Horseman Plastics manufactures plastic housings for air conditioners. One of the parts required to manufacture an air conditioner plastic housing is currently produced by Horseman at a rate of P90, 000 units annually. The management is considering purchasing the part from an external vendor, Heavy Plastics, Inc. The following data are made available for making a decision:

Cost per unit to manufacture: Cost per unit to buy:

Direct material P20.00 Purchase price P60.00

Direct labor 30.00 Freight charges 5.00

Variable overhead 13.00

Fixed overhead 12.00

Required:

1. Assuming all of Horseman's internal production costs are all avoidable if it purchases rather than make the parts, which alternative is better and by how much is its net advantage.

2. Assuming that Horseman's fixed overhead is unavoidable regardless of the alternative chosen, which alternative is better and by how much is its net advantage.

Problem 2

Dasmarinas Company produces organic fertilizer which is retailed through farm supply companies. Presently, the company uses 85% of its maximum capacity of 2,000 tons a year. Under its present capacity, the company has the following costs structure of producing a ton of fertilizer:

Direct materials P1, 600

Direct labor 2, 400

Variable overhead 2, 100

Fixed overhead 1, 000

The average sales price of the fertilizer is P10,000 per ton. The firm has been approached by a Malaysian company about supplying 250 tons of fertilizer next year at a price of P6,800 per ton.

Required:

1. What are the relevant costs to the decision to accept this order?

2. What would be the peso effect on pretax income if this order is accepted?