BM2021

NAMES: DATE: SCORE:

ACTIVITY
(11 items x 5 points)

1. Paul Company is contemplating to close the operations of the club temporarily. Due to heavy rains
brought by La Niña, the expected demand of the club was reduced, which is expected to last for six (6)
months. Assume the typical monthly operating revenues and costs of the club operations of Paul
Company:

Selling price per membership P400

Variable costs per membership 270
Contribution margin 130
Fixed costs per month P150,000
Fixed costs avoided if stop operations 70,000
Additional costs during the shutdown 40,000
period for six (6) months
Estimated restarting costs 100,000

If it continues operating, the company will be forced to reduce the membership selling price by 12.50%.
a. Determine the shutdown costs.
b. Determine the shutdown savings.
c. Determine the shutdown point.
d. If the demand of the club is 3,600 memberships, should the company shut down or continue
operations? Justify your answer.

2. ABC Company uses a joint process to produce products A, B, and C. The joint production costs for 201A
were 500,000 and were allocated using relative sales value at the split-off point method.

Each product may be sold at its split-off point or processed further. Additional processing costs are
entirely variable.

Additional
Sales Value at Final Sales
Products Processing
Split-off Value
Costs
A P300,000 P130,000 420,000
B 120,000 100,000 230,000
C 250,000 140,000 400,000
P670,000 P370,000 P1,050,000

a. To maximize profit, which product/s should be sold at split-off point and be processed further,
respectively?
b. If the alternative were to sell at split-off point or to process further all products, which
alternative would be recommended?

3. Maxwell Company manufactures and sells three (3) product lines with contribution margin per unit and
the required production time as follows:

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 BM2021

CM per Machine hour per

unit unit of product
Product A P5.00 2.5 hours
Product B 3.00 3 hours
Product C 4.00 1 hour

The company has a capacity of 20,000 machine hours a month. The market can absorb P4,000 units of
product A, 6,000 units of B, and 10,000 units of C.

a. Determine the contribution margin per hour of each product.

b. What is the most profitable product line based on the contribution margin per machine hour?
Justify your answer.
c. Compute the maximum contribution margin for the month that will meet the conditions stated.

4. Trask Industries, Inc. is considering replacing its old machine with a book value of P150,000 and still has a
remaining useful life of three (3) years. The old machine will be replaced with a new one that will cost
P375,000, with a three-year useful life and no salvage value.

The annual operating costs of the old machine amount to P180,000, which can be reduced by 55% if a
new machine is acquired. The old machine will have no disposal value after three (3) years but can be
disposed of now at P60,000.

a. Ignoring the time value of money and income taxes, determine the differential cost.
b. Should the machine be retained or replaced?

Rubric for problem-solving:

CRITERIA POINTS
Correct accounts and amounts used. 3
Computed final amounts are correct and balanced. 2
TOTAL 5

Rubric for short-answer:

CRITERIA PERFORMANCE INDICATORS POINTS
Content Provided pieces of evidence,
supporting details, and factual 3
scenarios
Organization Expressed the points in a clear and
of ideas logical arrangement of ideas in the 2
paragraph
TOTAL 5

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