ACC115

EXERCISES/ASSIGNMENT:
“Incremental Analysis”
THEORY

1. Predicted future cost and revenue data that will differ among alternative courses
A. relevant information
B. direct information
C. marginal costs
D. incremental costs

2. Incremental analysis would not be appropriate for a (an):

A. make or buy decision.
B. allocation of limited resource decision.
C. elimination of an unprofitable segment.
D. analysis of manufacturing cost variances.

3. What is the first step in the decision-making process?

A. Specify the criteria by which the decision is to be made.
B. Consider the strategic issues regarding the decision context.
C. Perform an analysis in which the relevant information is developed and analyzed.
D. Compare the alternatives.

4. Which of the following best describes a relevant information?

A. Focused on the past and differs between the alternatives under consideration.
B. Focused on the past and not related to the decision under consideration.
C. Focused on the future and differs between the alternatives under consideration.
D. Focused on the future and not related to the decision under consideration.

5. A major accounting contribution to the managerial decision-making process in evaluating

possible courses of action is to:
A. assign responsibility for the decision.
B. provide relevant revenue and cost data about each course of action.
C. determine the amount of money that should be spent on a project.
D. decide which action should the management consider.

6. The kind of cost that can be ignored in a short-term decision making is a (an)
A. differential cost
B. sunk cost
C. incremental cost
D. joint cost
7. An "opportunity cost" is
A. the difference in total costs chat results from selecting one alternative instead of another
B. the profit forgone by selecting one alternative instead of another
C. a cost that may be saved by not adopting an alternative
D. a cost that may be shifted to the future with little or no effect on current operations

8. The best characterization of an opportunity cost is that it is

A. relevant to decision making but is not usually reflected in the accounting records
B. not relevant to decision making and is not usually reflected in the accounting records
C. relevant to decision making and is usually reflected in the accounting records
D. not relevant to decision making and is usually reflected in the accounting records

9. Which of the following is least likely to be a relevant item in deciding whether to replace
an old machine?
A. acquisition cost of the old machine
B. cash outlay to be made for the new machine
C. annual savings to be realized on the new machine
D. life of the new machine

10. The Health Care Division of Piedmont Insurance employs three claims processors who are
capable of processing 5,000 claims each. The division currently processes 12,000 claims. The
manager has recently been approached by two sister divisions. Auto Division would like the
Health Care Division to process approximately 2,000 claims. Property Division would like the
Health Care Division to process approximately 5,000 claims. The Health Care Division would
be compensated by Auto Division or Property Division for processing these claims: Assume
that these are manually exclusive alternatives.
Claims processor salary cost is relevant for
A. Auto Division alternative only
B. Property Division alternative only
C. both Auto Division and Property Division alternatives
D. neither Auto Division nor Property Division alternatives

11. A fixed cost is relevant if it is

A. future cost
B. avoidable
C. sunk
D. a product cost

12. Relevant costs are

A. all fixed and variable costs
B. all costs that would be incurred within the relevant range of production
C. past costs that are expected to be different in the future
D. anticipated future costs that will differ among various alternatives

13. Which of the following is (are) a true statement(s) about cost behavior in incremental
analysis?
I. Fixed costs will not change between alternatives.
II. Fixed costs may change between alternatives.
III. Variable costs will always change between alternatives.
A. I
B. III
C. II
D. II & III

14. Sensitivity analysis is useful in decision making when:

A. there is a degree of uncertainty about the relevant data.
B. there is an opportunity cost included in the analysis.
C. sunk cost is included in the analysis.
D. the analysis is subject to a review by the management.

15. To determine the possible outcome in a decision analysis in case a key prediction or
assumption proves to be wrong, managers will use:
A. sensitivity analysis
B. total analysis
C. incremental analysis
D. regression analysis

16. Unit costs can mislead decision makers. Which of the following situations dealing with
unit costs is not expected to result in a faulty analysis?
A. Unit costs used in make-or-buy decisions might include costs such as avoidable fixed costs.
B. Variable unit cost directly varies with the changes in production units.
C. Total fixed costs increase as more units are produced within the relevant range.
D. Contribution margin on products that can be manufactured in using the freed capacity is
irrelevant in the decision.

