Name: the variable costs associated with the order.

B. excess capacity exists and the revenue exceeds all

variable costs associated with the order.
Section and Course: C. excess capacity exists and the revenue exceeds
Date: allocated fixed costs.
Professor: Prof. Jason Radam D. the revenue exceeds total costs, regardless of available
capacity.
Remarks: E. the revenue exceeds variable costs, regardless of
Score: %: available capacity.

8. Occidental is studying whether to drop a product because of

ongoing losses. Costs that would be relevant in this situation would
QUIZ – ACT 07A include variable manufacturing costs as well as:
A. factory depreciation.
B. avoidable fixed costs.
C. unavoidable fixed costs.
NOTE: Strictly NO erasures in any form! Use permanent D. allocated corporate administrative costs.
ball pen only. E. general corporate advertising.

I. Theories: (Write the capital letter of the correct answer

beside each number; 2 pts. each) Problems: (Write the correct amount and decisions being
asked; 3 pts. each)
1. Which of the following best defines the concept of a relevant
cost?
A. A past cost that is the same among alternatives. 1. Oso Interiors provides design services to residential and
B. A past cost that differs among alternatives. commercial clients. The residential services produce a contribution
margin of P450,000 and have traceable fixed operating costs of
C. A future cost that is the same among alternatives.
P480,000. Management is studying whether to drop the residential
D. A future cost that differs among alternatives.
operation. If closed, the fixed operating costs will fall by P370,000.
E. A cost that is based on past experience.
How much is the increase (decrease) in Oso's net income?
2. When deciding whether to sell a product at the split-off point or (P80,000)
process it further, joint costs are not usually relevant because:
A. such amounts do not help to increase sales revenue. For Nos. 2 - 3
B. such amounts only slightly increase a company's sales Hanep Company manufactures two products: Regular and Super.
margin. The results of operations for 2018 follow.
C. such amounts are sunk and do not change with the
decision.
D. the sales revenue does not decrease to the extent that it
should, if compared with separable processing.
E. such amounts reflect opportunity costs.

3. Consider the following costs and decision-making situations:

I. The cost of existing inventory, in a keep vs. disposal decision.

II. The cost of special electrical wiring, in an equipment acquisition
decision.
III. The salary of a supervisor who will be transferred elsewhere in
the organization, in a department-closure decision. Fixed manufacturing costs included in cost of goods sold amount to
$3 per unit for Regular and $20 per unit for Super. Variable selling
Which of the above costs is (are) relevant to the decision situation expenses are $4 per unit for Regular and $20 per unit for Super;
noted? remaining selling amounts are fixed.
A. I only.
B. II only.
Hanep wants to drop the Regular product line. If the line is dropped,
C. III only. company-wide fixed manufacturing costs would fall by 10% because
D. I and II. there is no alternative use of the facilities.
E. II and III.
2. What would be the increase (decrease) in operating income if
4. The book value of equipment currently owned by a company is an Regular is discontinued?
example of a(n):
A. future cost. ($39,600)
B. differential cost.
C. comparative cost. 3. Disregard the information in the previous question. If Hanep
D. opportunity cost. eliminates Regular and uses the available capacity to produce and
E. sunk cost. sell an additional 1,500 units of Super, what would be the impact on
operating income?
5. The City of Miami is about to replace an old fire truck with a new
vehicle in an effort to save maintenance and other operating costs. $55,00 increase
Which of the following items, all related to the transaction, would
not be considered in the decision? 4. Tigre Corporation manufactures A and B from a joint process (cost
= P160,000). Five thousand pounds of A can be sold at split-off for
P40 per pound or processed further at an additional cost of P40,000
A. Purchase price of the new vehicle.
and then sold for P50. Ten thousand pounds of B can be sold at
B. Purchase price of the old vehicle.
split-off for P30 per pound or processed further at an additional cost
C. Savings in operating costs as a result of the new vehicle.
of P40,000 and later sold for P32. If Tigre decides to process B
D. Proceeds from disposal of the old vehicle. beyond the split-off point, how much is the increase (decrease) in
E. Future depreciation on the new vehicle. operating income?

