1) Evaluating Investment Proposal (50 pts)

Wiser Company needs more space and machinery to increase production. The production manager
have been trying to decide which of two plans to accept.
Plan A Plan B
Investment 4,000,000 5,500,000
Additional fixed cash operating cost per year 600,000 800,000
Additional capacity in machine hours per year 200,000 280,000

The company uses straight line method of depreciation. No salvage value is expected for either
investment at the end of their ten-year useful lives.
The production manager prefers plan B because the cost per machine hour and investment per machine
hour are lower than those for Plan A. The president, A. F. Alvarez, is unsure about this and asks the sales
manager whether the capacity would be fully utilized. The sales manager provides the follow data.
Product
X Y Z
Potential increased sales, in units 30,000 40,000 30,000
Contribution margin per unit 18 24 40
Machine hours required per unit 2 4 5

Wiser Company pays taxes at a 40% rate and has cost of capital of 12%.

Required:
a) Prepare a good financial analysis of Plan A and Plan B
b) Using the present value factor, determine the Net Present Value of Plan A and Plan B
c) Which Plan will you recommend? Give a well organized justification.
d) Supposing the recommendation for expansion about expanding the capacity, illustrate
how this expanded capacity should be used?

2) Break-even Analysis (30 pts)

Modest Shirts Company operates a chain of stores in urbanized city. The store carry many styles of
shirts that are all sold at the same price. Sales personnel are paid substantial sales commission of each
shirt sold on top of their basic salary, to encourage aggressive sales effort. The following cost and revenue
data relate to Store AAA and are typical of one of the company's many outlets.
per unit
Sales price ₱45
Invoice cost 18
Sales commissions 7
Annual Expenses:
Advertising ₱280,000
Rental 80,000
Salaries 140,000
Required:
a) Calculate the annual break-even point in units and in pesos for Store AAA.
b) If 22,000 shirts are sold in a year, what would be Store AAA's net income or loss?
c) Suppose the company pays the store manager an incetive commission of P4 per shirt separate from
that of the salesperson's commission, what will be the new break-even point in units and pesos?
d) Suppose the company pays the store manager an incetive commission of P4 per shirt separate from
that of the salesperson's commission, what will be the new net income or loss if 34,000 units shirts
are sold?
e) The company is considering to eliminate the sales commissions entirely and increase fixed salaries
by P121,000 annually and all other data remain constant.
e.1) Compute the new break-even point in units and pesos
e.2) Would you recommend that this change be made? Give justifications.

3) Capital Budgeting - Effects of Events (20 pts)

You are analysing a number of capital budgeting decisions design to reduce labor costs or
increase output of your products. How will each of the following events affect the evaluation?
That is, will it make more attractive, less attractive or have no effect? Consider each event
independently. Justify your answer.
a) Your company signs a new contract, with its union calling for a significant increase in
salary rates?
b) Your chief competitor announces that, it will decrease the selling price of its products.
The entry of new product will slow the sales-growth rate of one of your major products.

4) Profit Planning - Sensitivty Analysis (30 pts)

Excel Company manufactures and sells adjustable canopies that attach to motor homes and trailers.
The market include includes both new unit purchases and purchasers of replacement canopies. The
company developed its business plan based on the assumption that canopies will sell at a price of P400
each. The variable costs for each canopy were projected at P200, and the annual fixed cost were budgeted
at P100,000. Excel company's after tax, profit objective was P240,000, the company's effective rate is 40%.
Although Excel's sales usually rise during the second quarter, the May financial statements reported
that sales were not meeting expectations. For the first five months of the year, only 350 units have been
sold at the established selling price, with variable costs as planned, and it was clear that the current year
after tax profit projection would not be reached unless some actions were taken. The company's president
assigned a management committee to analyze the situation and develop several alternative courses of action.
The following mutually exclusive alternatives were presented to the president.
a) The sale price can be reduced by P40. The sales organization forecasts that, with the
significantly reduced sales price, 2,760 units can be sold during the remainder of the year.
Total fixed and variable costs will remain as budgeted.
b) Variable costs per unit can be lowered by P25 through use of less expensive materials and
slightly modified manufacturing techniques. The sales price will also be reduced by P30,
and the sales forecast is 2,200 units for the remainder of the year.
c) Cut fixed costs by P10,000 and lower the sales price by 5%. Variable costs per unit will
be unchanged. Sales 2,000 units are expected for the remainder of the year.
Required:
1) If no change are made to the selling price or cost structure, what is the number of units that Excel
Company must sell to achieve the following:
a) the break-even point
b) Its original after-tax profit objective of P240,000.
2) Determine which one of the three alternatives Excel Company should select. Support your selection
with computations demonstrating the effect of each alternative on profit.

5) Product Costing Methods (20 pts)

Illustrate the product costing methods: Absorption, Variable, and Throughput costing
Justify which of these methods will give income figures closest to cash flow operations.