PROBLEM 1

Exercise 7-21 The S Company provides you with the following information on its products: Unit selling price P100 Unit variable costs and expenses 75 Fixed costs and expenses per year P600,000 It has been estimated that during a temporary shutdown o four months, fixed costs and expenses can be reduced by 20%, although additional costs of maintenance and security of P18,000 has to be incurred. REQUIRED: 1. At what point in units would loss from operations be equal to shutdown costs? Prove by preparing an income statement. 2. How many units must be sold to avoid a loss? Prove also the answer by preparing an income statement. 3. How much is the net advantage or disadvantage of shutting down during the 4- month period? 4. Assuming that the additional cost for security will not change at P18,000, compute again for shutdown point, if the shutdown would be: a. Three months b. Six months c. Five months d. One yearExercise 7-23 The U Oil Refinery is presently operating on a 60% capacity. Its budgeted operating costs for its processing departments are shown below: Capacity Shutdown 60% 80% 100% Throughput (liters) 0 600,000 800,000 1,000,000 Operating Costs: Cracking department P700,000 P1,600,000 P1,900,000 P2,300,000 Treating department 160,000 308,000 360,000 400,000 Solvent dewaxing department 200,000 560,000 670,000 750,000 Solvent extraction department 140,000 380,000 480,000 560,000 Filtering department 194,000 744,000 800,000 840,000 REQUIRED: 1. In each of the following cases, indicate in one short sentence the appropriate management decision. Treat the cases independently. Show the computations necessary to justify your answers. a. 200,000 liters of fuel is on hand. The refinery must decide whether it is more profitable to sell it as fuel oil, or to reprocess it further and crack it into gasoline. The following additional facts are available: Cracking yields: 75% gasoline; 15% fuel oil; and 10% loss. Current prices: fuel oil, P35 per liter; gasoline, P42 per liter. b. The refinery has 400,000 liters of kerosene. It must decide whether to process or sell the kerosene after passing it through the treating department, or crack it into its gasoline contents. Additional information is as follows: Cracking yields: 85% fuel oil; fuel oil, 5%; and 10% loss. Current prices: refined kerosene, P38 per liter; fuel oil, P35 per liter; gasoline, P42 per liter. C. The refinery can purchase an additional 200,000 liters of cylinder stock. The usual bargaining process will determine the final price. Management is interested in knowing how high a price it can pay and still make a profit. The stock purchased would be processed into conventional bright stock and sold as such. The process would require the following operations- solvent dewaxing, solvent extraction, and filtering. Additional information is as follows:Cylinder stock yields: 90% bright stock; 5% petrolatum; and 5% loss. Current prices: bright stock, P46 per liter; petrolatum, no market at present