17. Which of the following is a cost that requires a future outlay of cash and is relevant for
future decision-making?
A. Opportunity cost
B. Out-of-pocket cost
C. Relevant benefits
D. Incremental revenue
18. Incremental analysis is the process of identifying the financial data that:
A. do not change under alternative courses of action
B. are mixed under alternative courses of action
C. change under alternative courses of action
D. no correct answer is given

19. Avoidable costs are:

A. costs that increase due to a higher volume of activity or the performance of an additional
activity
B. costs that a company must incur to perform an activity at a given level, but will not be
incurred if a company reduces or discontinues the activity
C. the profits that a company forgoes by following a particular course of action
D. costs that were incurred prior to making a decision

20. Sunk costs are:

A. costs that increase due to a higher volume of activity or the performance of an additional
activity.
B. costs that a company must incur to perform an activity at a given level, but will not be
incurred if a company reduces or discontinues the activity
C. the profits that a company forgoes by following a particular course of action
D. costs that were incurred prior to making a decision

21. Incremental revenue is:

A. a difference in costs between two decisions.
B. a concession based on competitive influences.
C. additional revenue across decision choices from potential sales.
D. the difference between selling price and variable costs.

22. Manufacturing the parts internally by a company causes:

A. the company to be dependent upon suppliers for timely delivery of parts
B. the quality of the parts to be under the control of the company
C. lower cost of production of the parts being assured
D. a company's operations to be more efficient than when the parts are purchased from
suppliers

23. Within the context of the make or buy decision, when are fixed costs relevant?
A. Fixed costs are always relevant
B. Fixed costs are never relevant
C. Fixed costs are relevant when they differ among alternatives
D. It cannot be determined without closely examining each particular situation
24. The opportunity cost of making a component part in a factory with excess capacity for
which there is no alternative use is
A. the total manufacturing cost of the component.
B. the total variable cost of the component.
C. the fixed manufacturing cost of the component.
D. zero.

25. Which of the following qualitative factors favors he buy choice in a make or buy decision
for a component?
A. maintaining a long-term relationship with suppliers
B. quality control is critical
C. utilization of idle capacity
D. the component is critical to product

26. The concept of target pricing is employed when:

A. a company wishes to set the price in order to capture a predetermined market share.
B. a price is pre-set by market conditions.
C. a company wishes to meet marketing goals.
D. All of the given choices.

27. A company should decide to make, rather than buy, a part required for their
product, if the
A. company's production facility is at full capacity
B. relevant cost per unit of making the part exceeds the per-unit relevant costs of purchasing
the part
C. supplier of the part can produce a higher-quality part
D. supplier of the part has questionable reliability

28. The cost of not receiving rent from a space because you decide to make the part
rather than buying it from an outside supplier is considered a (an)
A. sunk cost
B. opportunity cost
C. future cost
D. fixed cost

29. In a make-or-buy decision, an opportunity cost that should be considered is the:

A. income that could be generated from idle production space.
B. total costs to produce the item
C variable costs to produce the item
D. fixed costs to produce the item
30. Incremental analysis is most useful:
A. in evaluating the master budget.
B. in choosing between the net present value method and the internal rate of return method.
C. in developing relevant information for management decisions.
D. as a replacement technique for variance analysis.

31. In making a special-order decision, management should:

A. compute a reasonable sales price for items not normally produced.
B. consider additional overhead cost.
C. consider normal and relevant costs.
D. All of the given choices.

32. An opportunity cost commonly associated with a special order is

A. the contribution margin on lost sales.
B. the variable costs of the order.
C. additional fixed cost that is related to the increased output.
D. any of the given choices.

