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DIFFERENTIAL COSTS Increases (increments) or decreases (decrements) in total costs that result from
selecting one alternative instead of another. IRelevant]
AVOIDABLE COSTS Costs that will be saved or those that will not be incurred if a certain decision is
made. .[Relevant]
OPPORTUNITY COSTS Income sacrificed or benefit foregone when a certain alternative is chosen over
a nother alternative. IRelevant]
SUNK COSTS Costs that are incurred already and cannot be avoided regardless of what
decision is made. IIrrelevant]
SHUTDOWN COSTS Usual costs that a. company will continue even lf it decides to discontinue or
shutdown the operation of a company segment. IIrrelevant]
JOINT COSTS Costs incurred in simultaneously manufacturing two or more (joint) products
that are difficult to identify individually as separate types of products until the
products ieach a certain processing stage known as the split-off point.
. [Irrelevant]
FURTHER PR.OCESSING Costs incurred beyond the split-off point as separated joint products are to be
COSTS processed further. [Relevant]
SPLIT OFF POINT The earliest stage in the production where joint products can be recognized as
distinct and separate products.
BOTTLENECK Any particular resource or operation where the capacity is less than the demand
RESOURCES placed upon it.
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RELE\/AI\T COSTING
Highest revenues
_EXE_&t-I"1E_5--.rrLi.lVpJl j--Co*SIJ,i.!:i
Variahle Costs;
D'irect nrateriais PL0
Direct laboi I
Variable Overhead 5
Vanable Seiiing ExDenst: __*-z
P"ai
Fixed'Costs:
Fixed 0verhead t-} 50,0rJ0
Fixed Sellin.q Expense 20.000
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REQUIR,ED: io,l)0,
1. What is L.onclon Company's present profit? ri'i (
2. Londorr Company could increase,' its sales tr\r 250.4 if it spends P 20,000 for advertisements.
Determine the effect on cornpaily pr,:,fit using:
A) rctal analysis l!F-
B) Differentiaianalysis tirrr
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RELEVANT COSTING
IfBMW buys the components, tfie facitity now used to *"L*30.",frf";,rJ'..n o;'*nted out ,r ''"--
another firm for P 4.000.
REQUIRED: , ,. ,... -._ ( . ht,
Slroulcl BMW make or buy the components? \,''r'(E ' jpillM" ! i I\..i ---_!
REQUIRED.,
Should Antonia accept or reject the special order? : Ih 1
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4. SPECIAL ORDER PRICING e 1..
' rry h\ .t
Conrada Company sells I-Phone 10 at a price of P 28,O00 per unit. The cost-. o6r unit are:
"" bF
Direct materials
Direct labor
Variable overhead
P B,OOO
4,000
;,;il ",\ , i.;r
Fixed overhead _*_39!0
TOTAL P 20,000 { il i. '. l'rK
A special order for 1,000 units was received fromr Marcia Bona, Bona, a welllkhown cell phone dealer
based in cavite. Additional shipping costs for this sale are p 2,000 per unit.
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REQUIRED: b., t,
What is the minimum selling price per unit fo1 the special order if:
A)
Conrada is operating at FULL capacity? 4,r,'.-, ,
Conrada has EXCESS capacity? .) ;
B)
"_
5. SHUTTING DOWN OPERATIONS
The most recent monthly income statement for Fermina Stores is given below:
Eraneh UevAe-qr-arch Totat
Sales p1,200,000
-C_ebu
p800,000 p2,000,000
Le-s-s"' Variable expenses (840-A0i) (360,000) (1.200,000)
Contribution margin p 360.000 p44O,00O. p900,000
Less.' Traceable fixed expenses (210.000) (180,000) (390.000)
Segment margin P 150,000 p 260,000 p 410,000
less.' Common fixed expenses (180.000) .tLZQ.Qle (300.000)
Profit (loss) (P 30,00Q p_140*p-09 p.Ll=0,O00
If Cebu Branch were eliminated, then its traceable fixed expenses could be avoided. The total
common fixed expenses are merely allocated and would be unaffected.
