ACCOUNTING INTEGRATION

MANAGEMENT ADVSORY SERVICES jjaur jrtcbic

RELEVANT COSTING May 2022

Multiple Choice
Identify the choice that best completes the statement or answers the question.

1. Which of the following is not a characteristic of relevant costing information? It is

a. associated with the decision under consideration.
b. significant to the decision maker.
c. readily quantifiable.
d. related to a future endeavor.

2. A fixed cost is relevant if it is

a. a future cost.
b. avoidable.
c. sunk.
d. a product cost.

3. 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.

4. Which of the following is the least likely to be a relevant item in deciding whether to replace an
old machine?
a. acquisition cost of the old machine
b. outlay to be made for the new machine
c. annual savings to be enjoyed on the new machine
d. life of the new machine

5. If a cost is irrelevant to a decision, the cost could not be

a. a sunk cost.
b. a future cost.
c. a variable cost.
d. an incremental cost.

6. Which of the following costs would be relevant in short-term decision making?

a. incremental fixed costs
b. all costs of inventory
c. total variable costs that are the same in the considered alternatives

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 d. the cost of a fixed asset that could be used in all the considered alternatives

7. The term incremental cost refers to

a. the profit foregone by selecting one choice instead of another.
b. the additional cost of producing or selling another product or service.
c. a cost that continues to be incurred in the absence of activity.
d. a cost common to all choices in question and not clearly or feasibly allocable to
any of them.

8. A cost is sunk if it
a. is not an incremental cost.
b. is unavoidable.
c. has already been incurred.
d. is irrelevant to the decision at hand.

9. Most ____ are relevant to decisions to acquire capacity, but not to short-run decisions involving
the use of that capacity.
a. sunk costs
b. incremental costs
c. fixed costs
d. prime costs

10. Irrelevant costs generally include

Sunk costs Historical costs Allocated costs

a. yes yes no
b. yes no no
c. no no yes
d. yes yes yes

11. In deciding whether an organization will keep an old machine or purchase a new machine, a
manager would ignore the
a. estimated disposal value of the old machine.
b. acquisition cost of the old machine.
c. operating costs of the new machine.
d. estimated disposal value of the new machine.

12. The potential rental value of space used for production activities
a. is a variable cost of production.
b. represents an opportunity cost of production.
c. is an unavoidable cost.
d. is a sunk cost of production.

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13. 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.

14. Which of the following are relevant in a make or buy decision?

Variable Avoidable fixed Unavoidable fixed

costs costs costs
a. no yes yes
b. yes no yes
c. no no yes
d. yes yes no

15. In a make or buy decision, the opportunity cost of capacity could

a. be considered to decrease the price of units purchased from suppliers.
b. be considered to decrease the cost of units manufactured by the company.
c. be considered to increase the price of units purchased from suppliers.
d. not be considered since opportunity costs are not part of the accounting records.

16. Which of the following are relevant in a make or buy decision?

Prime costs Sunk costs Incremental costs

a. yes yes yes
b. yes no yes
c. yes no no
d. no no yes

17. In a make or buy decision, the reliability of a potential supplier is

a. an irrelevant decision factor.
b. relevant information if it can be quantified.
c. an opportunity cost of continued production.
d. a qualitative decision factor.

18. Which of the following qualitative factors favors the buy choice in a make or buy decision for a
part?
a. maintaining a long-term relationship with suppliers
b. quality control is critical
c. utilization of idle capacity

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 d. part is critical to product

19. When a scarce resource, such as space, exists in an organization, the criterion that should be
used to determine production is
a. contribution margin per unit.
b. selling price per unit.
c. contribution margin per unit of scarce resource.
d. total variable costs of production.

20. Fixed costs are ignored in allocating scarce resources because

a. they are sunk.
b. they are unaffected by the allocation of scarce resources.
c. there are no fixed costs associated with scarce resources.
d. fixed costs only apply to long-run decisions.

21. The minimum selling price that should be acceptable in a special order situation is equal to total
a. production cost.
b. variable production cost.
c. variable costs.
d. production cost plus a normal profit margin.

