Relevant Costing Exercises
Make or Buy
1. ABC company manufactures a particular computer component. Currently, the costs per unit are as follows: direct materials,
P50; direct labor, P500; variable overhead, P250; fixed overhead, P400. XYZ has offered to sell 10,000 units of the
component for P1,100 per unit. If ABC accepts the proposal, P2,500,000 of the fixed overhead will be eliminated. Should
ABC make or buy the component? At what advantage?
2. GHI company manufactures part G for use in the production cycle. The cost per unit for 10,000 units for part G are as
follows: direct materials, P3; direct labor, P15; variable overhead, P6; fixed overhead, P8. TUV company offered to sell
GHI 10,000 units of part G for P30 per unit. If GHI accepts TUV’s offer, the released facilities could be used to save
P45,000 in relevant costs. In addition, P5 per unit of fixed overhead applied to part G would be totally eliminated. What
alternative is more desirable and by what amount?
Accept or Reject a Special Order
1. Tagaytay open-air flea market is along the highway leading to Taal Vista Lodge. Arnel has a stall which specializes in
hand-crafted fruit baskets that sell for P60 each. Daily fixed costs are P15,000 and variable costs are P30 per basket. An
average of 750 baskets are sold each day. Arnel has a capacity of 800 baskets per day. By closing day time yesterday, a
bus load of teachers who attended a seminar at the Development Academy of the Philippines stopped by Arnel’s stall and
collectively offered P1,500 for 40 baskets.
Required: Decide whether Arnel should accept or reject the offer by computing the contribution
margin or loss.
2. Wagner company sells product A at a selling price of P21 per unit. Its cost per unit on the full capacity of 200,000 units are
as follow: direct materials, P4; direct labor, P5; overhead (2/3 of which is fixed), P6. A special order offering to buy 20,000
units were received from a foreign distributor. The only selling costs that would be incurred on this order would be P3 per
units for shipping. The company has sufficient existing capacity to manufacture the additional units.
Required: compute for the minimum selling price that Wagner should accept.
Drop or Continue a Business Segment
1. Division A of a corporation is being evaluated for elimination. It has contribution to overhead of P400,000. It
receives an allocated overhead of P1 million, 10% of which cannot be eliminated.
Required: Compute by how much the elimination of Division A would affect pre-tax income of the corporation.
2. A company’s partial income statement data are presented below:
S J P
Sales P200,000 P150,000 P125,000
Separate (product) fixed costs 60,000 35,000 40,000
Allocated fixed costs 35,000 40,000 25,000
Variable costs 95,000 75,000 50,000
The company lost its lease and must move to a smaller facility. As a result, total allocated fixed costs will be reduced by 40%.
However, one product must be discontinued.
Required: Identify the product that should be discontinued and compute the expected income after it is discontinued.
Optimization of Scarce Resources
1. A company has a limited number of machine hours that it can use for manufacturing two products, A & B. Each
product has a selling price of P160 per unit. Product A has 40% contribution margin and product B has 70%
contribution margin. One unit of B takes twice as many machine hours to make as a unit of A.
Required: Identify which product should the limited number of machine hours be used, assuming that either
product can be sold in whatever quantity is produced.
2. Data regarding four different products manufactured by an organization are presented below. Direct materials and
direct labor are readily available from their respective resources. However, the manufacturer is limited to a maximum
of 3,000 machine hours per month.
Product A B C D
Selling price/unit P15 P18 P20 P25
Variable cost/unit 17 11 10 16
Units produced per machine hour 3 4 2 3
Required: Identify the most profitable product of the manufacturer.
Retain or Replace an Old Asset
1. A company has an opportunity to acquire a new equipment to replace one of its existing equipment. The new equipment
would cost P900,000 and has a five-year useful life, with a zero terminal disposal price. Variable operating cost would be
P1 million per year. The present equipment has a book value of P500,000 and a remaining life of five years. Its disposal
price now is P50,000 but would be zero after five years. Variable operating costs would be P1,250,000 per year.
Required: Decide whether to replace or retain the old equipment considering the five years in total, but ignoring the time
value of money and income taxes.
2. A company produces motherboard at a special economic zone in Bicol. It is now considering to shift to new automated
equipment instead of its present facility. Management was given the mandate to shift it. Its breakeven point will materially
be improved with a minimum of 10% reduction in volume. Below is the pertinent information:
Existing Automation
Sales in units 800,000 900,000
Selling price P 30 P 30
Variable cost per unit P 15 P 13
Fixed cost P 775,000 P 892,500
Required: Compute the basis of deciding whether the company should shift to automation or not.
Sell as-is or Process Further
1. A company owns a large processing line which segregates coconuts into its components upon contract with breaker of the
machine. Presently, it sells the coconut meat, juice, shell and husk to various manufacturers. A feasibility study is being
made to process its components into “buko pies” for the meat, “buko juice” for the juice, flower pots for the shells and
fuel briquettes for the husk. At the segregation point, you gathered the following data per unit:
Meat Juice Shell Husk
Selling price P 4.00 P 2.00 P 1.00 P 1.00
Allocated joint cost .13 .06 .03 .03
Profit(loss) 3.87 1.94 .97 .97
The study shows that after further application of additional manufacturing process, the following is projected:
Meat Juice Shell Husk
Selling price P 12.00 P 4.00 P 2.00 P 2.00
Additional processing cost 3.8 2.90 1.95 1.95
Fixed cost of the plant amounts to P500,000. Interest rate is 12%.
Required: Identify which product/s should go through the additional manufacturing process.
2. A company produces 3 products from a joint process costing P 100,000. The following information is available:
Selling price Cost/s to Process Sales price after
Product/s Unit/s @ Split -off Further processing further
A 10,000 P 35 P 60,000 P 40
B 20,000 P 40 P 20,000 P 45
C 30,000 P 20 P 90,000 P 25
Required: Identify which product/s should go through the additional manufacturing process.
Bid Price
1. A company manufactures engines for the military equipment on a cost-plus basis. The cost of a particular machine the
company manufactures is shown below:
Direct materials P 400,000
Direct labor 300,000
Overhead -
Supervisor’s salary 40,000
Fringe benefits on direct labor 30,000
Depreciation 24,000
Rent 22,000
Total P 816,000
Required: Compute the minimum bid price if the production of the engine was discontinued, the production capacity would
be idle and the supervisor will be laid off.
2. A company has its own cafeteria with the following annual costs: food, P 400,000; labor, P 300,000; overhead, P440,000.
The overhead is 40% fixed. Of the fixed overhead, P100,000 is the salary of the cafeteria supervisor. The remainder of the
fixed overhead has been allocated from total company overhead.
Required: Determine the maximum cost that the company is willing to pay an outsider to operate the cafeteria assuming
that the cafeteria supervisor will remain and the company will continue to pay his salary.
Temporarily Shut Down Operations or Continue
1. A corporation has been experiencing a slowdown in business activities in August and September and is considering
temporarily shutting down its operations during those months. The accounting department has provided the following
normal operating data for consideration: unit sales price, P 150; unit variable production cost, P 60; unit variable marketing
cost, P10; monthly fixed overhead, P 500,000, monthly fixed expenses, P200,000; regular sales in units, 10,000 per month;
estimated sales in units in August and September, 5,000 per month.
If the company shuts down its operations, the following costs are expected to be incurred: security and safety, P 200,000 per
month; restart-up costs, P 100,000 per set-up, regular fixed overhead, 40% of total will remain; regular fixed expenses,
reduced by 30%.
Required: Compute the total shutdown costs, shutdown point in two months, and the advisable alternative (continuing or
discontinuing the operations) with its advantage amount.
Scrap or Rework Defective Units
1. A company has 2,000 obsolete light fixtures that are carried in inventory at a manufacturing cost of P30,000. If the fixtures
are reworked for P10,000, they could be sold for P 18,000. Alternatively, the light fixtures could be sold for P 3,000 to a
jobber located in a distant city.
Required: Compute the opportunity cost in the decision to scrap or rework defective units.
2. A company has 7,000 obsolete toys carried in inventory at a manufacturing cost of P 6 per unit. If the toys are reworked for
P 2 per unit they could be sold for P 3 per unit. If the toys are scrapped, they could be sold for P1.85 per unit.
Required: Compute the total peso amount of the advantage of the desired alternative.
Indifference Point
1. A company owns and operates a chain of movie theaters. The theaters in the chain vary from low volume, small town to
high volume, Big City/Downtown theaters. Management is considering installing machines that will make popcorn on the
premises. This proposed feature would be properly advertised and is intended to increase patronage at the company’s
theaters. These machines are available in two different sizes with the following details:
Economy Popper Regular Popper
Annual capacity 50,000 boxes 120,000 boxes
Costs:
Annual machine rental P 80,000 P 110,000
Popcorn cost per box 1.30 1.30
Cost of each box .80 .80
Other variable costs/box 2.20 1.40
Required: Compute the level of output at which the two poppers would earn the same profit/loss.
2. A company employs 45 personnel to market its cars. The average car sells for P 690,000 and a 6% commission is paid to
the sales person. It is considering changing the scheme to a commission arrangement that would pay each person a package
of P 30,000 plus a commission of 2% of the sales made by the person.
Required: Compute the indifference point where the total payments to sales personnel will be the same.
