Test III PROBLEM SOLVING (CASE ANALYSIS) (2 points each) 20 points

A.

EGO Company produces three products, A, B, and C. A machine is used to produce the products. The contribution margin, sales demands, and time of the machine (in minutes) are as follows:

Demand CM Machine Time (minutes)

Product A 1,200 P 10 5

Product B 800 18 10

Product C 1,000 25 15

There are 400 hours available on the machine during the week.

REQUIRED: Compute for the following:

1. The contribution margin per minute of machine time for each product.
2. The optimal mix of products (number of units) for all the products
3. The contribution margin earned for the optimal mix as computed above.

B.

Kristine Company manufactures a fast-bonding glue in its Cavite plant. The company produces and sells 40,000 gallons of the glue each month. This glue, which is known as KK-5, is used in the wood industry to manufacture plywood. The selling price of KK-5 is P35 per gallon, variable costs are P21 per gallon, fixed manufacturing overhead costs in the plant total P230,000 per month, and the fixed selling costs total P310,000 per month.

Strikes in the mills that purchase the bulk of the KK-5 glue have caused Kristine company's sales to temporarily drop to only 11,000 gallons per month. Kristine Company's management estimates that the strikes will last for two months, after which sales of KK-5 should return to normal. Due to the current low level of sales, Kristine company's management is thinking of about closing down the Cavite plant during the strike.

If Kristine company does close down the Cavite plant, fixed manufacturing overhead costs can be reduced by P60,000 per month and fixed selling costs can be reduced by 10%. Start-up cost at the end of the shutdown period would total P 14,000. Since Kristine company uses Lean Production methods, no inventories are on hand.

REQUIRED: Compute for the following:

1. What are the alternatives of Kristine Company in this situation?
2. The shutdown costs based on the above information
3. The advantage or disadvantage of whether to shutdown operation or continue operations

C.

Ridge Company manufactures Part Z for use in its production cycle. The per unit cost for 2,000 units of Part Z are as follow:

Direct materials P 5.00

Direct labor 25.00

Variable overhead 10.00

Fixed overhead 20.00

Mc Done Company has offered to sell Ridge Company 2,000 units of Part Z for P50 per unit. If Ridge accepts Mc Done's offer, the released facilities could be used to save P30,000 in relevant costs in its manufacture of Part Z. In addition, P10 per unit of fixed overhead applied to Part Z would be totally eliminated.

REQUIRED:

1. What are the alternatives of Ridge company in this situation?
2. Compute for the relevant unit cost of the special offer.
3. Determine the effect in operating income of Ridge if they will accept the special offer.