22. Which of the following costs is irrelevant in making a decision about a special order price if
some of the company facilities are currently idle?
a. direct labor
b. equipment depreciation
c. variable cost of utilities
d. opportunity cost of production

23. An ad hoc sales discount is

a. an allowance for an inferior quality of marketed goods.
b. a discount that an ad hoc committee must decide on.
c. brought about by competitive pressures.
d. none of the above.

24. A manager is attempting to determine whether a segment of the business should be eliminated.
The focus of attention for this decision should be on
a. the net income shown on the segment's income statement.
b. sales minus total expenses of the segment.
c. sales minus total direct expenses of the segment.
d. sales minus total variable expenses and avoidable fixed expenses of the segment.

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25. Assume a company produces three products: A, B, and C. It can only sell up to 3,000 units of
each product. Production capacity is unlimited. The company should produce the product (or
products) that has (have) the highest
a. contribution margin per hour of machine time.
b. gross margin per unit.
c. contribution margin per unit.
d. sales price per unit.

26. For a particular product in high demand, a company decreases the sales price and increases the
sales commission. These changes will not increase
a. sales volume.
b. total selling expenses for the product.
c. the product contribution margin.
d. the total variable cost per unit.

27. An increase in direct fixed costs could reduce all of the following except
a. product line contribution margin.
b. product line segment margin.
c. product line operating income.
d. corporate net income.

28. When a company discontinues a segment, total corporate costs may decrease in all of the
following categories except
a. variable production costs.
b. allocated common costs.
c. direct fixed costs.
d. variable period costs.

29. In evaluating the profitability of a specific organizational segment, all ____ would be ignored.
a. segment variable costs
b. segment fixed costs
c. costs allocated to the segment
d. period costs

30. Knox Company uses 10,000 units of a part in its production process. The costs to make a part
are: direct material, P12; direct labor, P25; variable overhead, P13; and applied fixed overhead,
P30. Knox has received a quote of P55 from a potential supplier for this part. If Knox buys the
part, 70 percent of the applied fixed overhead would continue. Knox Company would be better
off by
a. P50,000 to manufacture the part.
b. P150,000 to buy the part.
c. P40,000 to buy the part.

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 d. P160,000 to manufacture the part.

31. Paulson Company has only 25,000 hours of machine time each month to manufacture its two
products. Product X has a contribution margin of P50, and Product Y has a contribution margin
of P64. Product X requires 5 hours of machine time, and Product Y requires 8 hours of machine
time. If Paulson Company wants to dedicate 80 percent of its machine time to the product that
will provide the most income, the company will have a total contribution margin of
a. P250,000.
b. P240,000.
c. P210,000.
d. P200,000.

32. Doyle Company has 3 divisions: R, S, and T. Division R's income statement shows the following
for the year ended December 31:

Sales P1,000,000
Cost of goods sold (800,000)
Gross profit P 200,000
Selling expenses P100,000
Administrative expenses 250,000 (350,000)
Net loss P (150,000)

Cost of goods sold is 75 percent variable and 25 percent fixed. Of the fixed costs, 60 percent are
avoidable if the division is closed. All of the selling expenses relate to the division and would be
eliminated if Division R were eliminated. Of the administrative expenses, 90 percent are applied
from corporate costs. If Division R were eliminated, Doyle’s income would
a. increase by P150,000.
b. decrease by P 75,000.
c. decrease by P155,000.
d. decrease by P215,000.

33. Thomas Company is currently operating at a loss of P15,000. The sales manager has received a
special order for 5,000 units of product, which normally sells for P35 per unit. Costs associated
with the product are: direct material, P6; direct labor, P10; variable overhead, P3; applied fixed
overhead, P4; and variable selling expenses, P2. The special order would allow the use of a
slightly lower grade of direct material, thereby lowering the price per unit by P1.50 and selling
expenses would be decreased by P1. If Thomas wants this special order to increase the total net
income for the firm to P10,000, what sales price must be quoted for each of the 5,000 units?
a. P23.50
b. P24.50
c. P27.50
d. P34.00

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34. Quest Company produces a part that has the following costs per unit:

Direct material P8
Direct labor 3
Variable overhead 1
Fixed overhead 5
Total P17

Zest Corporation can provide the part to Quest for P19 per unit. Quest Company has
determined that 60 percent of its fixed overhead would continue if it purchased the part.
However, if Quest no longer produces the part, it can rent that portion of the plant facilities for
P60,000 per year. Quest Company currently produces 10,000 parts per year. Which alternative is
preferable and by what margin?
a. Make-P20,000
b. Make-P50,000
c. Buy-P10,000
d. Buy-P40,000

35. Browning Company has 15,000 units in inventory that had a production cost of P3 per unit.
These units cannot be sold through normal channels due to a significant technology change.
These units could be reworked at a total cost of P23,000 and sold for P28,000. Another
alternative is to sell the units to a junk dealer for P8,500. The relevant cost for Browning to
consider in making its decision is
a. P45,000 of original product costs.
b. P23,000 for reworking the units.
c. P68,000 for reworking the units.
d. P28,000 for selling the units to the junk dealer.

Robertson Corporation

Robertson Corporation sells a product for P18 per unit, and the standard cost card for the
product shows the following costs:

Direct material P1
Direct labor 2
Overhead (80% fixed) 7
Total P10

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36. Refer to Robertson Corporation. Robertson received a special order for 1,000 units of the
product. The only additional cost to Robertson would be foreign import taxes of P1 per unit. If
Robertson is able to sell all of the current production domestically, what would be the minimum
sales price that Robertson would consider for this special order?
a. P18.00
b. P11.00
c. P5.40
d. P19.00

37. Refer to Robertson Corporation. Assume that Robertson has sufficient idle capacity to produce
the 1,000 units. If Robertson wants to increase its operating profit by P5,600, what would it
charge as a per-unit selling price?
a. P18.00
b. P10.00
c. P11.00
d. P16.60

38. Glamorous Grooming Corporation makes and sells brushes and combs. It can sell all of either
product it can make. The following data are pertinent to each respective product:

Brushes Combs
Units of output per machine hour 8 20
Selling price per unit P12.00 P4.00
Product cost per unit
Direct material P1.00 P1.20
Direct labor 2.00 0.10
Variable overhead 0.50 0.05

Total fixed overhead is P380,000.

The company has 40,000 machine hours available for production. What sales mix will maximize
profits?
a. 320,000 brushes and 0 combs
b. 0 brushes and 800,000 combs
c. 160,000 brushes and 600,000 combs
d. 252,630 brushes and 252,630 combs

39. Houston Footwear Corporation has been asked to submit a bid on supplying 1,000 pairs of
military combat boots to the Armed Forces. The company's costs per pair of boots are as
follows:

Direct material P8

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 Direct labor 6
Variable overhead 3
Variable selling cost (commission) 3
Fixed overhead (allocated) 2
Fixed selling and administrative cost 1

Assuming that there would be no commission on this potential sale, the lowest price the firm
can bid is some price greater than
a. P23.
b. P20.
c. P17.
d. P14.

40. Holt Industries has two sales territories-East and West. Financial information for the two
territories is presented below:

East West
Sales P980,000 P750,000
Direct costs:
Variable (343,000) (225,000)
Fixed (450,000) (325,000)
Allocated common costs (275,000) (175,000)
Net income (loss) P(88,000) P 25,000

Because the company is in a start-up stage, corporate management feels that the East sales
territory is creating too much of a cash drain on the company and it should be eliminated. If the
East territory is discontinued, one sales manager (whose salary is P40,000 per year) will be
relocated to the West territory. By how much would Holt's income change if the East territory is
eliminated?
a. increase by P88,000
b. increase by P48,000
c. decrease by P267,000
d. decrease by P227,000

Woodville Motors

Woodville Motors is trying to decide whether it should keep its existing car washing machine or
purchase a new one that has technological advantages (which translate into cost savings) over
the existing machine. Information on each machine follows:

Old machine New machine

Original cost P9,000 P20,000

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 Accumulated depreciation 5,000 0
Annual cash operating costs 9,000 4,000
Current salvage value of old machine 2,000
Salvage value in 10 years 500 1,000
Remaining life 10 yrs. 10 yrs.

41. Refer to Woodville Motors. The P4,000 of annual operating costs that are common to both the
old and the new machine are an example of a(n)
a. sunk cost.
b. irrelevant cost.
c. future avoidable cost.
d. opportunity cost.

42. Refer to Woodville Motors. The P9,000 cost of the original machine represents a(n)
a. sunk cost.
b. future relevant cost.
c. historical relevant cost.
d. opportunity cost.

43. Refer to Woodville Motors. The P20,000 cost of the new machine represents a(n)
a. sunk cost.
b. future relevant cost.
c. future irrelevant cost.
d. opportunity cost.

44. Refer to Woodville Motors. The estimated P500 salvage value of the existing machine in 10 years
represents a(n)
a. sunk cost.
b. opportunity cost of selling the existing machine now.
c. opportunity cost of keeping the existing machine for 10 years.
d. opportunity cost of keeping the existing machine and buying the new machine.

45. Refer to Woodville Motors. The incremental cost to purchase the new machine is
a. P11,000.
b. P20,000.
c. P13,000.
d. P18,000.

Entertainment Solutions Corporation

Entertainment Solutions Corporation manufactures and sells FM radios. Information on the prior
year's operations (sales and production Model A1) is presented below:

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 Sales price per unit P30
Costs per unit:
Direct material 7
Direct labor 4
Overhead (50% variable) 6
Selling costs (40% variable) 10
Production in units 10,000
Sales in units 9,500

46. Refer to Entertainment Solutions Corporation. The Model B2 radio is currently in production
and it renders the Model A1 radio obsolete. If the remaining 500 units of the Model A1 radio are
to be sold through regular channels, what is the minimum price the company would accept for
the radios?
a. P30
b. P27
c. P18
d. P4

47. Refer to Entertainment Solutions Corporation. Assume that the remaining Model A1 radios can
be sold through normal channels or to a foreign buyer for P6 per unit. If sold through regular
channels, the minimum acceptable price will be
a. P30.
b. P33.
c. P10.
d. P4.

Chip Division of Computer Solutions, Inc.

The Chip Division of Computer Solutions, Inc. produces a high-quality computer chip. Unit
production costs (based on capacity production of 100,000 units per year) follow:

Direct material P50

Direct labor 20
Overhead (20% variable) 10
Other information:
Sales price 100
SG&A costs (40% variable) 15

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48. Refer to Chip Division of Computer Solutions, Inc. Assume, for this question only, that the Chip
Division is producing and selling at capacity. What is the minimum selling price that the division
would consider on a "special order" of 1,000 chips on which no variable period costs would be
incurred?
a. P100
b. P72
c. P81
d. P94

49. Refer to Chip Division of Computer Solutions, Inc. Assume, for this question only, that the Chip
Division is operating at a level of 70,000 chips per year. What is the minimum price that the
division would consider on a "special order" of 1,000 chips to be distributed through normal
channels?
a. P78
b. P95
c. P100
d. P81

50. Refer to Chip Division of Computer Solutions, Inc. Assume, for this question only, that the Chip
Division is presently operating at a level of 80,000 chips per year. Accepting a "special order" on
2,000 chips at P88 will
a. increase total corporate profits by P4,000.
b. increase total corporate profits by P20,000.
c. decrease total corporate profits by P14,000.
d. decrease total corporate profits by P24,000.

Richmond Steel Corporation

The capital budgeting committee of the Richmond Steel Corporation is evaluating the possibility
of replacing its old pipe-bending machine with a more advanced model. Information on the
existing machine and the new model follows:

Existing machine New machine

Original cost P200,000 P400,000
Market value now 80,000
Market value in year 5 0 20,000
Annual cash operating costs 40,000 10,000
Remaining life 5 yrs. 5 yrs.

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51. Refer to Richmond Steel Corporation. The major opportunity cost associated with the continued
use of the existing machine is
a. P30,000 of annual savings in operating costs.
b. P20,000 of salvage in 5 years on the new machine.
c. lost sales resulting from the inefficient existing machine.
d. P400,000 cost of the new machine.

52. Refer to Richmond Steel Corporation. The P80,000 market value of the existing machine is
a. a sunk cost.
b. an opportunity cost of keeping the old machine.
c. irrelevant to the equipment replacement decision.
d. a historical cost.

53. Refer to Richmond Steel Corporation. If the company buys the new machine and disposes of the
existing machine, corporate profit over the five-year life of the new machine will be ____ than the
profit that would have been generated had the existing machine been retained for five years.
a. P150,000 lower
b. P170,000 lower
c. P230,000 lower
d. P150,000 higher

54. Emerald Corporation has been manufacturing 5,000 units of Part 10541, which is used in the
manufacture of one of its products. At this level of production, the cost per unit of
manufacturing Part 10541 is as follows:

Direct material P2
Direct labor 8
Variable overhead 4
Fixed overhead applied 6
Total P20

Hamilton Company has offered to sell Emerald 5,000 units of Part 10541 for P19 a unit. Emerald
has determined that it could use the facilities currently used to manufacture Part 10541 to
manufacture Part RAC and generate an operating profit of P4,000. Emerald has also determined
that two-thirds of the fixed overhead applied will continue even if Part 10541 is purchased from
Hamilton. To determine whether to accept Hamilton’s offer, the net relevant costs to make are
a. P70,000.
b. P84,000.
c. P90,000.
d. P95,000.

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 55. Harding Corporation manufactures batons. Harding can manufacture 300,000 batons a year at a
variable cost of P750,000 and a fixed cost of P450,000. Based on Harding's predictions, 240,000
batons will be sold at the regular price of P5.00 each. In addition, a special order was placed for
60,000 batons to be sold at a 40 percent discount off the regular price. The unit relevant cost
per unit for Harding's decision is
a. P1.50.
b. P2.50.
c. P3.00.
d. P4.00.

56. Which of the following activities within an organization would be least likely to be outsourced?
a. accounting
b. data processing
c. transportation
d. product design

57. An outside firm selected to provide services to an organization is called a

a. contract vendor.
b. lessee.
c. network organization.
d. centralized insourcer.

58. Costs forgone when an individual or organization chooses one option over another are
a. budgeted costs.
b. sunk costs.
c. historical costs.
d. opportunity costs.

59. Which of the following costs would not be accounted for in a company's recordkeeping system?
a. an unexpired cost
b. an expired cost
c. a product cost
d. an opportunity cost

Problem

Agri-Magic Corporation

Agri-Magic Corporation grows corn in rural areas of the South. Agri-Magic's costs per bushel of
corn (based on an average yield of 130 bushels per acre) follow:

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 Direct material P1.10
Direct labor 0.40
Variable overhead 0.30
Fixed overhead 0.60
Variable selling costs 0.10
Fixed selling costs 0

Agri-Magic defines direct material costs as seed, fertilizer, water, and other chemicals. The
variable overhead costs represent maintenance and repair costs of machinery. The fixed
overhead costs are completely comprised of depreciation expense on machinery and real estate
taxes.

60. Refer to Agri-Magic Corporation. Assume that the current date is March 15. On this date, Agri-
Magic must make a decision as to whether it is financially better off to plant a certain farm with
corn or leave the land idle (no income is derived from idle land). Corn prices have been severely
depressed in recent years and Agri-Magic’s best guess is that corn prices will be around P2.00
per bushel at the time the crop is ready for harvest. Should the company plant corn or leave the
land idle? Explain.

61. Refer to Agri-Magic Corporation. Assume for this question only that the company decided to
plant the corn. A local oil refiner has approached the company about converting the crop to
grain alcohol (used to make gasohol) rather than selling the grain to the local grain elevator. If
Agri-Magic converts the grain to alcohol, it will incur additional costs of P0.60 per bushel, and
the company will be able to sell the crop to the oil refiner for the equivalent of P2.50 per bushel.
Otherwise, the company can sell the corn crop to the local grain elevator for P1.85 per bushel. If
Agri-Magic elects to sell the grain to the refinery, the company will not incur the variable selling
costs. What should the company do? Support your answer with calculations.