33. Which of the following factors should be considered in deciding whether to

accept a special order?
A. the sales price of the product or service
B. the production capacity of the company
C. the impact on regular customers
D. all of the given choices

34. Operating at or near full capacity, a firm that is considering a special order should
recognize the:
A. opportunity cost arising from lost sales
B. value of full employment
C. time value of money
D. need for good management

35. Given the following list of costs, which one should be ignored in a decision to produce
additional units of product for a factory that is operating at less than 100% capacity, and the
additional business will not use up the remainder of the plant capacity?
A. Direct material cost per unit
B. Direct labor cost per hour
C. Fixed selling expenses
D. Variable selling expenses

36. If there is excess capacity, the minimum acceptable price for a special order must cover
A. variable costs associated with the special order.
B. variable and fixed manufacturing costs associated with the special order.
C. variable and incremental fixed costs associated with the special order.
D. variable costs and incremental fixed costs associated with the special order plus the
contribution margin usually earned on regular units.

37. If a firm is at full capacity, the minimum special order price must cover
A. variable costs associated with the special order.
B. variable and fixed manufacturing costs associated with the special order.
C. variable and incremental fixed costs associated with the special order.
D. variable costs and incremental fixed costs associated with the special order plus foregone
contribution margin on regular units not produced.

38. In using the variable cost concept of applying the cost-plus approach to product pricing,
what is included in the markup?
A. Total costs plus desired profit.
B. Desired profit.
C. Total selling and administrative expenses plus desired profit.
D. Total fixed manufacturing costs, total fixed selling and administrative expenses, and
desired profit.

39. Managers who often make special pricing decisions are more likely to use which
of the following cost concepts in their work?
A. Total cost
B. Variable cost
C. Product cost
D. Fixed cost

40. In contrast to the total product and variable cost concepts used in setting seller's prices,
the target cost approach assumes that:
A. a markup is added to total cost.
B. selling price is set by the marketplace.
C. a markup is added to variable cost.
D. a markup is added to product cost.

41. Which of the following is NOT a cost concept commonly used in applying the cost-plus
approach to product pricing?
A. Total cost concept
B. Product cost concept
C. Variable cost concept
D. Fixed cost concept
42. How does a company determine whether to sell a product "as is" or process it further?
A. If the costs to process further exceed the costs of current production, the product should be
sold as is.
B. If the costs to process further exceed the costs of current production, the product should be
processed further.
C. If the increase in revenue from selling the product after further processing is greater than
the additional costs incurred in further processing, the company should opt for further
processing.
D. If the revenues generated by processing the product further exceed the revenues from
selling the product "as is," the company should process further.

43. Which of the following costs is relevant in deciding whether to sell joint products at split-
off or process them further?
A. The unavoidable costs of further processing.
B. The additional costs of further processing.
C. The variable costs of operating the joint process.
D. The cost of materials used to make the joint products

44. The decision to keep or drop products or services involves a strategic consideration of
the:
A. potential impact on remaining products or services
B. impact on employee morale
C. growth potential of the firm
D. All of the given answers are correct

45. When there is one scarce resource, the product that should be produced first is the
product with the highest:
A. contribution margin per unit of the scarce resource.
B. sales price per unit of scarce resource.
C. demand.
D. contribution margin per unit.

46. A useful device for solving production problems involving multiple products
and limited resources is:
A. gross sales per unit of product
B. contribution per unit of scarce resource
C. net profit per unit of product
D. total benefit

47. When there is only one production constraint and excess demand, it is generally best to
focus production and sales on the product with the highest:
A. Contribution per unit of scarce resource
B. Margin of Safety
C. Contribution margin in pesos
D. Operating Leverage

48. Uranus Company has 2 products that use the same manufacturing facilities and cannot
be subcontracted. Each product has sufficient orders to utilize the entire manufacturing
capacity. For short-run profit maximization, Uranus should manufacture the product with the:
A. lower total manufacturing costs for the manufacturing capacity.
B. lower total variable manufacturing costs for the manufacturing capacity.
C. greater gross profit per hour of manufacturing capacity.
D. greater contribution margin per hour of manufacturing capacity.

49. A product mix decision involves:

A. influencing the sales volume mix of the products to minimize cost.
B. influencing the sales volume mix of the products to maximize revenue.
C. producing the maximum amount of items that provide the highest contribution margin.
D. producing the maximum amount of items that carry the lowest per-unit cost.

50. The goal in deciding whether to add or drop products, services, or departments is to
obtain the greatest
A. reduction in total costs,
B. contribution possible to cover unavoidable costs.
C. increase in sales revenues.
D. decrease in direct fixed costs.

51. As long as its marginal cost is lower than its marginal revenue, a company should
A. suspend additional production and sales activities.
B. perform a cost-benefit balance analysis before producing and selling additional products.
C. engage in additional production and sales activities.
D. examine cost behaviors and develop a cost function to measure the cost of future
production.

52. Which of the following should not be considered in a decision of whether to drop a
product line?
A. Unavoidable costs
B. Avoidable costs
C. Revenue that would be lost
D. Nonfinancial impacts of the decision
53. The production of a special order will increase gross profit when the additional revenue
from the special order is greater than the amount of.
A. nonvariable costs incurred in producing the order.
B. direct material and labor costs in producing the order.
C. fixed costs incurred in producing the order.
D. marginal cost of producing the order.

54. In considering a special order that will enable a company to make a use of presently
idle capacity, which of the following costs would be irrelevant.
A. Materials
B. Direct labor
C. Depreciation
D. Variable OH.

55. A company owns equipment that is used to manufacture important parts for its
production process. The company plans to sell the equipment for P10,000 and to select one
of the following alternatives:
(1) acquire new equipment for P80,000
(2) purchase the important parts from an outside company at P4 per part.
The company should quantitatively analyze the alternatives by comparing the cost of
manufacture the parts:
A. plus P80,000 to the cost of buying the parts less P10,000.
B. to the cost of buying the parts less P10,000.
C. less P10,000 to the cost of buying the parts.
D. to the cost of buying the parts.
Problems:
1. Shelley & Company has 24,000 defective units of a product that cost P8 per unit to
manufacture, and can be sold for P4 per unit. These units can be reworked for P2 per unit
and sold at their full price of P12 each. If Shelley reworks the defective units, how much
incremental net income will result?
A. P144,000
B. P 72,000
C. P 96,000
D.P 48,000

2. Venus Company, a manufacturer of lamps, budgeted its production and sale of 400,000
lamps at P20 per unit for the year. Variable manufacturing costs were budgeted at P8 per
unit, and fixed manufacturing costs at P 5 per unit. A special order offering to buy 40,000
lamps for P11.50 each was received by Venus in April. Venus has sufficient plant capacity to
manufacture the additional quantity of lamps; however, the production would have to be
done.by the present work force on an overtime-basis at an estimated additional cost of P1.50
per lamp. Venus will not incur any selling expenses as a result of the special order. Venus
Company would have a unit relevant cost of
A. P 8.00
B. P13.00
C. P 9.50
D. P14.50

3. For the year ended April 30, 2009, Dela Joya Company incurred direct costs of
P800,000 based on a particular course of action.
Had a different course of action been taken, direct costs would have been P650,000. In
addition, Dela Joya's fixed costs during the fiscal year were P110,000.
The incremental (decremental) cost was:
A. P 40,000
B. P( 40,000)
C. P 150,000
D. P(150,000)

4. Baras Co. has considerable excess manufacturing capacity. A special job order's cost
sheet includes the following applied manufacturing overhead costs:

Variable costs P56,250

Fixed costs 45,000
The Axed costs include a normal P6,800 allocation for in-house design cost, although no in-
house design will be done, Instead, the special job will require the use of external designers
costing P13,750.
What is the minimum acceptable price for the job?
A. P 63,050
B. P 70,000
C. P101,250
D. P108,200

5. A business is operating at 90% of capacity and is currently purchasing a part which is

being used in its manufacturing operations for P15 per unit. The unit cost for the business to
make the part is P20, including fixed costs, and P12, not including fixed costs. If 30,000 units
of the part are normally purchased during the year but could be manufactured using unused
capacity, what would be the amount of differential cost, increase or decrease, from making
the part rather than purchasing it?
A. P150,000 cost increase
B. P 90,000 cost decrease
C. P150,000 cost decrease
D. P 90,000 cost increase

6. Sylvan Processing Company is considering whether to make 2,000 units of product Whirl
which costs P16 a unit or buy it from outside for P15 a unit. A further analysis shows that if
product Whirl is outsourced, fixed costs of P8,000 attributable to this product will be
reduced by 25%. If the product is outsourced, Sylvan will
A. Decrease profit by P2,000
B. Decrease profit by P4,000
C. Increase profit by P2,000
D. Increase profit by P4,000

