AE 23 – STRATEGIC COST MANAGEMENT

BALIWAG, DANNICA C. 2BSA1

ENGAGING ACTIVITY 1 – RELEVANT COST

EXERCISE NO. 4 (Evaluating Special Order) pg. 306

Requirement:

Only the incremental costs and benefits are relevant. More specifically, in this case, the only
relevant overhead costs are the cost of the special tool and the variable production overhead. The
decision has no influence on the other fixed manufacturing overhead costs.

Per Total
Unit 10 bracelets
Incremental revenue P3,499.50 P34,995.00
Incremental costs:
Variable costs:
Direct materials 1,430.00 14,300.00
Direct labor 860.00 8,600.00
Variable manufacturing overhead 70.00 700.00
Special filigree 60.00 600.00
Total variable cost P 2,420.00 P 24,200.00
Fixed Costs:
Purchase of special tool 4,650.00
Total incremental cost 28.850.00
Incremental net operating income P 6.145.00

The special order should be accepted even if it is less expensive than the business typically
costs for the same item because it will increase net operating income. This conclusion might not be
accurate if the special order had an impact on the bracelets' regular selling price or if it called for the
utilization of a limited resource.

EXERCISE NO. 5 (Utilization of a Constrained Resource) pg. 306-307

Requirement No. 1

X Y Z
1) Contribution Margin per Unit P 18 P 36 P 20
2) Direct Labor Cost per Unit P 12 P 32 P 16
3) Direct Labor Rate per Hour 8 8 8
4) Direct Labor-Hours Required per Unit 1.5 4.0 2.0
Contribution Margin per Direct Labor-Hour P 12 P 9 P 10
AE 23 – STRATEGIC COST MANAGEMENT
BALIWAG, DANNICA C. 2BSA1
ENGAGING ACTIVITY 1 – RELEVANT COST

Requirement No. 2

The company should concentrate its labor time on producing product X:

X Y Z
Contribution Margin per Direct Labor-Hour P 12 P 9 P 10
Multiply by: Direct Labor-Hours Available 3,000 3,000 3,000
Total Contribution Margin P 36,000 P 27,000 P 30,000

Product X has the highest contribution margin per direct-labor hour but the lowest
contribution margin per unit and second lowest contribution margin ratio. This measure ought to
inform management's judgments about production, as labor time appears to be the company's
constraining factor.

Requirement No. 3

The amount Jaycee Company should be willing to pay in overtime wages for additional
direct labor time depends on how the time would be used. Jaycee is likely to utilize the additional
time to produce more of product X if there are unfilled orders for every product. P12 of contribution
margin is produced for every hour of direct work time, above and beyond the typical direct labor
cost. Jaycee would therefore like to pay much less, but should be prepared to pay up to P20 per
hour (the P8 regular salary + the P12 contribution margin per hour) for additional labor time.
Managers are informed of the value of extra labor hours to the company by the upper limit of P20
per direct labor hour.

Upon the fulfillment of all product X demand, Jaycee Company would use any additional
direct labor hours to manufacture product Z. In that case, in order to increase production of
product Z, the corporation ought to be prepared to pay up to P18 per hour (the P8 standard wage
+ the P10 contribution margin per hour).

Likewise, more labor hours would be needed to manufacture product Y if all of the demand for
both products X and Z had been met. If so, the business ought to be prepared to pay P17 per hour
or more to manufacture more of product Y.