College of Accounting Education

3F, Business & Engineering Building

Matina, Davao City
Phone No.: (082)300-5456 Local 137

MAS 10 EXERCISES
Management Advisory Services

1.Milford Corporation has in stock 16,100 kilograms of material R that it bought five years ago for
P5.75 per kilogram. This raw material was purchased to use in a product line that has been
discontinued. Material R can be sold as is for scrap for P3.91 per kilogram. An alternative would
be to use material R in one of the company's current products, S88Y, which currently requires 2
kilograms of a raw material that is available for P7.60 per kilogram. Material R can be modified
at a cost of P0.77 per kilogram so that it can be used as a substitute for this material in the
production of product S88Y. However, after modification, 4 kilograms of material R is required
for every unit of product S88Y that is produced. Milford Corporation has now received a request
from a company that could use material R in its production process. Assuming that Milford
Corporation could use all of its stock of material R to make product S88Y or the company could
sell all of its stock of the material at the current scrap price of P3.91 per kilogram, what is the
minimum acceptable selling price of material R to the company that could use material R in its
own production process?

2.Otool Inc. is considering using stocks of an old raw material in a special project. The special project
would require all 240 kilograms of the raw material that are in stock and that originally cost the
company P2,112 in total. If the company were to buy new supplies of this raw material on the
open market, it would cost P9.25 per kilogram. However, the company has no other use for this
raw material and would sell it at the discounted price of P8.35 per kilogram if it were not used in
the special project. The sale of the raw material would involve delivery to the purchaser at a
total cost of P71.00 for all 240 kilograms. What is the relevant cost of the 240 kilograms of the
raw material when deciding whether to proceed with the special project?

3.Hamby Corporation is preparing a bid for a special order that would require 780 liters of material
W34C. The company already has 640 liters of this raw material in stock that originally cost P8.30
per liter. Material W34C is used in the company's main product and is replenished on a periodic
basis. The resale value of the existing stock of the material is P7.60 per liter. New stocks of the
material can be readily purchased for P8.35 per liter. What is the relevant cost of the 780 liters
of the raw material when deciding how much to bid on the special order?

4.Schickel Inc. regularly uses material B39U and currently has in stock 460 liters of the material for
which it paid P3,128 several weeks ago. If this were to be sold as is on the open market as
surplus material, it would fetch P5.95 per liter. New stocks of the material can be purchased on
the open market for P6.45 per liter, but it must be purchased in lots of 1,000 liters. You have
been asked to determine the relevant cost of 760 liters of the material to be used in a job for a
customer. The relevant cost of the 760 liters of material B39U is:

5.Winder Corporation is a specialty component manufacturer with idle capacity. Management

would like to use its extra capacity to generate additional profits. A potential customer has
 offered to buy 3,000 units of component QEA. Each unit of QEA requires 5 units of material F85
and 5 units of material E71. Data concerning these two materials follow:
Original Current
Units in Cost Per Market Price Disposal Value
Material Stock Unit Per Unit Per Unit
F85............... 740 P4.90 P4.75 P4.20
E71............... 13,680 P5.00 P4.70 P3.60

Material F85 is in use in many of the company's products and is routinely replenished. Material
E71 is no longer used by the company in any of its normal products and existing stocks would not
be replenished once they are used up.

What would be the relevant cost of the materials, in total, for purposes of determining a
minimum acceptable price for the order for product QEA?

6.ABD Realty manages five apartment complexes in its region. Shown below are summary income
statements for each apartment complex:

U V W X Y
Rental income.............. P1,000 P1,210 P2,347 P1,878 P1,065
Expenses......................     800  1,300  2,600  2,400  1,300
Operating income........ P  200 (P    90) (P  253) (P  522) (P  235)

Included in the expenses is P1,200 of common corporate expenses that have been allocated to
the apartment complexes based on rental income. These common corporate expenses would
have to be incurred regardless of how many apartment complexes ABD Realty manages. The
apartment complex(es) that ABD Realty should consider dropping is (are):

7.Sardi Inc. is considering whether to continue to make a component or to buy it from an outside
supplier. The company uses 17,000 of the components each year. The unit product cost of the
component according to the company's cost accounting system is given as follows:

Direct materials............................................... P 8.20

Direct labor...................................................... 8.30
Variable manufacturing overhead................... 1.20
Fixed manufacturing overhead........................    4.30
Unit product cost............................................. P22.00

Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 70% is
avoidable if the component were bought from the outside supplier. In addition, making the
component uses 2 minutes on the machine that is the company's current constraint. If the
component were bought, this machine time would be freed up for use on another product that
requires 4 minutes on the constraining machine and that has a contribution margin of P7.00 per
unit. When deciding whether to make or buy the component, what cost of making the
component should be compared to the price of buying the component?

8.Wood Carving Corporation manufactures three products. Because of a recent lack of skilled wood
carvers, the corporation has had a shortage of available labor hours. The following per unit data
 relates to the three products of the corporation:

Letter Openers Elvis Statues Candle Holders

Sales price....................... P30 P80 P42
Variable costs.................. P20 P40 P20
Labor hours required....... 1 6 2

Assume that Wood Carving only has 1,800 labor hours available next month. Also assume that
Wood Carving can only sell 800 units of each product in a given month. What is the maximum
amount of contribution margin that Wood Carving can generate next month given this labor hour
shortage?

