A. Fresh Restaurant, a large restaurant chain, needed to determine if it would be cheaper to produce 5,000 units of main food ingredient for use in its restaurants or to purchase them from an outside supplier for P12.00 each. Cost information on internal production includes the following: Total Cost Unit Cost Direct materials P 25,000 P 5.00 Direct labor 15,000 3.00 Variable manufacturing overhead 7,500 1.50 Variable marketing cost 10,000 2.00 Fixed plant overhead 30,000 6.00 Total P 87,500 P17.50

Fixed overhead will continue whether the ingredient is produced internally or externally. No additional costs of purchasing will be incurred beyond the purchase price.

REQUIRED:

1. What are the alternatives for Fresh Restaurants?

2. List the relevant cost(s) of internal production and of external purchase

3. Which alternative is more cost effective and by how much?

4. Now assume that 20% of the fixed overhead can be avoided if the ingredient is purchased externally. Which alternative is more effective and by how much?

B.

Halcon Company has been approached by a new customer with an offer to purchase 10,000 units of its model TJ5 at a price of P5.00 each. The new customer is geographically separated from the company's other customers, and existing sales would not be affected. Halcon normally produces 75,000 units of TJ5 per year but only plans to produce and sell 60,000 in the current year. The normal sales price is P12.00 per unit. Unit cost information for the normal level of activity is as follows:

Direct materials P 1.75 Direct labor 2.50 Variable overhead 1.50 Fixed overhead 3.25 Total P9.00 Fixed overhead will not be affected by whether or not the special order is accepted. REQUIRED: 1. What are the relevant costs and benefits of the two alternatives (accept or reject the special order)?

2. By how much will operating income increase or decrease if the order is accepted?

C. Comfort Fit Company manufactures two types of university sweatshirts, the Scoop and the Ruffs, with unit contribution margins of P5.00 and P15.00, respectively. Regardless of type, each sweatshirts must be fed through a stitching machine to affix the appropriate university logo. The firm leases seven machines that each provides 1,000 hours of machine time per year. Each Scoop sweatshirt requires 6 minutes of machine time, and each Ruffs sweatshirt requires 20 minutes of machine time. Note: For all answers that are less than 1.0, round the answer to 2 decimal places. For all unit answers (e.g., the answer is greater than 1.0), round the answer to the nearest whole number.) Assume that there are no other constraints. REQUIRED: 1. What is the contribution margin per hour of machine time for each type of sweatshirt?

2. What is the optimal mix of sweatshirts?

3. What is the total contribution margin earned for the optimal mix.