6. An opportunity cost may be described as: (P20,000)

A. a forgone benefit.
B. an historical cost. 5. Pihikan Company which has experienced excess production
C. a specialized type of variable cost. capacity received a special offer for its product at P78 per unit for
D. a specialized type of fixed cost. 100,000 units. It has been using the variable costing method and
E. a specialized type of semi-variable cost. has been pricing its product at P96 per unit based on a mark-up of
60% as follows:
7. A special order generally should be accepted if: Direct Materials P30
A. its revenue exceeds allocated fixed costs, regardless of Direct Labor 20
Variable Overhead 6
 Variable Selling and Administrative 4
Total Variable Expenses P60 Sales $205,000
60% Mark-up 36 Cost of sales 67,900
Selling Price P96 Building occupancy costs:
Rent 36,500
Assuming that this special offer will not affect the market for the Utilities 15,000
product, should the company accept the special offer and how much Supplies used 5,600
is the increase (decrease) in net income if the special offer is Wages 77,700
accepted? Miscellaneous 2,400
Allocated corporate overhead 16,800
Yes, P1.8 million
All employees except the store manager would be discharged. The
6. Mael Industries, Inc. has an opportunity to acquire a new manager, who earns $27,000 annually, would be transferred to store
equipment to replace one of its existing equipments. The new no. 8 in a neighboring city. Also, no. 7's furnishings and equipment
equipment would cause P900,000 and has a five-year useful life, are fully depreciated and would be removed and transported to Papa
with a zero terminal disposal price. Variable operating costs would Fred's warehouse at a cost of $2,800.
be P1 million per year. The present equipment has a book value of
P500,000 and a remaining life of five years. It’s disposal price now is Should the store no. 7 be closed and how much is the increase
P50,000 but would be zero after five years. Variable operating costs (decrease) in net income if it will be closed?
would be P1,250,000 per year. Considering the five years in total but
ignoring the time value of money, should Mael replace or not replace No, decrease of $29,700
the old equipment and how much is the net advantage
(disadvantage) of replacing the old equipment? ** End of Quiz **

Replace, P400,000 advantage

7. Gawgaw Industries is a multi product company that currently “For we brought nothing into this world, and it is certain
manufactures 30,000 units of Part 143V each month for use in we can carry nothing out.” - 1 Timothy 6:7-8
production. The facilities now being used to produce Part 143V have
a fixed cost of P150,000 and a capacity to produce 84,000 units per
month. If Gawgaw were to buy Part 143V from an outside supplier,
the facilities would be idle, but it’s fixed costs would continue at 40%
of their present amount. The variable production costs of Part 143V
are P11 per unit. If Gawgaw Industries is able to obtain Part 143V
from an outside supplier at a unit price of P12.875, what is the
monthly usage at which it will be indifferent between purchasing and
making Part 143V?

48,000 units

For Nos. 8 – 9
Howard Robinson builds custom homes in Cincinnati. Robinson was
approached not too long ago by a client about a potential project,
and he submitted a bid of $483,800, derived as follows:

Land $ 80,000
Construction materials 100,000
Subcontractor labor costs 120,000
$300,000
Construction overhead: 25% of 75,000
direct costs
Allocated corporate overhead 35,000
Total cost $410,000

Robinson adds an 18% profit margin to all jobs, computed on the

basis of total cost. In this client's case the profit margin amounted to
$73,800 ($410,000 x 18%), producing a bid price of $483,800.
Assume that 70% of construction overhead is fixed.

8. Suppose that business is presently very slow, and the client

countered with an offer on this home of $390,000. Should Robinson
accept the client's offer and how much is the increase (decrease) in
operating income if accepted?

Yes, increase of $67,500

9. If Robinson has more business than he can handle, how much

should he be willing to accept for the home?

$483,800

10. Bush Manufacturing has 31,000 labor hours available for

producing M and N. Consider the following information:

Product M Product N
Required labor time per unit (hours) 2 3
Maximum demand (units) 6,500 8,000
Contribution margin per unit P50 P57
Contribution margin P25 P19
per labor hour

If Bush follows proper managerial accounting practices in terms of

setting a production schedule, how much contribution margin would
the company expect to generate?

P667,000

11. Papa Fred's Pizza store no. 7 has fallen on hard times and is
about to be closed. The following figures are available for the period
just ended: