Relevant Costing

Drills
Problem 1

Sport Company produces a ball bearing used in bantam cars. Each ball
bearing sells for P45 and the company sells approximately 500,000
bearings each year. Unit cost data for 2020 given below:
Fixed Variable
Direct material - 12.00
Direct labor - 10.00
Factory overhead 8.00 4.00
Distribution cost 2.00 4.00

Sport has received an offer from a foreign buyer to purchase 50,000 ball
bearings. Domestic sales would not be affected by this transaction. The
offer price is P37. If the offer is accepted, variable distribution costs
will increase P2 per ball bearing for shipping, insurance and import
duties. The company has idle capacity to produce the offer.
Required:
a. Determine ethe relevant unit cost to this special order.
b. Determine the net effect of the special order.
Problem 2
Julie Company produces a single product. The cost of producing and
selling a single unit of this product at the company's normal activity
level of 40,000 units per month is as follows:
Direct materials ................... P53.60
Direct labor ....................... P5.30
Variable manufacturing overhead .... P1.40
Fixed manufacturing overhead ....... P13.20
Variable selling and administrative expense P1.60
Fixed selling and administrative expense P9.10

The normal selling price of the product is P91.60 per unit.

An order has been received from an overseas customer for 3,000
units to be delivered this month at a special discounted price.
This order would have no effect on the company's normal sales and
would not change the total amount of the company's fixed costs.
The variable selling and administrative expense would be P1.00 less
per unit on this order than on normal sales.
Direct labor is a variable cost in this company.

Required:

a. Suppose there is ample idle capacity to produce the units

required by the overseas customer and the special discounted
price on the special order is P81.90 per unit. By how much would
this special order increase (decrease) the company's net

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 operating income for the month?
b. Suppose the company is already operating at capacity when the
special order is received from the overseas customer. What would
be the opportunity cost of each unit delivered to the overseas
customer?
c. Suppose there is not enough idle capacity to produce all of the
units for the overseas customer and accepting the special order
would require cutting back on production of 2,100 units for
regular customers. What would be the minimum acceptable price
per unit for the special order?

Problem 3
Seaman Inc. uses a joint process to produce products A, B and C. Joint
production costs for 2020 were P200,000 and are allocated using the
relative-sales-value at split-off method.
Each product may be sold at its split-off point or processed further.
Addtional processing costs are entirely variable. Relevant data are given
below:
Sales Additional
Final Sales
Product Value at Processing
Value
Split-off Costs

A 100,000.00 40,000.00 200,000.00

B 200,000.00 50,000.00 240,000.00

C 40,000.00 60,000.00 80,000.00

340,000.00 150,000.00 520,000.00

Required:
To maximize profit, which product or products should be sold at split-
off point and which product or products should be processed further?

Problem 4
Ready Inc. has 15,000 hours of idle capacity. They need 20,000 units of
a component part used in its products lines. It is estimated that each
unit take one-half machine hour for production. The following information
is available:
Cost to make the parts:
Materials P14
Direct labor P18
Factory overhead (75% of direct labor cost per unit)
Variable factory overhead (40% of factory overhead per unit)
**Cost to buy the parts per unit from the supplier P45

If Ready Inc. buys the parts rather than producing them, it will save
60% of fixed overhead cost per unit.

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Required:
a. Determine the relevant unit costs.
b. Detemine the relevant total costs and differential costs.
c. Should Ready Inc. manufacture the parts or should it buy them from
the outside supplier?
Problem 5
The Dallas Company has 5,000 obsolete truck parts that are carried in
their inventory at a cost of P50,000. The company is faced with a decision
whether to scrap the parts or modify them. If the parts were junked, it
would realize only 10% of its cost. Should the company modify the parts,
it will spend P10,000 for materials, P3,000 for direct labor and overhead
equal to 40% of direct labor. The new parts will sell for P25,000 in the
market.
Required:
Should Dallas Company modify or scrap the parts? Determine the relevant
and differential costs.
Problem 6
The following data were taken from Helton Inc. based on these data, the
management of Helton is considering eliminating product B. They assumed
that by operating only product A and C, the company would have higher
profits.
Product A Product B Product C
Sales 100,000.00 200,000.00 300,000.00
Cost of Sales:
Materials 25,000.00 80,000.00 75,000.00
Labor 20,000.00 50,000.00 40,000.00
Variable overhead 10,000.00 15,000.00 20,000.00

Fixed overhead 5,000.00 35,000.00 15,000.00

Total 60,000.00 180,000.00 150,000.00
Gross margin 40,000.00 20,000.00 150,000.00
Selling and
administrative
Variable 12,000.00 10,000.00 30,000.00

Fixed 8,000.00 30,000.00 40,000.00

Total 20,000.00 40,000.00 70,000.00
Net Income (Loss) 20,000.00 (20,000.00) 80,000.00

It was determined that if product line B is discontinued, 60% of the

fixed overhead can be avoided and 50% of fixed selling and administrative
expenses can also be avoided.
Required:
Based on the above data, should product line B be eliminated?

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Problem 7
The Mavs Inc. is in the fish canning industry. Its regular monthly
production from January to October averages 100 tons of tuna fish that
will produce 1,000,000 cans of canned tuna that can be sold at P10 per
can in the market. Its annual fixed costs amount to P18,000,000 which
are evenly allocated on a twelve-month period.
During the months of November and December, the supply of tuna fish goes
down to an average of 20 tons monthly or 200,000 cans of canned tuna
monthly.
Management is considering to shutdown operations during the months of
November and December on the belief that the company will be saved from
greater losses during these months.
If the management decides to shutdown operations, additional costs of
P50,000 monthly will be incurred for security and insurance of the plant.
The company will spend additional P60,000 in re-starting operations in
January.
The following data are gathered from the records of Mavs Inc.
Raw materials & ingredients 5.20
Direct labor 0.55
Variable overhead 0.25
Total variable cost per unit 6.00

Variable selling and administrative expenses averaged P0.10 per can. It

is assumed that the market can absorb all canned tuna produced.
Shutdown operations will reduce fixed costs during November and December
by 40%.
Required:
a. Compute the shutdown costs.
b. Determine the shutdown point.
c. Eval0uate the result of continued operations and compare with
shutdown of operations.
Problem 8
PMC Inc. manufactures and sells three lines of product with contribution
margins per unit as follows:
Product A = P12; Product B = P2; Product C = P5.
Each unit of product requires production time as follows:
Product A = 3 hours; Product B = 10 minutes; Product C = 2 hours.
The company has plant capacity of 20,000 machine hours a month. The
market can absorb 2,000 units of Product A, 24,000 units of Product B
and 15,000 units of Product C.

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Required:
a. What is the most profitable product line on the basis of
contribution margin per machine hour?
b. Compute the maximum contribution margin for the month that will
meet the conditions stated.
Problem 9
The Keeve Company is considering to replace its old machine with a book
value of P75,000 and still have a remaining useful life of 5 years. The
old machine will be replaced with a new one that will cost P250,000,
will have 5-year useful life and no salvage value.
The annual operating costs of the old machine amount to P90,000 which
can be reduced by 60% if a new machine is acquired. The old machine
would require re-conditioning that will cost P10,000 if not replaced
which will be incurred before it starts operation. The old machine will
have zero disposal value after 5 years, but can be disposed now at
P20,000.
Required:
Ignoring the time value of money and income taxes, determine the relevant
and differential costs.

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