekeeping is for a small van that is used to earry the housekeepers and their equipment from job to job. If the program were discontinued, the van would be donaied to a charitable organization Depreciation charges assume zero salvage value. None of the general Administrative overhead would be avoided if the housekeeping program were dropped, but the liability insurance and the salary of the program administrator would be avoided. Required: i, Should the housekeeping program be discontinued? Explain. Show computations to support your answer. 2 Recast the above data in a format that would be more useful t= management in assessing the long-run financial viability of the various services. :Exercise 9 (Special Order) Kimura Company produces a single product. The costs of producing and selling a single unit of this product at the company’s current activity level oF 8,000 units per month are: Direct materials P2.50 Direct labor P3.00 Variable manufacturing overhead PO0.50 Fixed manufacturing overhead P4.25 Variable selling and administrative expenses PL.SO Fixed selling and administrative expenses P2.00 The normal selling price is P15 per unit. The company’s capacity is 10,000. units per month. An order has been received from a potential customer overseas for 2,000 units at a price of P12.00 per unit. This order would net affect regular sales. Ps Required: 1. If the order is accepted, by how much will monthly profits increase ce decrease? (The order would not change the company’s total fixed costs.) 2. Assume the company has 500 units of this product left over from the lax year that are inferior to the current model. The units must be sole through regular channels at reduced prices. What unit cost is relevant for establishing a minimum selling price for these units? Explain.Exercise 10 (Make or Buy a Component) KTIM Company manufactures 20,000 units of part R-3 each year for use on 4% production line, At this level of activity, the cost per unit for part R-3 follows: Direct materials P 4.80 Direct labor " 7.00 Variable manufacturing overhead 3.20 Fixed manufacturing overhead 10.00 Total cost per part ‘25,00 An outside supplier has offered to scll 20,000 units of part R-3 each year to 'M Coinpany for P23.50 per part. If KTTM Company accepts this offer, facilities now being used to manufacture part R-3 could be rented to ther company at an annual rental of P150,000. However, KTTM pany has determined that P6 of the fixed manufacturing overhead being lied to part R-3 would continue even if part R-3 were purchased from the ide supplier. lired: computations showing how much profits will increase or decrease if outside supplier’s offer is accepted.Exercise 12 (Target Costing) Olympic Auto Supply, Inc., produces and distributes auto supplies. The company is anxious to enter the rapidly growing market for long-life batteries that is based on lithium technology. Management believes that to be fully competitive, the price of the new battery that the company is developing cannot exceed P65. At this price, management is confident that the company can sell 50,000 batteries per year. The batteries would require an investment of P2,500,000, and the desired ROI is 20%. Required: Compute the target cost of one battery. Exercise 13 (Pri ing a New Product) Prince Shop owns and’ operates a chain of popular coffee stands that serve over 30 different coffee-based beverages. The constraint at the coffee stands is the amount of time required to fill an order, which can be considerable for the more complex beverages. Sales are often lost because customers leave after seeing a long waiting line to place an order. Careful analysis of the company’s existing products has revealed that the opportunity cost of order- filling time is P34.00 per minute. The company is considering introducing a new product, amaretto cappuccino, to be made with almond extract and double-fine sugar. The variable cost of the standard size amaretto cappuccino would be P4.60 and the time required to fill an order for the beverage would be 45 seconds. Required: What is the minimum acceptable selling price for the new amaretto cappuccino product?Problem I (Accept or Reject an Order) Inc., has excess capacity of As a result of an expansion program, Marianas, Inc., 0 40,000 machine hours, which is expected to be absorbed by the domestic market in a few months. The company has received inquiries from two companies located in another country. One offers to buy 21,000 units of Product A at P1.20 per unit; the Second offers to buy 30,000 units of Product B at P1.40 per unit, Marianas, Inc. can accept only one of these two offers, The standard cost for these two products is as follows: PRODUCT A PRODUCT B Factory overhead is applied on a machine-hour basis at P11.20 per hour, 75% factory overhead is estimated to be fixed. No marketing and aciministreticg | gaPenses would be applicable to either order. Transportation charges are to Materials PO.50 PO.70 Labor 0.20 0.24 , Factory overhead 0.40 0.56 Total standard cost PL1o PLSQ be paid by the buyer. | Required: Which order should be accepted?Problem 2 (Eliminate or Retain a Product Line) Crystal Sports Equipment manufactur ‘ es round, rectangular, and octagonal Hampolines. Data on sales and expenses for the past month follow: salt Trampoline otal Round ~~ Rectangular Octagonal PL 900,000 140,000 500,000 P360,000 i 10,000 60,000 200,000 + _150.000 ~ 590,000 80.000 300.000 + “210.000 Sales. — Less variable expenses | Contribution margin | Tess fixed expenses: | Advertising ~ traceabl 216,000, 41,004 ee ees 000 110,000 65,000 | equipment... 98,000 Rene. 20,000 40,000 35,000 BATHS. ctscnnsern 19,000 6,000 7,000 6,000 General factory | overhead*... Total fixed expenses. ‘Net operating income (loss)... 200,000 28,000 190,000 _72, 2,000 530,000 95,000 _ 257,000 178,000 P_60,000 — PC15,000)—_P_43,000 232,000 74 common fixed cost that is allocated on the basis of sales pesos Management is concerned about the continued losses shown by the round trampolines and wants a recommendation as to whether or not the line should be discontinued. The special equipment used to produce the trampolines has no resale value, If the round trampoline model is dropped, the two line supervisors assigned to the model would be discharged. Required: : 1, Should production and sale of the round trampolines be discontinued? You may assume that the company has no other use for the capacity now being used to produce the round trampolines. Show computations to support your answer. 