Items 1 and 2 are based on Kingston Company, which needs 10,000 units of a certain part to be used in its

production cycle. If Kingston buys the part from Utica Company instead of making it Kingston could not use the

realized facilities in another manufacturing activity. 60% of the fixed overhead applied will continue regardless of what

decision is made. The following information is available:

Cost of Kingston to make the part:

Direct materials P6

Direct labor 24

Variable overhead 12

Fixed overhead applied 15

Cost to buy the part from Utica Company P53

1. In deciding whether to make or buy the part, Kingston's total relevant costs to make the part are:

a. P342,000 b. P480,000 c. P530,000 d. P570,000

2. Which alternative is more desirable for Kingston and by what amount?

a. Buy, P50,000 b. Make, P50,000 c. Buy, P40,000 d. Make, P40,000

Syanton manufactures a particular computer component. Manufacturing cost per units are as follows:

Direct materials P50

Direct labor 500

Variable overhead 250

Fixed overhead 400

Total manufacturing costs P1,200

Fredix, Inc. has contracted Syanton with an offer to sell 10,000 of the component for P1,100 per unit. If Syanton

accepts the proposals, P2,500,000 of the fixed overhead will be eliminated. Should Syanton make or buy the

component and why?

a. Buy due to savings of P1,000,000 c. Buy due to savings of P2,500,000

b

.

Make due to savings of P500,000 d. Make due to savings of P3,000,000

4. Below are a company's monthly unit costs to manufacture and market a particular product.

Manufacturing Costs:

Direct materials P2.00

Direct labor 2.40

Variable indirect 1.60

Fixed indirect 1.00

Marketing Costs:

Variable 2.50

Fixed 1.50

The company must decide to continue making the product or buy it from an outside supplier. The supplier has

offered to make the product at the same level of quality that the company can make it. Fixed marketing costs would

be unaffected, but variable marketing costs would be reduced by 30% if the company were to accept the proposal.

What is the maximum amount per unit that the company can pay the supplier without decreasing its

operating income?

a. P8.50 b. P6.75 c. P7.75 d. P6.90

5. The Reno Company manufactures Part No. 498 for use in its production cycle. The cost per unit for 20,000 units of

Part No. 498 are as follows:

Direct materials P6

Direct labor 30

Variable overhead 12

Fixed overhead applied 16

The Tray Company has offered to sell 20,000 units of Part No. 498 to Reno for P60 per unit. Reno will make the

decision to buy the part from Tray if there is a savings of P25,000 for Reno. If Reno accepts Tray's offer, P9 per unit

of the fixed overhead applied would be totally eliminated. Furthermore, Reno has determined that the release

facilities could be used to save relevant costs in the manufacture of Part No. 575. In order to have a savings of

P25,000, the amount of relevant costs that would be save by using the released facilities in the manufacture

of Part No. 575 would have to be

a. P80,000 b. P85,000 c. P125,000 d. P140,000

Accept or Reject a Special Order

6. KC Industries manufactures a product with the following costs per unit at the expected production of 30,000 units.

Direct materials P 4

Direct labor 12

Variable manufacturing overhead 6

Fixed manufacturing overhead 8

The company has the capacity to produce 40,000 units. The product regularly sells for P40. A wholesaler has

offered to pay P32 a unit for 2,000 units. If the firm accepts the special order the effect on its operating

income would be a

a. P20,000 increase c. P4,000 increase

b

.

P16,000 decrease d. P0 effect

7. Louderhead Company makes bull-repellent scent according to a traditional Western recipe, which normally sells at

P90 per unit. Normal production volume is 10,000 ounces per month. Average cost is P50 per ounce, of which P20 is

direct material and P10 is variable conversion cost. This product is seasonal. After July, demand for this product drops

to 6,000 ounces monthly. In November, Garrison Co. offers to buy 1,500 ounces for P60,000. If Louderhead accepts

the order, it must design a special label for Garrison at a cost of P5,000. Each label will cost P2.50 to make and apply.

