RELEVANT COSTING

PART 1

QUESTION.

Do you consider Relevant Costing for personal transactions? Why or why not?

PROBLEM SOLVING

PROBLEM 1

Suppose Jobelita Company must decide whether to make or buy some of its components from Jimboy Corporation. The cost of producing 50,000 electrical connectors for its printers is P110,000, broken down as follows:

Direct materials 60,000

Direct labor 30,000

Variable manufacturing overhead 12,000

Fixed manufacturing overhead 8,000

Instead of making the electrical connectors at an average cost per unit of P2.20, the company has an opportunity to buy the connectors at P2.15 per unit. If the connectors are purchased, all variable costs and one-half of the fixed costs will be eliminated.

Instructions:

1.Make an incremental analysis showing whether the company should make or buy the electrical connectors.

2.Will the answer of question 1 be different if the released productive capacity resulting from the purchase of the connectors will generate additional income of P25,000?

PROBLEM 2

Jigo Fiber Company is the creator of J-Go, a technology that weaves silver into its fabrics to kill bacteria and odor on clothing while managing heat. J-Go has become very popular as undergarment for sport activities. Operating at capacity, the company can produce 1,000,000 undergarments of J-Go a year. The per unit and the total costs for an individual garment when the company operates at full capacity are as follows:

The other Five Catbalogan Division Total Divisions Sales 1,664,200 100,000 1,764,200 Cost of goods sold 978,520 76,500 1,055,020 Gross profit 685,680 23,500 709,180 Operating expenses 527,940 48,000 575,940 Net income 157,740 (24,500] 133,240 Per Total undergarment Direct materials 2.00 2,000,000 Direct labor 0.50 500,000 Variable manufacturing overhead 1.00 1,000,000 Fixed manufacturing overhead 1.50 1,500,000 Variable selling expenses 0.25 250,000 Totals 5.25 5,250,000