Strategic Cost Management

Coordinated Quiz No. 2 considered.

Name: __________________________________ Year & Section: 5. Minimization of contribution margin is a common objective function in
__________________ optimization of scarce resources.
TRUE on FALSE. Write A if the statement is CORRECT. Otherwise.write B. 6. Segment margin measures a segment's contribution to the coverage of indirect
1. In evaluating alternative courses of action, a manager should select the expenses.
alternative that provides 7. The fixed cost used in the computation of the shutdown point includes the fixed
the highest incremental benefit to the company. cost that the company will incur they decided to temporarily stop their operations.
2. that has a bearing on future events is relevant in the decision-making process. 8. In the decision to sell as is or process further a product, managers must only
3. an outsourcing decision, avoidable fixed costs irrelevant. watch out for incremental revenues.
4. making a decision to discontinue an operating segment, allocated common costs
are not
9. When the idle capacity of the company is enough for the manufacturing of the decision.
special order, lost contribution margin is considered as a relevant cost C. Subtract the joint cost from the total sales value of the product before
10. the estimated sales during the slack period is greater than the shutdown point determining relative sales
in units, the company must continue its operations in order to maximize profit In value and makingt the decision
the short run. D. Ignore the joint cost in making the decision
17. The potential rental value of space used for production activities
MULTIPLE CHOICE. Choose the letter of the BEST answer. A. Is a variable cost of production
11. Assume a company produces three products: A, B, and C. It can only sell up to B. Represents an opportunity cost of production
3,000 units of each product. Production capacity Is unlimited. The company C. Is an unavoidable cost
should produce the product that has the highest D. Is a sunk cost of production
A. gross margin per unit B. sales price per unit 18. Irrelevant costs generally include
C. contribution margin per hour of machine time. D. contribution margin per unit. Sunk cost. Historical cost. Allocated cost
12. Which of the following costs is irrelevant in making a decision about a special A. Yes. Yes. Yes
order price if some of the company facilities are currently idle? B. Yes. No. Yes
A. Direct labor B. Equipment depreciation C. Yes. No. No
C. Opportunity cost of production D. Variable cost of utilities D. No. No. Yes
13. Fixed costs are ignored in allocating scarce resources because 19. Cost forgone when an individual or organization choose one option over
A. they are sunk another are
B. they are unaffected by the allocation of scarce resources. A. Historical costs. C. Sunk costs
C. there are no fixed costs associated with scarce resources B. Opportunity costs. D. Budgeted costs
D. Fixed cost only apply to long-run decision 20. A fixed costs is relevant if it is
14. Which of the following qualitative factors favors the buy choice in a make or A. Uncontrollable B. Avoidable costs
buy decision for a part C. Sunk. D. A product cost
A. Maintaining a long-term relationship with suppliers
B. Quality control is critical C. Utilization of idle capacity PROBLEM SOLVING. Compute for the requirement/s of each problem.
D. Part is critical to product Each question is independent unless otherwise stated.
15. Which of the following is relevant in a make or buy decision PROBLEM A
Prime cost. Sunk cost. Incremental cost Persimmon Pizza store No. 31 experience losses for the past two years and is
A. Yes. Yes. Yes about to be closed. The
B. Yes. No. Yes following figures are available for the period just ended:
C. Yes. No. No Sales. 492,000
D. No. No. Yes Cost of sales. 162,960
16. Halley company produces three products from joint process. The product can Rent. 87,600
be sold at split-off or processed further. In deciding whether to sell at split-off or Utilities. 36,000
processed further, management should Supplies and used. 14,400
A. Allocate the joint cost to the products based on relative sales prior to making Salaris and wages. 186,480
the decision Miscellaneous. 5,760
B. Allocate the joint cost to the product based on physical quantity measure prior Allocated corporate overhead. 40,320
to making the
All Employees except the store manager would be discharged. The manager, who PROBLEM B
earns P64,800 Pasadena Corporation produces three products, and currently has a shortage of
annually, would be transferred to store No. 19 in neighbouring city. machine hours since
1. How much is the store No. 31's reported profit/(loss) for the period just one of its machines is down - only 360 hours are available this month. The sellimg
ended price, cost, labor
2. Compute for the total unavoidable cost of store No. 31 requirement, qnd demand of three products are as follows
3. How much is the increase/(decrease) in Profit if Persimmon Pizza decided X. Y. Z
to close store No. 31? Selling Price. P17.50. P10.50 P17.50
Variable cost per unit 12.25. 7.00. 7.00
Machine hours per unit 0.75. 0.25. 1.00
Demand. 300. 400. 210
4. How many of each product should be sold while the machine is down to
maximize profit
5. What is the total contribution margin if Pasadena prioritize production
according to its limited
resources
PROBLEM C
Center Company currently produces three product from a joint process. The joint PROBLEM D
process has total of P2,000,000 per month all three products A, B, and C are Archer currently manufactures a subcomponent that is used in its main product. A
immediately saleable as they come out of joint process. Alternatively, any of the supplier has offered to supply all the subcomponents need a price of P210. Archer
products could continue on which on additional processing and be sold as more currently produces 100,000 subcomponents at the following manufacturing costs:
complete product. The following information is available: Units. Immediate sales Direct materials. P75
Price. Later sales price Further Processing per Unit Direct labor. 45
A. 5,000. 60. 80. 24 Variable manufacturing overhead. 50
B. 17,500. 80. 100. 16 Fixed manufacturing overhead. 75
C. 10,000. 100. 128. 12 Unit costs. P245
6. What is the net advantage/(disadvantage) of the company opt to process 9. If Archer has no alternative uses for the manufacturing capacity, what
Product A would be the profit impact of buying the subcomponents from the supplier?