9.Faustina Chemical Company manufactures three chemicals (TX14, NJ35, and KS63) from a joint
process. The three chemicals are in industrial grade form at the split-off point. They can either
be sold at that point or processed further into premium grade. Costs related to each batch of
this chemical process is as follows:

TX14 NJ35 KS63

Sales value at split-off point............................ P16,000 P12,000 P5,000
Allocated joint costs........................................ P6,000 P6,000 P6,000
Sales value after further processing................ P20,000 P18,000 P9,000
Cost of further processing............................... P5,000 P3,000 P2,000

For which product(s) above would it be more profitable for Faustina to sell at the split-off point
rather than process further?

10. The Draper Company is considering dropping its Doombug toy due to continuing losses.
Revenue and cost data on the toy for the past year follow:

Sales of 15,000 units.............. P150,000

Variable expenses..................  120,000
Contribution margin.............. 30,000
Fixed expenses.......................    40,000
Net operating loss.................. (P 10,000)

If the toy were discontinued, then Draper could avoid P8,000 per year in fixed costs.

a. Under the given conditions, the change in annual operating income from discontinuing the
production and sale of Doombugs would be an increase or decrease of:
b. Assuming all other conditions stay the same, at what level of annual sales of Doombugs (in
units) should Draper be indifferent to discontinuing Doombugs or continuing the production
and sale of Doombugs?
c. Suppose that if the Doombug toy is dropped, the production and sale of other Draper toys
would increase so as to generate a P16,000 increase in the contribution margin received
from these other toys. If all other conditions are the same, the change in annual operating
income from discontinuing the production and sale of Doombugs would be an increase or
decrease of:
d. Suppose again that if the Doombug toy is dropped, the production and sale of other Draper
 toys would increase so as to generate a P16,000 increase in the contribution margin
received from these other toys. At what selling price per Doombug should Draper be
indifferent (on economic grounds) between dropping the Doombug or continuing its
production and sale? (All other conditions remain the same, including annual sales of 15,000
units of the Doombug toy.)

11. Blake Company produces a single product. Last year, Blake's net operating income under
absorption costing was P3,600 lower than under variable costing. The company sold 10,000
units during the year, and its variable costs were P9 per unit, of which P1 was variable selling
expense. If production cost was P11 per unit under absorption costing, then how many units did
the company produce during the year?

12. Hurlex Company produces a single product. Last year, Hurlex manufactured 15,000 units and
sold 12,000 units. Production costs for the year were as follows:

Direct materials............................................................ P150,000

Direct labor.................................................................. P180,000
Variable manufacturing overhead................................ P135,000
Fixed manufacturing overhead.................................... P210,000

Sales totaled P840,000 for the year, variable selling expenses totaled P60,000, and fixed selling
and administrative expenses totaled P180,000. There were no units in the beginning inventory.
Assume that direct labor is a variable cost.

a. The contribution margin per unit would be:

b. Under absorption costing, the carrying value on the balance sheet of the ending
inventory for the year would be:
c. Under variable costing, the company's net operating income for the year would be:

13. Abdi Company, which has only one product, has provided the following data concerning its most
recent month of operations:

Selling price..................................................... P81

Units in beginning inventory........................... 0

Units produced................................................ 7,300
Units sold......................................................... 7,000
Units in ending inventory................................ 300

Variable costs per unit:

Direct materials............................................ P20
Direct labor.................................................. P30
Variable manufacturing overhead................ P7
Variable selling and administrative.............. P11

Fixed costs:
Fixed manufacturing overhead.................... P65,700
Fixed selling and administrative................... P21,000
 a. What is the unit product cost for the month under variable costing?
b. What is the unit product cost for the month under absorption costing?
c. The total contribution margin for the month under the variable costing approach is:
d. The total gross margin for the month under the absorption costing approach is:
e. What is the total period cost for the month under the variable costing approach?
f. What is the total period cost for the month under the absorption costing approach?
g. What is the net operating income for the month under variable costing?
h. What is the net operating income for the month under absorption costing?

14. Elly Industries is a multi-product company that currently manufactures 30,000 units of Part
MR24 each month for use in production. The facilities now being used to produce Part MR24
have a fixed monthly cost of P150,000 and a capacity to produce 35,000 units per month. If Elly
were to buy part MR24 from an outside supplier, the facilities would be idle, but its fixed costs
would continue at 40% of their present amount. The variable production costs of Part MR24 are
P11 per unit.

a. If Elly Industries continues to use 30,000 units of Part MR24 each month, it would realize a
net benefit by purchasing Part MR24 from an outside supplier only if the supplier's unit price
is less than:
b. If Elly industries is able to obtain Part MR24 from an outside supplier at a unit purchase price
of P15, the monthly usage at which it will be indifferent between purchasing and making Part
MR24 is: