Zoom Manufacturing had always made its components in-house. However, Brent Component Works had recently offered to supply one component, K3, at a price of P25.00 each. Zoom uses 10,000 units of Component K3 each year. The cost per unit of this component is as follows:

Direct materials P 12.00

Direct labor 8.25

Variable overhead 4.50

Fixed overhead 2.00

Total P 26.75

Additional information:

The fixed overhead is an allocated expense; none of it would be eliminated if production of Component K3 stopped.

REQUIRED:

1. What are the alternatives facing Zoom Manufacturing with respect to production of Component K3?

1. List the relevant costs for each alternative. If Zoom decides to purchase the component from Brent, by how much will operating income or decrease?

1. Which alternative is better?

1. 5 points

Smash Company manufactures professional paperweights and has been approached by a new customer with an offer to purchase 15,000 units at a per-unit price of P7.00.The new customer is geographically separated from Smash's other customers, and existing sales will not be affected. Smash normally produces 82,000 units but plans to produce and sell only 65,000 units in the coming year. The normal sales price is P12.00 per unit. Unit cost information is as follows:

Direct materials P 3.10

Direct labor 2.25

Variable overhead 1.15

Fixed overhead 1.80

Total P` 8.30

If Smash accepts the order, no fixed manufacturing activities will be affected because there is sufficient excess capacity.

REQUIRED:

1. What are the alternatives for Smash Company?

1. Should Smash accept the special order? By how much will profit increase or decrease if the order is accepted?

1. 4 points

Refer to the data in Problem letter B, assume the following information:

Supposed a customer wants to have its company logo affixed to each paperweights using a label. Smash would have to purchase a special logo labelling machine that will cost P12,000. The machine will be able to label the 15,000 units and then it will be scrapped (with no further value). No other fixed overhead activities will be incurred. In addition, each label logo requires additional direct materials of P0.20 per unit.

REQUIRED:

1. Should Smash Company accept the special order? By how much will profit increase or decrease if the order is accepted?