Louderhead should:

a. Accept the order, at a gain of P6,250 c. Reject the order, at a loss of P23,750

b

.

Reject the order, at a loss of P18,750 d. Accept the order, at a gain of P11,250

Kator company is a manufacturer of industrial components. One of their products that are used as a subcomponent in

auto manufacturing is KB-96. This product has the following financial structure per unit:

Selling price P150

Direct Materials P20

Direct Labor 15

Variable Manufacturing Overhead 12

Fixed Manufacturing Overhead 30

Shipping and Handling 3

Fixed Selling and Administrative 10

Total Cost P90

8. Kator Co. has received a special, one-time, order for 1,000 KB-96 parts. Assuming Kator has excess capacity, the

minimum price that is acceptable for this one-time special order is in excess of

a. P47 b

.

P50 c

.

P60 d

.

P77

9. During the next year, KB-96 sales are expected to be 10,000 units. All of the costs will remain the same except

that fixed manufacturing overhead will increase by 20% and direct materials will increase by 10%. The selling

price per unit for next year will be P160. Based on this data, the contribution margin from KB-96 for next

year will be

a. P620,000 b. P750,000 c. P1,080,000 d. P1,110,000

CONTINUE OR DISCONTINUE OPERATING A BUSINESS SEGMENT - Segment Margin

10. Gata Co. plans to discontinue a department with a P48,000 contribution to overhead, and allocated overhead of

P96,000, of which P42,000 cannot be eliminated. What would be the effect of this discontinuance on Gata's pretax

profit?

a. P48,000 increase b

.

P48,000 decrease c

.

P6,000 increase d

.

P6,000 decrease

11. Consider the following portion of a segmented income statement for the year just ended. Assume that the fixed

expenses of Division X include P30,000 of direct expenses and that the discontinuance of the department will not

affect the sales of the other departments nor reduce the common expenses:

Net sales P100,000

Variable manufacturing costs 60,000

Gross profit P 40,000

Fixed expenses (direct and allocated) 50,000

Loss from operations P (10,000)

What would be the effect on the firm's operating income if Division X were discontinued?

a. P10,000 increase b

.

P40,000 decrease c

.

P100,000 decrease d

.

P10,000 decrease

Questions 19 through 21 are based on the following information: Condensed monthly operating income data for

Korbin Inc. for May follow:

Urban Store Suburban Store Total

Sales P80,000 P120,000 P200,000

Variable costs 32,000 84,000 116,000

Contribution Margin P48,000 P36,000 P84,000

Direct fixed costs 20,000 40,000 60,000

Store segment margin P28,000 P(4,000) P24,000

Common fixed cost 4,000 6,000 10,000

Operating income P24,000 P(10,000) P14,000

Additional information regarding Korbin's operations follows:

One-fourth of each store's direct fixed costs would continue if either store is closed.

Korbin allocates common fixed costs to each store on the basis of sales pesos

Management estimates that closing Suburban Store would result in a 10% decrease in Urban Store's sales,

whereas closing Urban Store would not affect Suburban Store's sales.

The operating results for May are representative of all months.

12. A decision by Korbin to close Suburban Store would result in a month increase (decrease) in Korbin's operating

income of

a. P(10,800) b. P(6,000) c. P(1,200) d. P4,000

13. Korbin is considering a promotional campaign at Suburban Store that would not affect Urban Store. Increasing

annual promotional expense at Suburban Store by P60,000 in order to increase this Store's sales by 10% would result

in a monthly increase (decrease) in Korbin's operating income during the year (rounded) of

a. P(5,000) b. P(1,400) c. P487 d. P7,000

14. One-half of Suburban Store's peso sales are fro items sold at variable cost to attract customers to the store. Korbin is

considering the deletion of these items, a move that would reduce Suburban Store's direct fixed expenses by 15%

and result in a 20% loss of Suburban Store's remaining sales volume. This change would not affect Urban Store. A

decision by Korbin to eliminate the items sold at cost would result in a month increase (decrease) in Korbin's

operating income of

a. P(5,200) b. P(1,200) c. P(7,200) d. P2,000

SELL AS IS OR PROCESS FURTHER - Incremental Profit

Questions 22 and 23 are based on the following information: From a particular joint process, Yulo Company

produces three products, X, Y, and Z. each product may be sold at the point of split or processed further. Additional

processing requires no special facilities, and production costs of further processing are entirely variable and traceable to

the products involved. In 2015, all three products were processed beyond split-off. Joint production costs for the year

were P60,000. Sales values and costs needed to evaluate Yulo's 2015 production policy follow.

Additional Costs and Sales

Value if Processed futher

Product Units Produced Sales Values at Split-Off Sales values Added costs

X 6,000 P25,000 P42,000 P9,000

Y 4,000 41,000 45,000 7,000

Z 2,000 24,000 32,000 8,000

Joint costs are allocated to the products in proportion to the relative physical volume of output.

15. For units of Z, the unit production cost most relevant to a sell-or-process-further decision is

a. P5 b. P12 c. P4 d. P9

16. To maximize profit, Yulo should subject the following product(s) to additional processing.

a. X only b. X, Y, and Z c. Y and Z only d. Z only

SHUT-DOWN OR NOT - lesser loss

17. The Mark X Corp. contemplates the temporary shutdown of its plant facilities in a provincial area which are

economically depressed due to natural disasters. Below are certain manufacturing and selling expenses

1. Depreciation 5. Sales commission

2. Property tax 6. Delivery expenses

3. Interest expense 7. Security of premises

4. Insurance of facilities

Which of the following expenses will continue during the shutdown period?

a. All expenses in the list c. Items 1, 2 and 3 only

b. All except items 5 and 6 d. Items 1, 2, 3, 4, 6 and 7 only

18. Bulusan Company normally produces and sells 30,000 units of E14 each month. E14 is a small electrical relay used

in the automotive industry as a component part in various products. The selling price is P22 per unit, variable costs

are P14 per unit, fixed manufacturing overhead costs total P150,000 per month, and fixed selling costs total P30,000

per month.

Employment-contract strikes in the companies that purchase the bulk of the E14 have caused Bulusan Company's

sales to temporarily drop to only 9,000 units per month. Bulusan Company estimates that the strikes will last for

about two months, after which time sales of E14 should return to normal. Due to the current low level of sales,

however, Bulusan Company is thinking about closing down its own plant during the two months that the strikes are

on. If Bulusan Company does close down its plant, it is estimated that fixed manufacturing overhead costs can be

reduced to P105,000 per month and that fixed selling costs can be reduced by 10%. Start-up costs at the end of the

shutdown period would total P8,000. Since Bulusan Company uses just-in-time production method, no inventories

are on hand.

At what level of unit sales for the two-month period should Bulusan Company be indifferent between closing the

plant and keeping it open?

a. 11,000 b

.

24,125 c

.

10,000 d

.

8,000

Questions 28 - 30 are based on the following information. Levy Corporation had been experiencing a slow down in

business activities in August and September and is considering temporarily shutting down its operations during those

months. The accounting department has provided the following normal operating data for considerations:

Unit sales price P150

Unit variable production costs 60

Unit variable marketing costs 10

Monthly fixed overhead 500,000

Monthly fixed expenses 200,000

Regular sales in units 10,000 per month

Estimated sales in units in August and September 5,000 per month

If the company shuts down its operations, the following costs are expected to be incurred:

Security and safety P200,000 per month

Re-startup costs 100,000 per set up

Regular fixed overhead 40% of total will remain

Regular fixed expenses will be reduced by 30%

19. The total shutdown costs amount to

a. P840,000 b

.

P940,000 c

.

P1,240,000 d

.

P1,180,000

20. The shutdown point in two (2) months is

a. 7,000 units b

.

2,750 units c

.

17,500 units d

.

10,500 units