2. Recast the above data in a format that would be more usable to management in assessing the long-run profitability of the various product lines.Problem 3 (Product Mix) Data concerning four product lines are as follows: Product Line A B Cc D Selling price per unit P30 P25 P10 P8 Variable cost per unit 25 10 5 4 Hours required for each unit Shrs. 10 hrs. 4hrs. Thr. Market limit (unit) None None 8,000 4,000 Total fixed cost . P100,000 Total hours available 96,000 hours Required: 1. Based on these data, choose the best product combinati 2. How would the answer change if there are no market limitations on any of the products? How much greater is the profit from this combination of products than the profit associated with the combination in (1)? Problem 4 (Accept or Reject a Special Order) Although Prairie Company has the capacity to produce 16,000 per month, current plans call for monthly production and sales of only 10,000 units of P15.00 each. Costs per unit are as follows: Direct materials P 5.00 Direct labor 3.00 Variable factory overhead 0.75 Fixed factory overhead Variable marketing expense Fixed administrative expense mmend whether or not the company should accept a special order 4,000 units @ P10. , the maximum price Prairie Company should be willing to pay ‘joutside supplier who is interested in manufacturing this product. the unit cost figure the company would use in costing inventory, eng direct co: ; ify the effect on the monthly contribution margin if the sales price reduced to P14, resulting in a 10% increase in sales volume.Problem 6 (Pricing) Neilsen’s Woodworking Company came to you for assistance when the bookkeeper presented the income statement showing large loss for the second year of operations. The loss of P70,000 was expected for the first year when the company operated at low level. However, the management of Neilsen’s Woodworking was shocked to discover a loss of P160,000 for the second year. The president of the company could not understand how they could be ‘operating at near-capacity and losing money. ‘The company was consistently short of cash, a commen problem when operations are expanding, From your preliminary examinations, you found very poor accounting records. You are satisfied that the data in the financial statements are correct and that there is no significant fraud. The company manufactures a line of kitchen cabinets. Because of the lack of detailed records, it is impossible to develop data about the cost of the product. The selling price was set by the president 10 undersell competition. Condensed income statements are presented below. NEILSEN*S WOODWORKING Income Statement 2013 and 2014 2013 2014 Sales (P40 each) P_100,000 — P_400,00 Operating expenses: Beginning inventory of materials P oP Operating, expense 190,000 Total P 190,000 P_ 590,000 Ending inventory of materials 20,000 30.000 Expenses for the year P170,000 — B_560,000 ‘Net loss 220,900) PU60,000) Other data: Units produced 2,500 units 10,000 units Units sold 2,500 units 10,000 units Assets invested in business P100,000 100,000 Capacity in units 12,000 12,000 Required: A. Why did the company lose P160,000 in the second year? How much would the company lose if they operated at capacity? B._ What price must be set to earn a profit of 8% of sales? €. What price must be set to carn a contribution margin ratio of 30%? D. What price must be set to earn 15% on the assets invested in the business?Problem 7 (Make or Buy) i i +h year as a component in the key Company uses 5,000 units of Part Z cacl n ae of ai ‘orits products. The company is presently producing Part Z internally at a total cost of P100,000, computed as follows: Direct materials P 15,000 Ciect tebor 50,000 Variable manufacturing overhead 10,000 Fixed manufacturing overhead —45.000 ; Total costs 100,000 {An outside supplier has offered to provide Part Z (Mickey Company stops producing the part intern PPanufacturing overhead would be eliminated. Required: re an analysis showing the annual Secepting the outside supplicr’s offer. at a price of P18 per unit, ally, one-third of the fixed Peso advantage or disadvantage ofProblem 9 (Shutting Down or Continuing to Operate a Plant) (Note: This type of decision is similar to dropping a product line.) Kristin Company manuféctures a fast-bonding glue in its Laguna plant. The company produces and sells 40,000 gallons of the glue each month. This glue, which is known as KK-8, is used in the wood industry to manufacture plywood. The selling price of KK-8 is P35 per gallon, variable costs are P21 per gallon, fixed manufacturing overhead costs in the plant total P230,000 per month, and the fixed selling costs total P3 10,000 per month. Strikes in the mills that purchase the bulk ofthe KK-8 glue have caused Kristin Company’s sales to temporarily drop to only 11,000 gallons per month. Kristin Company’s management estimates that strikes will last for two months, after which sales of KK-8 should return to normal. Due to the current low level of sales, Kristin Company's management is thinking about closing down the Laguna plant during the strike. If Kristin Company does close down the Laguna plant, fixed manufacturing ‘overhead costs can be reduced by P60,000 per month and fixed selling costs can be reduced by 10%. Start-up costs at the end of the shutdown period ‘would total P14,000. Since Kristin Company uses Lean Production methods. no inventories are on hand. Required: 1. Assuming that the strikes continue for tvo months, would you recommend that Kristin Company close the Laguna plant? Explain. Show computations to support your answer. 2. At what level of sales (in gallons) for the two-month period should Kristin Company be indifferent between closing the plant or keeping it open? Show computations. (Hint: This is a type of break-even analysis. except that the fixed cost portion of your break-even computation should include only those fixed costs that are relevant [i.e., avoidable} over the two-month period.) ~