Short-Run Alternative Choice Decisions Alternative choice decisions: manager seeks to choose best out of several alternatives.

. Introduces construct of differential costs and revenues for several types of problems, each having a relatively short time horizon. Differential Costs Costs that are different under one set of conditions than under another. Avoidable costs costs that may be avoided if a specific course of action is not taken. ut!of!pocket costs costs re"uiring cash disbursements in the current accounting period or additional costs that incurred in a specific course of action. pportunity cost value # income lost or sacrificed by giving up an alternative course of action. Sunk Cost a cost that has already been incurred and therefore cannot be changed by any decision currently being considered. $ot differential cost. Alternative Choice Problems Change of operation method. %ake or buy. Constrained resources and product mi& 'iscontinuing a product # business segment Additional business (e.g. special orders) *ell or process further

Exercises 1. Ilaw Inc. budgeted sales of 400,000 lamps at P20 per lamp. Variable manufacturing costs were budgeted at P8 per unit and fixed manufacturing costs were also budgeted at P per unit. ! special order offering to bu" 40,000 lamps at P11. 0 per lamp was recei#ed b" Ilaw. Ilaw $as sufficient capacit" to manufacture t$e additional lamps% $owe#er, t$e production would $a#e to be done b" t$e present wor& force on an o#ertime basis at an estimated additional cost of P1. 0 per lamp. Ilaw will not incur an" selling expenses from t$is special order. '$ould Ilaw accept t$is offer( 2. )ou $a#e been approac$ed b" a foreign customer w$o wants to place an order for 1 ,000 units of Product * at P22. 0 per unit. )ou currentl" sell t$is item for P+, per unit and t$e item $as a total cost of P2, per unit. -urt$er anal"sis re#eals t$at "ou will not be pa"ing sales commission of P2. 0 per unit on t$is sales and its pac&aging re.uirement will sa#e "ou an additional P1. 0 per unit. /owe#er, t$e additional grap$ics re.uired on t$is 0ob will cost "ou P+0,000. 1ote also t$at fixed costs amounting to P400,000 for t$e production of 0,000 units of suc$ products will not c$ange. '$ould "ou accept t$e special order( +. 2$e cost to produce 24,000 units consist of t$e following3 4irect materials 4irect labor -actor" o#er$ead, all fixed 'elling expense 6+ 7 #ariable, 5 7 fixed8 P +50,000 40,000 2,0,000 240,000

9$at unit price would t$e compan" $a#e to c$arge to ma&e P22, 00 on a sale of 1, 00 additional units t$at would be s$ipped out of t$e normal mar&et area( 4. !le0ar *orp. manufactures a product wit$ a unit #ariable cost of P 0 and a unit sales price of P88. -ixed manufacturing costs were P240,000 w$en 10,000 units were produced and sold. 2$e compan" $as a one:time opportunit" to sell an additional +,000 units at P;0 per unit in a foreign mar&et. 2$is special sale would not affect its present sales. If t$e compan" $as sufficient capacit" to produce t$e additional units, w$at will be t$e effect on net income as a result of accepting t$e special order( . <efer to number 4. !ssume t$at selling t$e +,000 units will affect regular sales. 2$is means t$at t$e +,000 units will come from t$e regular sales and t$at !le0ar does not $a#e enoug$ capacit" to produce t$e +,000 units. 9ill !le0ar accept t$e special order( 5. ! business is currentl" operating at ,07 and is currentl" purc$asing a part, w$ic$ is being used in its manufacturing operations for P1 per unit. 2$e unit cost for t$e business to ma&e t$e part is P20, including fixed costs and P12, not including fixed costs. -ixed costs will remain t$e same regardless of bu"ing or ma&ing t$e part. If +0,000 units of t$e part are normall" purc$ased during t$e "ear could be manufactured using t$e unused capacit", w$at would be t$e amount of sa#ings from ma&ing t$e part rat$er t$an purc$asing it( ;. '"l#an Processing *orp. is considering w$et$er to ma&e 2,000 units of product 9$irl, w$ic$ $as a total unit cost of P15 or bu" it from an outside supplier for P1 per unit. ! furt$er anal"sis s$ows t$at if product 9$irl is outsourced, fixed costs of P8,000 attributable to t$is product will be reduced b" 2 7. '$ould '"l#an ma&e or bu" t$e product( 8. It costs P4 0,000 to ma&e 1 ,000 units of a part in a manufacturing plant. 2$is cost includes direct material of P,0,000, direct labor of P120,000, #ariable o#er$ead of P1 ,000 and P22 ,000 in fixed o#er$ead inclusi#e of P4 ,000 in depreciation and common o#er$ead allocation of P1 0,000. 2$e balance is for t$e section super#isor=s salar". 2$e part can be purc$ased for P20. If t$e part is purc$ased, t$e space released can be rented to potential lessees for P5 ,000 and t$e super#isor will be unemplo"ed. If t$e compan" decides to purc$ase t$e part, w$at will be t$e effect on income( ,. >ars *orp. is a multi:product firm t$at currentl" manufactures +0,000 units of Part ? eac$ mont$ for use in t$e production of its main product. 2$e facilities now being used to produce Part ? $a#e a fixed mont$l" cost of P1 0,000 and a capacit" to produce 84,000 units per mont$. If >ars were to bu" t$e part from an outside supplier, t$e facilities would be idle, but 407 of t$e fixed costs will continue. 2$e #ariable production cost of Part ? is P11 per unit. If >ars is able to purc$ase t$e part from an outside supplier, t$e purc$ase price is P12.8; per unit. 9$at is t$e mont$l" usage at w$ic$ it will be indifferent between ma&ing or bu"ing product ?(

10. @atawa *orp. produces two products from a 0oint process. Information about t$e two 0oint products follows3 !nticipated Production 6pounds8 'elling Price per pound, as is 6at split off8 !dditional Processing *ost per pound after split off 6all #ariable8 'elling Price per pound after furt$er processing A 2,000 P+0 P1 P40 ) 4,000 P15 P+0 P 0

2$e 0oint cost is P8 ,000. @atawa is currentl" selling t$e products as is. '$ould @atawa process furt$er products A and )( /ow muc$ will be t$e increase in net income( 11. >atador >anufacturing sc$edules a wee&l" production of 1 ,000 units of Product > and +0,000 units of Product 1 for w$ic$ P800,000 common #ariable costs are incurred. 2$ese products can be sold as is or processed furt$er. -urt$er processing of eit$er product does not dela" t$e production of subse.uent batc$es of t$e 0oint products. Below are some data3 Cnit price wit$out furt$er processing Cnit price wit$ furt$er processing 2otal separate wee&l" #ariable cost of furt$er processing '$ould >atador sell or process furt$er Products > and 1( 12. /ilo *orp. manufactures electricit" carpentr" tools. 2$e production department $ad met all production re.uirements for t$e current mont$ and $as an opportunit" to produce additional units wit$ excess capacit". Cnit selling prices and unit costs for t$ree different drill products are as follows3 'elling Price 4irect >aterial 4irect Dabor 69or&ers are paid P10 per $our8 Variable E#er$ead -ixed E#er$ead /ome P 8 15 10 8 15 4eluxe P5 20 1 12 Pro P80 1, 20 15 1 > P2 P+1 P100,000 1 P1, P2+ P110,000

Variable o#er$ead is applied on t$e basis of direct labor pesos, w$ile fixed o#er$ead is applied on t$e basis of mac$ine $ours. 2$ere is sufficient demand for t$e additional production of an" model in t$e product line. If it $as a limited amount of labor time, to w$ic$ product or products s$ould /ilo *orp. de#ote its excess production( 1+. Product ! sells for P12 per unit and its #ariable cost per unit is P10. Product B sells for P1 per unit and its #ariable cost per unit is P12. 2$e plant capacit" is + 0,000 mac$ine $ours and Product ! re.uires 48 minutes to complete w$ile Product B re.uires ; minutes to complete. 9$ic$ of t$e following will pro#ide t$e best sales mix of Product ! and Product B assuming t$e mar&et limitation of Product ! is 200,000 units and t$e mar&et limitation of Product B is 2 0,000 units( -or numbers 14 to 1;, answer t$e following problem3 1ucup *ompan" operates two stores in DuFon, one in >anila and anot$er in ?ueFon *it". 2$e operating results for t$e mont$ of Ectober 200;, w$ic$ are also t$e approximate mont$l" results, are condensed as follows3 'ales Dess3 Variable *ost *ontribution >argin Dess3 4irect -ixed *ost 'tore >argin Dess3 Indirect -ixed *ost 6allocated based on peso sales8 Eperating Income >anila P400,000 6150,0008 240,000 6100,0008 140,000 6 20,0008 P120,000 ?* P500,000 6 420,0008 180,000 6200,0008 6 20,0008 6 +0,0008 6P 0,0008 2otal P1,000,000 6 80,0008 420,000 6 +00,0008 120,000 6 0,0008 P;0,000

!dditional Information3

+07 of eac$ store=s direct fixed cost cannot be eliminated e#en if eit$er store is closed. If t$e ?ueFon *it" 'tore were closed, t$e >anila sales would decrease b" 207. /owe#er, closing t$e >anila 'tore would not affect t$e ?ueFon *it" sales.

14. 2$e ?ueFon *it" 'tore suffered in operating loss of P 0,000. '$ould t$e store be closed( 9$at is t$e effect on o#erall operating income( 1 . In order to impro#e t$e profitabilit" of t$e ?ueFon *it" 'tore, 1ucup is considering a promotional campaign t$at would not affect t$e >anila 'tore. 2$e campaign would cost P+00,000 annuall" and it is expected to increase t$e ?ueFon *it" 'tore 'ales b" 207. 2$e campaign would result in a mont$l" increase 6decrease8 in o#erall operating income of( 15. !ssume t$at at present 6refer to t$e original data8, one:$alf of t$e ?ueFon *it" sales are from items sold at #ariable cost to attract customers to t$e store. 1ucup is considering to stop selling suc$ items. 2$is action would reduce t$e remaining sales b" 207 and t$e direct cost to 8 7. 2$e c$anges would not affect t$e >anila 'tore. 2$e compan"=s decision to eliminate t$e items sold at #ariable cost would result in a mont$l" increase 6decrease8 in o#erall operating income b"( 1;. <efer to t$e original data. 1ucup is considering a promotional campaign for t$e w$ole compan", w$ic$ will increase sales in bot$ stores b" 207 and double t$e total indirect fixed costs. 9$at will be t$e effect on o#erall operating income(

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