PROBLEM 1

Loretta company produces burglar alarms. The companys normal capacity is 20,000 units. It produces and sells 20,000 units each year at a selling price of P60 per unit. The companys unit costs at this level of activity are given below:

Direct materials P15.00

Direct labor 16.00

Variable overhead 4.60

Fixed overhead 10.00

Variable selling expenses 2.40

Fixed selling expenses 8.00

Total P56.00

One of the materials used in the production of burglar alarms is obtained from a foreign supplier. Civil unrest in the suppliers country has caused a cut-off in material shipment that is expected to last for six monthsloretta Company has enough of the material on hand to continue to operate at 40% of normal levels for six-month period. As an alternative, the company could close the plant down entirely for six months. Closing the plant would reduce fixed overhead cost by 80% during the six month period; the fixed selling cost would continue at 60% of their normal level while the plant was closed. However, additional shut-down cost of P9,000 would be incurred during the shut down period for the maintenance.

Requirement

1. What would be the peso advantage or disadvantage of closing the plant during the six-month period?

2. Compute the shutdown point in units.

PROBLEM 2

AB manufacturing can produce either of two products, Product A and Product B, with its existing machinery. Making either product requires the use of grinding machines. AB has 10 grinding machines, each of which can be operated 200 hours per month. Following are the comparative per-unit data for the two products:

Required: 1. If AB can sell as many units of either product as it can make with its limited supply of grinding machines, which product should AB make and what will ABs total contribution margin be per month if it makes that product?

2. The selling price of Product B has only risen to P17,50. ABs manager now estimated that the maximum sales volume of B at that price is 9,000 unit per year. They also believe that at the P11 price, they can sell of product A they can make. How should AB use it grinding machine capacity over the coming year? (That is, how many of each product should AB produce?)

Selling price Variable cost Grinding time, hours Product A P11.00 P7.00 2 Product B P17.50 P10.00 2.5