further? 10. Assume Archer would avoid P750,000 in equipment leases and salaries if
7. How much is the increase in profit If center to process Product C further? the subcomponents were purchased from the supplier. What would be the
8. Assuming the company has decided to maximize profit, how much is the profit impact of
gross profit of Center Company buying from the supplier?
11. Assume that aside from P750,000 savings indicated in Num. 10 Archer can
use the freed-up capacity to manufacture a new product which is expected to
generate a total contribution margin of P3,800,000. What is the net
advantage/(disadvantage) of outsourcing the subcomponent?
PROBLEM E
Cornell Corporation manufacturers faucets. Seceral weeks ago, the company
received a special order inquiry from Yale, Inc. Yale desires to market a faucet
similar to Cornell's model no. 702 and has offered to purchase 3,000 units. The
following data are available:
a) Cost data for Cornell's model no. 702 faucet: direct materials, P108; direct
labor, P72
(2hours at P36 per hour); and manufacturing overhead, P168 (2 hours at 84 per
hour).
b) The normal selling price of model no. 702 is P432; however, Yale has offered
Cornell
only P276 because of the large quantity it is willing to purchase.
c) Yale requires a design modification that will allow a P9.60 reduction in direct
material
cost.
d) Cornell's production supervisor notes that the company will incur P20,880 in
additional
set-up costs and will have to purchase a P7,920 special device to manufacture
these
units. The device will be discarded once the special order is completed.
e) Total manufacturing overhead costs are applied to production at the rate of P84
per
labor hour. This figure is based, in part, on budgeted yearly fixed overhead of
P1,497,600 and planned production activity of 24,000 labor hours.
f) Cornell will allocate P12,000 of existing fixed administrative costs to order as
"...part of
the cost of doing business,"
12. Should Cornell accept or reject the special order?
13.How much will the profit of Cornell Company Increase/(decrease) as a
result of accepting
the special order
14. Assuming that Cornell has no excess capacity, how much is the
opportunity cost of
accepting the special order
15. Assuming that Cornell has no excess capacity, should Cornell accept or
reject the special
order?
PROBLEM F
Boa Mining Company currently is operating at less than 50% of practical capacity. PROBLEM G
The Fowler Industries produces two bearings: J20 and T02. Data regarding these two
management of the company expects sales to drop below the present level of bearings are as follows:
10,000 tons of Machine hours required per unit 2.00 2.50
ore per month very soon. The sales price per ton is P150 and the variable cost per Standard cost per unit
ton is P100. Fixed costs per month total P50,000. Direct material P25 P40
Management is concerned that a further drop in sales volume will generate a loss Direct labor 50 40
and Variable overhead* 30 25
accordingly is considering temporarily suspending operations until demand in the Fixed overhead** 40 50
metals Total P145 P155
markets rebounds and prices once again rise. Management has implemented a cost *Applied on the basis of direct labor hours
reduction program over the past year, but at this point suspension of operations ** Applied on the basis of machine hours
appears to be the only variable alternative. Management estimates that suspension The company requires 8,000 unuts of J20 and 11,000 units of T02. Recently,
of operations would reduce fixed costs from P500,000 to P200,000 per month. management
16. At what sales volume per month will the company be indifferent between decided to devote additional machine time to other product lines, resulting in only
continuing to operate the mine and closing it? 31,000
17. Assume that the estimated sales are at 5,500 tons per month, should the machine hours per year that can be dedicated to production of the bearings. An
mine continue its operation or shut down temporarily? What is the net outside
advantage of choosing one option over the other? company has offered to sell Fowler the bearings at prices of P135 for J20 and
18. Compute for the new shut down point if Boa expects to spend P150,000 in P135 for T02.
recalibrating the mining equipment and training new miners. 9.Assume that Fowler decided to produce all J20s and purchase T02s only as
needed.
Determine the number of T02s to be purchased.
20.Compute the net benefit to the company of manufacturing (rather than
purchasing) a unit of J20.