7. Referring to the original data, if Sylvan Processing Company purchased the product
Whirl, the space could be rented out for P6,000. If the product is outsourced, profit would
A. decrease, P2,000
B. increase, P2,000
C. decrease, P4,000
D. increase, P4,000

8. It costs P450,000 to make 15,000 units of a part in this plant. This cost includes material
of P90,000, direct labor of P120,000, variable overhead of P15,000, and P225,000 in
fixed overhead inclusive of P45,000 in depreciation and common overhead allocation of
P150,000. The balance is for the section supervisor's salary. The part can be purchased for
P20 a unit. If the part is purchased, the space released can be rented for P65,000. If the part
is purchased, the company will
A. lose P20,000
B. lose P45,000
C. gain P20,000
D. gain P45,000

9. San Isidro Co. manufactures ballpoint pens. Another manufacturer has offered to supply
San Isidro with the 5,000 ink cartridges that it needs annually. The cost to buy the cartridges
would be P15 each. In producing its own cartridges, San Isidro has incurred P10 in fixed
costs and P8 in variable costs. If San Isidro buys the cartridges, its net income will:
A. not change
B. increase by P35,000
C. decrease by P35,000
D. increase by P25,000

10. The San Pascual Company manufactures Part No. 498 far use in its production cycle.
The cost per unit if 20,000 units of Part No. 498 are manufactured are as follows:
Direct materials P6
Direct labor 30
Variable overhead 12
Fixed overhead applied 16
Total unit cost P64

The Sta. Rita Company has offered to sell 20,000 units of part No. 498 to San Pascual for
P60 per unit. San Pascual will make the decision to buy the part from Sta. Rita if there is a
savings of P25,000 for San Pascual. If San Pascual accepts Sta. Rita's offer, P9 per unit of the
fixed overhead applied would be totally eliminated. Furthermore, San Pascal has determined
that the released facilities could be used to save relevant costs in the manufacture of part No.
575. In order to have a savings of P25,000, the amount of the relevant costs that would be
saved by using the released facilities in the manufacture of Part
No. 575 would have to be
A. P 80,000
B. P 85.000
C. P125,000
D. P140,000

11. Leis Manufacturing Co. uses I0 units of Part Number WS73 each month in the
production of computer printer. The unit cost to manufacture one unit of WS73 is presented
below.
Direct materials P 1,000
Materials handling
(20% of direct material cost) 200
Direct labor 8,000

Manufacturing overhead
(150% of direct labor) 12,000
Total manufacturing cost P21,200

Material handling represents the direct variable costs of the Receiving Department that are
applied to direct materials and purchased components on the basis of their cost. This is a
separate charge in addition to manufacturing overhead. Leis annual manufacturing overhead
budget is one-third variable and two-thirds fixed. Garland Company, one of Leis' reliable
vendors, has offered to supply part WS73 at a unit price of P15,000.If Leis purchases the
WS73 units from Garland, the capacity being used by Leis to manufacture these parts would
be idle. Should Leis decide to purchase the parts from Garland, the unit cost of WS73 would
A. Increase by P4,800
B. Decrease by P3,200
C. Decrease by P6,200
D. Increase by P1,800

12. Balagras & Company expects to incur the following costs at the planned
production level of 10,000 units:

Direct materials P100,000

Direct labor 120,000
Variable overhead 60,000
Fixed overhead 30,000

The selling price is P50 per unit. capacity of 10,000 units. The company currently operates
at full production. Capacity can be increased to 13,000 units by working overtime: Variable
costs would increase by P14 per unit for overtime production. Fixed overhead costs remain
unchanged when overtime operations occur. Balagtas has received a special order from
Florante, Inc. who has offered to buy 2,000 units at P45 each.
What is the incremental cost associated with this special order?
A. P42,000
B. P31,000
C. P84,000
D. P62,000

13. You have been approached by a foreign customer who wants to place an order for 15,000
units of Product Cat P22.50 a unit. You currently sell this item for P39 a unit, and the item has
a cost of P29 a unit. Further analysis reveals that you will not be paying sales commission of
P2.50 a unit on this sales and its packaging requirement will save you an additional P1.50
per unit. However, the additional graphics required on this job will cost you P30,000. Note
also that fixed costs amounting to P400,000 for the production of 50,000 units will not change.
You decided to accept this order but another customer who buys an average of 2,000 units
for the period wants to pay you P22.50 rather than the regular price of P39 a unit. Accepting
the special order, the amount of profit will:
A. increase by P19,500
B. increase by P16,500
C. increase by P52,500
D. decrease by P52,500

14. The Lilingiwan Company has received a special order for 300 units of product X for P6 a
unit. It usually sells for P9.50 a unit with a cost of P7.50 a unit inclusive of 75 centavos a unit
as sales commission that will not be paid on this order. The cost also includes P3 in
manufacturing overhead, two-third of which is for the fair share of depreciation, rent, utilities
and supervisor's salary. The latter's (supervisor's salary) accounts for one-half of this amount.
Assuming that excess capacity is available, and this order requires a mold thar costs P150,
accepting the order will increase
A. loss by P225
B. loss by P375
C. gain by P225
D. gain by P375

15. The cost to produce 24,000 units at 70% capacity consists of:
Direct materials P360,000
Direct labor 540,000
Factory overhead, all fixed 290,000
Selling expense (35% variable, 65% fixed) 240,000

What unit price would the company have to charge to make P22,500 on a sale of 1,500
additional units that would be shipped out of the normal market area?
A. P 51
B. P 41
C. P 56
D P 50
16. The following are company's monthly unit costs to manufacture and market a particular
product.

Manufacturing Costs:
 Direct materials P2.00
Direct labor 2.40
Variable indirect 1.60
Fixed indirect 1.00

Marketing Costs:
Variable 2.50
Fixed 1.50

The company must decide to continue making the product or buy it from an outside supplier.
The supplier has offered to make the product at a level of quality that the company prescribes.
Fixed marketing costs would be unaffected, but variable marketing costs would continue at
30% if the company were to accept the proposal.

What is the maximum amount per unit that the company can pay the supplier without
decreasing its operating income?
A. P8.50
B. P7.75
C. P6.75
D. P5.25

16. The lijan Cooperative: Inc, produces 1,000 units of Pare M per month. The
total manufacturing costs of the part are as follows:

Direct materials P10,000

Direct labor 5,000
Variable overhead 5,000
Fixed overhead 30,000
Total manufacturing cost P50,000

An outside supplier has offered to supply the part ar P30 per unit. If estimated that 20% of
the fixed overhead being assigned to Part M will no longer be incurred if the company
purchases the part from the outside supplier. If Ilijan Cooperative purchases 1,000 units of
Part M from the outside supplier, its monthly operating income will
A. decrease by P 4,000
B. decrease by P20,000
C. increase by P 1,000
D. increase by P20,000
Tinga Corporation currently manufactures all component parts that are used in the
manufacture of various hand tools. A steel handle is used in three different tools. The budgeted
costs per unit based on 20,000 units are:

Direct material P6.00

Direct labor 4.00
Variable overhead 1.00
Fixed overhead 2.00
Total unit cost P13.00

Sans Steel, Inc. has offered to supply 20,000 units of the handle to Tinga for P12.50 each
delivered. If Tinga currently has idle capacity that cannot be used for any other purpose,
accepting the offer will
A. Decrease the handle unit cost by P0.50.
B. Increase the handle unit cost by P1.50.
C. Decrease the handle unit cost by P1.50.
D. Increase the handle unit cost by P0.50.

17. Mars Industries is a multi-product company that currently manufactures 30,000 units of
Part QS42 each month for use in the production of its main product. The facilities now being
used to produce Part QS42 have fixed monthly cost of P150,000 and a capacity to produce
84,000 units per month. If Mars were to buy Part QS42 from an outside supplier, the facilities
would be idle, but 60 percent of its fixed costs would not continue. The variable production
costs of Part QS42 are P11 per unit. If Mars Industries is able to obtain Part QS42 from an
outside supplier at a unit purchase price of P12.875, the monthly usage at which it will be
indifferent between purchasing and making Part Q542 is
A. 30,000 units
B. 32,000 units
C. 80,000 units
D. 48,000 units

18. Simlong Company manufactures a product with a unit variable cost of P50 and a unit
sales price of P88. Fixed manufacturing costs were P240,000 when 10,000 units were
produced and sold. The company has a one-time opportunity to sell an additional 3,000
units at P70 each in a foreign market. This special sale would not affect its present sales. If
the company has sufficient capacity to produce the additional units, acceptance of the
special order would affect net income as follows:
A. Income would decrease by P 12,000.
B. Income would increase by P 12,000.
C. Income would increase by P210,000.
D. Income would increase by P 60,000.
19. Mars Industries is a multi-product company that currently manufactures 30,000 units of
Part QS42 each month for use in the production of its main product. The facilities now being
used to produce Part Q542 have fixed monthly cost of P150,000 and a capacity to produce
84,000 units per month. I f Mars were to buy Part QS42 from an outside supplier, the facilities
would be idle, but 60 percent of its fixed costs would not continue. The variable production
costs of Part QS42 are P11 per unit. If Mars Industries is able to obtain Part QS42 from an
outside supplier at a unit purchase price of P12,875, the monthly usage at which it will be
indifferent between purchasing and making Part QS42 is
A. 30,000 units
B. 32,000 units
C. 80,000 units
D. 48,000 units

20. Ambulong Company's unit cost of manufacturing and selling a given item at an
activity level of 10,000 units per month are:

Manufacturing Costs:
Direct materials P39
Direct labor 6
Variable overhead 8
Fixed overhead 9

Selling Expenses:
Variable 30
Fixed 11

The company desires to seek an order for 5,000 units from a foreign customer. The variable
selling expenses will be reduced by 40%, bur the fixed costs for obtaining the order will be
P20,000. Domestic sales will not be affected by the order.
The minimum break-even price per unit to be considered on this special sale is
A. P 71
B. P 75
C. P 69
D. P 84

21. A company can sell all the units it can produce of either Product A or Product B but not
both. Product A has a unit contribution margin of P36 and takes two machine hours to make
and Product B has a unit contribution margin of P45 and cakes three machine hours to make.
If there are 1,000 machine hours available to manufacture a product, income will be
A. P3,000 more if Product A is made.
B. P3,000 more if Product B is made.
C. P2,000 less if Product A is made.
D. the same if either product is made.

22. Tabançao Company is starting business and is unsure, of whether to sell it, product
assembled or unassembled. The unit cost of the unassembled product is P40, and the
Company would sell it for P90, The cost to assemble the product is estimated at P18 per unit
and Tabangao Company believes the market would support a price of P116 on the assembled
unit.

What is the correct decision using the sell or process further decision rule?
A. Sell before assembly, the company will be better off by P18 per unit.
B. Sell before assembly, the company will be better off by P26 per unit.
C. Process further, the company will be better off by P26 per unit.
D. Process further, the company will be better off by P8 per unit.

23. Sales of 25,000 units at P7.20 per unit are made monthly. The unit cost is P5.90.
Incremental costs of P1.35 per unit to further process the units will result in the 25,000 units
being sold for P8.75 each. Which course of action should the company take?
A. Commit its resources to a different product
B. Sell the units at the current stage of completion
C. Do further processing and sell the units at P8.75
D. Do further processing on only one-half of the units

24. Dalig Company produces a product that can be sold for P250,000 at an intermediate
stage. If Dalig finishes the product, they will incur P75,000 of additional material costs and
another P15,000 in labor and overhead costs. When finished, Dalig will be able to sell the
product for P350,000.
Which of the following answers is correct?
A. Sell now
B. Finish the product because profits will increase by P25,000
C. Finish the product because profits will increase by P12,500
D. Finish the product because profits will increase by P10,000

25. Dahilig Company sells a product for P20 with variable cost of P8 per unit. Dahilig could
accept a special order for 1,000 units at P14. If Dahilig accepted the order, how many units
could it lose at the regular price before the decision become unwise?
A. 1,000 units
B. 200 units
C. 500 units
D. 0 units