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

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.