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19.

Red Nose Company makes hoses f


or its sprayers. Unit costs applicable to these
hoses are:
Direct materials
P35.00
Direct labor
20.00
General and Administrative cost
16.00
Fixed manufacturing overhead
21.00
Variable manufacturing overhead
9.00
Five thousand units (5,000) are requi
red for the year. The space that is used for
the hoses production can be used as warehouse and will save rental cost of
P48,000 per year. The hoses can be bought for P70.00 a piece. Should Red Nose
Co. buy or make the hoses? Why?
A.
Buy because there will be
savings of P3.60 per hose.
B.
Make, there will be a savings of P6.00 per hose
C.
Make, because there will be savings of P31.00 per hose
D.
Buy, because there will be savings of P31.00 per hose
(rpcpa)
19.
A
?
Should the company make or buy the hoses?

In the
short
-
term profit analysis, whichever alternative that gives a lower total
relevant cost will be chosen to generate savings and increase the income of the
business. The relevant costs analysis is shown below:
Cost to make Cost to buy
Un
it purchase price
P
-
P 70.00
Unit direct materials
35.00
Unit direct labor cost
20.00
Unit variable manufacturing overhead
9.00
Savings in rental (P48,000/5,000)
________
( 9.60)
Net relevant costs
P 64.00
P 60.
40
Less: Cost to buy
60.40
Net advantage of buying per unit
P 3.60
The company should buy the hoses and save an amount of P3.60 per hose or
a total savings of P18,000 ( i.e., 5,000 x P3.60). The fixed manufacturing overhead
is not expect
ed to change between the alternatives and is considered irrelevant in
the analysis. Avoidable fixed overhead is, however, to be included in the make
-
or
-
buy costs analysis. The general and administrative cost, since the problem is silent,
is considered as f
ixed and is also an irrelevant cost.
20.
The Blue Plate Company is operating at 50% capacity producing 100,000 units
ceramic plates a year. With the economic boom that the country is expected to
have in the coming year, the company plans to utilize 75% of
capacity. Part of the
manufacturing process is hand
-
painting which has a variable cost of material at
P4.50 and labor at P5.50 per plate. This painting process has variable overhead at
P1.00 which is 40% of total variable factory overhead. Total factory o
verhead is set
at P500 per 100 plates. No increase in fixed factory overhead is expected even
with the substantial increase in production. An offer to sub
-
contract the incremental
hand painting job was a given at P10.50 per plate but the company will have
to
lease an equipment at P10,000 annual rental. The plates sell for P50.00 a piece at
the contribution margin rate of 45%. Should Blue Plate Company sub
-
contract?
Why?
A.
No because the company will lose P135,000.
B.
Yes, because the company will save P165,000.
C.
Yes, because the company will earn P15,000 more.
D.
No, because there is no benefit for the company.
(rpcpa)
20.
C
?
Should the company sub
-
contract the additional units to be produced?

The company is presently operating at 50% capacity producing
100,000 units. It
wants to increase its production to 75%. One of the production processes in
producing the product may be sub
-
contracted at P10.50 per unit. The company
should rent an equipment for P10,000 if the process is sub
-
contracted. The costs
and s
hort
-
term profit analyses are as follows:
a.
Production at 75% capacity (100,000/50% x 75%)
150,000 units
Less: Present production at 50% capacity
100,000
units
Incremental units to be produced
50,000
units
b. Relevant costs analysis:
Cost to make
Cost to sub
-
contract
Materials (50,000 x P4.50)
P225,000
Labor (50,000 x P5.50)
275,000
Variable overhead (50,000 x P1.00)
50,000
Sub
-
contract price (50,000 x P10.50)
P 525,000
Equipment rental
_______
10,000
Total relevant costs
550,000
P 535,000
Less: Relevant costs to sub
-
contract
535,000
Savings from sub
-
contracting
P 15,000
The company should sub
-
contract the additional 50,000 units and earn a
savings of P15,0
00

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