POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

Sta. Mesa, Manila

MANAGEMENT ACCOUNTING PART 2

Quiz Differential Cost Analysis
September 2017

Make or Buy

Jam Foods Corp is known for selling a great tasting yet very affordable siomai in Manila.
Information on selling price and related costs of one complete order is shown below. Fixed cost is
computed using the normal operations of 3,000 orders (4pcs per order).

Selling price per order P 25.00

Variable cost per order
Direct materials P 4.00
Direct Labor 4.00
Variable Overhead 2.00
Fixed cost allocated to products per order
Supervisory salaries P 3.00
Other fixed cost 3.00

Erwin Inc. has offered to supply siomai for P3 per piece.

1. If Erwin has offered to supply siomai for P3 per piece, on normal operations, should Jam make or
buy siomai? ______________________________

Suppose that Erwin has offered to supply siomai for P3 per piece and that P2.50 of the total fixed
costs could be eliminated.

2. Should Jam make or buy siomai? ________________________________

3. Determine the indifference point. ___________________________________
4. If Jam plans to sell 1,800 orders, should the company make or buy siomai.
________________________________

Accept or Reject:

Jam Foods Corp is known for producing and selling a great tasting yet very affordable siomai.
Information on selling price and cost per unit at a normal capacity of 20,000 pieces is as follows:

Selling Price P 6.25

Less, Variable Cost 2.50
Contribution Margin P 3.75
Less, Fixed Cost 1.50
Net Profit P 2.25

Ruby House of Dumplings offers to buy 5,000 pieces at P3.65. Also, an extra shipping cost of
P0.15 per unit will be incurred if the company will accept the special order.

5. If there is excess capacity to produce the special order, should Jam accept or reject the order?
____________________________
6. If present production is also 20,000 pieces, should the special order be accepted?
____________________________
7. If present production is 16,000 pieces, should the Jam accept or reject the special order?
______________________________
 Howard Robinson builds custom homes in Cincinnati. Robinson was approached not too long
ago by a client about a potential project, and he submitted a bid of P483,800, derived as follows:
Land P 80,000

Construction materials 100,000

Subcontractor labor costs 120,000

P300,000

Construction overhead: 25% of direct costs 75,000

Allocated corporate overhead 35,000

Total cost P410,000

Robinson adds an 18% profit margin to all jobs, computed on the basis of total cost. In this
client's case the profit margin amounted to P73,800 (P410,000 x 18%), producing a bid price of P483,800.
Assume that 70% of construction overhead is fixed.

8. Suppose that business is presently very slow, and the client countered with an offer on this home
of P390,000. Should Robinson accept the client's offer? ______________________________

9. If Robinson has more business than he can handle, how much should he be willing to accept for
the home? ____________________________________

Drop/Eliminate, Retain or Add:

Jam Foods Corp has three product lines. Results of the 4 th quarter are presented below:

Shrimp Pork Beef Total

Units sold 800 4,000 4,200 9,000
Revenue P20,000.00 P100,000.00 P105,000.00 P225,000.00
Variable departmental costs 12,000.00 40,000.00 42,000.00 94,000.00
Direct fixed costs 5,000.00 15,000.00 15,000.00 35,000.00
Allocated fixed costs 8,000.00 12,000.00 12,000.00 32,000.00
Net Income (Loss) (P5,000.00) P33,000.00 P36,000.00 P64,000.00

The allocated fixed costs are unavoidable. Demands of individual products are not affected by
changes in other product lines.

10. Will Jam retain or drop Shrimp Siomai? ___________________________

11. What will be the net income or loss of Jam if Shrimp is dropped? ___________________

Claude Inc. produces and sells 8,000 units of Product X each year. Each unit of Product X sells for
P10 and has a contribution margin of P6. It is estimated that if Product X is discontinued, P50,000 of the
P60,000 fixed costs chargeable to Product X could be eliminated.

12. What would be the effect on the overall net income of the company if the Product X is
discontinued? Indicate increase or decrease and the amount. _______________________

Sell as is or Process Further:

Vicky manufactures A and B from a joint process (cost = P80,000). Five thousand pounds of A
can be sold at split-off for P20 per pound or processed further at an additional cost of P20,000 and then
sold for P25. Ten thousand pounds of B can be sold at split-off for P15 per pound or processed further at
an additional cost of P20,000 and later sold for P16.

13. If Lido decides to process B beyond the split-off point, the change in operating income will be
_________________________
Profit maximization by utilizing limited or scarce resources:

Smith Manufacturing has 27,000 labor hours available for producing X and Y. Consider the
following information:

Product X Product Y

Required labor time per unit (hours) 2 3

Contribution margin per unit P5.00 P6.00

Contribution margin per labor hour P2.50 P2.00

14. If maximum demands for products X and Y are none and 8,000, respectively, how many product
Y should the company produce? _____________________
15. If maximum demands for products X and Y are 5,000 and 6,000, respectively, how many product
Y should the company produce? _____________________
16. If maximum demands for products X and Y are 4,000 and none, respectively, how many product
Y should the company produce? _____________________

Shut down or Continue operations:

ABC Company is contemplating to temporarily stop operating for the next four months since
demand declines below the breakeven point. The company has a normal operating fixed costs of P50,000
per month and if they shut down, they could eliminate P20,000 fixed cost per month. However, they
would incur additional costs for insurance and security guards for the entire shut down period of
P25,000. They estimated that the restarting cost will be P20,000. At present, they have a selling price of
P50 per unit and a variable cost of P30. For the next four months, they will be forced to reduce their
selling price to 80%. Based on these facts, determine the following:

17. Shut down costs ____________________________

18. Shut down savings ____________________________
19. Shut down point ____________________________

Replace or retain:

Three years ago, the Broadway Dairy Queen bought a frozen yogurt machine for P80,000. A
salesman has just suggested to the Broadway manager that she replace with a new, P100,000 machine.
The manager has gathered the following data:

Old Machine:
Useful life is 8 years
Disposal value now is P20,000
Disposal value after useful life is zero
Annual operating cost is P45,000

New machine
Useful life is 5 years
Disposal value after useful life is zero
Annual operating cost is P25,000

20. If the manager decides to replace the old machine, what would be the net advantage or
disadvantage over the next 5 years? _______________________

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/rcroque