COSTRAM MOD 2 REVIEWER

• Daisy Company produces a product that can be sold for P250,000 at an intermediate stage. If Daisy
finishes the product, they will incur P75,000 of additional material costs and another P15,000 in
labor and overhead costs. When finished, Daisy will be able to sell the product for P350,000. Which
of the following answers is correct?

Correct answer: Finish the product because profits will increase by P10,000.

• The Sta. Clara Company uses 5,000 units of Part 501 each year. The cost of manufacturing one unit
of Part 501 at this volume is as follows:
Direct materials P 2.50
Direct labor 3.50
Variable overhead 1.50
Fixed overhead 1.00

An outside supplier has offered to sell Sta Clara unlimited quantities of Part 501 at a unit cost of P7.75.
If Sta. Clara accepts this offer, it can eliminate 50 percent of the fixed costs assigned to Part 501.
Furthermore, the space devoted to the manufacture of Part 501 would be rented to another company
for P6,000 per year. If Sta. Clara accepts the offer of the outside supplier, annual profits will increase by:

Correct answer: P7,250

• A company is deciding whether or not to eliminate a segment of its business. The segment
generates total sales of P104,000, its direct expenses are P22,000, and its indirect expenses are
P26,000. Its cost of goods sold is P64,000. Six thousand pesos of the direct expenses and P8,000 of
its indirect expenses are avoidable expenses. Which of the following is not true?

Correct Answer: This segment is a good candidate for elimination.

• Statement 1. In an outsourcing decision, unavoidable fixed costs are irrelevant.

Statement 2. In an outsourcing decision, avoidable fixed costs are irrelevant.

Correct Answer: Only the first statement is correct.

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 • A business is operating at 90% of capacity and is currently purchasing a part which is being used in
its manufacturing operations for P15 per unit. The unit cost for the business to make the part is
P20, including fixed costs, and P12, not including fixed costs. If 30,000 units of the part are normally
purchased during the year but could be manufactured using unused capacity, what would be the
amount of differential cost, increase or decrease, from making the part rather than purchasing it?

Correct Answer: P 90,000 cost decrease

• Cute Company plans to discontinue a department that has a contribution margin of P240,000 and
P480,000 in fixed costs. Of the fixed costs, P210,000 can be avoided. The effect of this
discontinuance on Cute's overall net operating income would be a (an):

Correct Answer: decrease of P30,000

• Statement 1. Segment margin measures a segment’s contribution to the coverage of indirect

expenses.

Statement 2. Depreciation on factory equipment is normally a relevant cost in product line

decisions.

Correct Answer: Only the first statement is correct.

• It costs P450,000 to make 15,000 units of a part in this plant. This cost includes material of P90,000,
direct labor of P120,000, variable overhead of 15,000, and P225,000 in fixed overhead inclusive of
P45,000 in depreciation and common overhead allocation of P150,000. The balance is for the
section supervisor's salary. The part can be purchased for P20 a unit. If the part is purchased, the
space released can be rented for P65,000. If the part is purchased, the company will

Correct answer: gain P20,000

• Mars Company, a manufacturer of lamps, budgeted its production and sale of 400,000 lamps at P20
per unit for the year. Variable manufacturing costs were budgeted at P8 per unit, and fixed
manufacturing costs at P5 per unit. A special order offering to buy 40,000 lamps for P11.50 each
was received by Mars in April. Mars has sufficient plant capacity to manufacture the additional
quantity of lamps; however, the production would have to be done by the present workforce on an
overtime-basis at an estimated additional cost of P1.50 per lamp. Mars will not incur any selling
expenses as a result of the special order. Mars Company would have a unit relevant cost of

Correct answer: P 9.50

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 • Trevor Company is starting business and is unsure of whether to sell its product assembled or
unassembled. The unit cost of the unassembled product is P40 and Trevor Company would sell it for
P90. The cost to assemble the product is estimated at P18 per unit and Trevor Company believes
the market would support a price of P116 on the assembled unit. What is the correct decision using
the sell or process further decision rule?

Correct answer: Process further, the company will be better off by P8 per unit.

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