t/ A) Whatwill be the new company profit (loss) if Cebu Branch is eliminated? l'ltl&
a. P 260,000 c. (p 40,000) (lH, /-\ lt_3 fl.t1
b. P 140,000 (P 70,000) ttufr
",tr,>
B) What will be the decrease in company profit if Cebu Branch is closed anO ZOLaJf?J traceable fixed
b expense would remain unchanged while Davao sales would decrease bV 2oio?
a. P 352,000 c. P 136,000
b. P 280,000 d. No decrease; profit will increase .t '
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RELEVANT COS'TING g,\ .,1r,J,.1 f'. 1," ; i'.'.ii': , '.1 ,-
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PROPUCT ELIMIhIATION PCIINT :
Chrissy Company expt-.cts that sales will dr-c;; Lrelo..a.r tire cr.;rr-ent level of 5,000 r-rnits per nronth. An
income stat(:ment prepared fcrthr-'rrrcinl:hi? s.'rins L.f 5,(-tll0 uniis shoy,, the foliowinq:
Saies (5,C00 O Pr) p 15,000
[_ess:
Variai:i€ costs {5,000 i@ P 2) P '10,ij0c}
Fixed costs
Frofit - Nit -
If plant openations are susltertri*:rj, a shut,-iowrr cost (i.e., oiant maintenance and taxes) of p 2,000
per month wili remain as inrj(rri.ed. Since there is n,.r im,rredtate possihiiity of proftt under preG6il[
conditions, the probler':r oF the company is just ho',r to nrininrize tite loss.
REQUIRED: T I
s9-LUII_o_t[ c_uiDC
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Contribution l.1arg irr
:ljzed.,QsEtE (5-Q!:l) (Ij,Qoq) G-0_Q0)
Profit (loss) i-----,.----=-_---t___-_-"__ -- __l-
7. SEI-L OR PROCESS TURTHER 1,1i [,1x,1
Gorgonia Contpany produces lcrl:r produr;ts iar a fgttil--e€I cf(t, 10,000.t, The firrn could sell the
pr,:ducts at the :pJ:!_pf_pginl for the foiloninE arr:olrnls: @
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At presetlt, the prr:duito ,i* pro."rserl beyonrl tire si:lit-off point arrd they are scrlcl as follows:
!lc,{t,tpJs__ __ lqlpq . __E!ill!i.ql_rqt-,[1p9g9,111g Cq_st Pi'rt]l: I .r lirrg ii '.^''.
M P 40,00ii [, 28,000
L30,000 15, C{}r.1
L. ,/_t,,00{.J 14, COC
o 7,1;co 3.00r:)
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REQIIIR.ED:
1. Which product(s) shr:uicl the fir..n seil at :piit-ofi'point) I
2. If the company takes ihe most crrof;tatrle aciion, then wlrat rryill be its profit? 75k
a. BEST PRODUCT COi.iBINATION
Kulang Co. produces three prodt.:cis;: A, B and C. orie machine is usecl to procluce the prgducts.
The contribution rnargins, sale:> derr;antJs, and tirrre on the nraclrine iin hours) are as follows:
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RELEVANT COSTING
Ir 5. If there ts excess capacity, the minimum acceptable prrce for a special order must cover
l.-, a. Usual fixed manufacturing costs
b. Variable and usual fixed manufacturing costs
c: Variable manufacturing costs associated with the special order
d. Variable manufactuiing cbsts plus contffirition marginfFegone on lost regulat unfta
ilr 6. If the margin that wlll be lost by dropping a product line is more than the fixed costs that will be
I avoided, then
a. The product line operates at a loss
b. The product llne shall be continued
c. The product line shall be shutdown
d. The product line has no significant impact on company profit
1-1
V 7 . If there are no shlrtdown costs, then a company's shutdown point is
a. Nil or zero
b. Below its break-even point
c, Above its break-even point
d. Equai to its break-even point
)'.
h 10. The role of sunk costs in decision making can be summed up in which of the following sayings?
a. No pain, no gain
b. Bygones are bygones
c. A penny saved is a penny earned
d. The love of money is the root of all evil