62. Refer to Agri-Magic Corporation. Assume that the current date is March 15. On this date, Agri-
Magic Corporation must make a decision as to whether it is financially better off to plant a
certain farm to corn, leave the land idle (no income is derived from idle land), or rent the land to
another farmer for P50 per acre. Corn prices have been severely depressed in recent years and
Agri-Magic Corporation's best guess is that corn prices will be around P2.00 per bushel at the
time the crop is ready for harvest. What should the company do? Show calculations.

63. New Iberia Corporation makes and sells the "Tabasco Maiden”, a wall hanging depicting a
magical pepper plant. The Tabasco Maidens are sold at specialty shops for P50 each. The
capacity of the plant is 15,000 Maidens per year. Costs to manufacture and sell each wall
hanging are as follows:

Direct material P 5.00

Direct labor 6.00

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 Variable overhead 8.00
Fixed overhead 10.00
Variable selling expenses 2.50

New Iberia Corporation has been approached by an Texas company about purchasing 2,500
Tabasco Maidens. The company is currently making and selling 15,000 per year. The Texas
company wants to attach its own Lone Star label, which increases costs by P.50 each. No selling
expenses would be incurred on this order. The corporation believes that it must make an
additional P1 on each Tabasco Maiden to accept this offer.

a. What is the opportunity cost per unit of selling to the Texas company?
b. What is the minimum selling price that should be set?

64. Mighty Mike’s Accounting Service provides two types of services: audit and tax. All company
personnel can perform either service. In efforts to market its services, Mighty Mike relies on
radio and billboards for advertising. Information on Mighty Mike's projected operations for the
coming year follows:

Audit Taxes
Revenue per billable hour P35 P30
Variable cost of professional labor 25 20
Material cost per billable hour 2 3
Allocated fixed costs per year 100,000 200,000
Projected billable hours 14,000 10,000

a. What is Mighty Mike’s projected profit or (loss)?

b. If P1 spent on advertising could increase either audit services billable time by
1 hour or tax services billable time by 1 hour, on which service should the
advertising peso be spent?

65. The management of Whalen Industries has been evaluating whether the company should
continue manufacturing a component or buy it from an outside supplier. A P100 cost per
component was determined as follows:

Direct material P 15
Direct labor 40
Variable manufacturing overhead 10
Fixed manufacturing overhead 35
P100

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 Whalen Industries uses 4,000 components per year. After Wilfert Corporation submitted a bid of
P80 per component, some members of management felt they could reduce costs by buying
from outside and discontinuing production of the component. If the component is obtained
from Wilfert Corporation, Whalen Industries' unused production facilities could be leased to
another company for P50,000 per year.

Required:
a. Determine the maximum amount per unit Whalen Industries could pay an
outside supplier.
b. Indicate if the company should make or buy the component and the total
peso difference in favor of that alternative.
c. Assume the company could eliminate one production supervisor with a salary
of P30,000 if the component is purchased from an outside supplier. Indicate if
the company should make or buy the component and the total peso
difference in favor of that alternative.

66. Baxter Corporation is working at full production capacity producing 10,000 units of a unique
product, JKL. Manufacturing costs per unit for JKL follow:

Direct material P2
Direct manufacturing labor 3
Manufacturing overhead 5
P10

The unit manufacturing overhead cost is based on a variable cost per unit of P2 and fixed costs
of P30,000 (at full capacity of 10,000 units). The non-manufacturing costs, all variable, are P4 per
unit, and the selling price is P20 per unit. A customer, Jacksonville Company, has asked Baxter to
produce 2,000 units of a modification of JKL to be called RST. RST would require the same
manufacturing processes as JKL. Jacksonville Company has offered to share equally the non-
manufacturing costs with Baxter. RST will sell at P15 per unit.

Required:
a. What is the opportunity cost to Baxter of producing the 2,000 units of RST
(assume that no overtime is worked)?
b. The Graves Company has offered to produce 2,000 units of JKL for Brown, so
Brown can accept the Jacksonville offer. Graves Company would charge
Baxter P14 per unit for the JKL. Should Baxter accept the Graves Company
offer?
c. Suppose Baxter had been working at less than full capacity producing 8,000
units of JKL at the time the RST offer was made. What is the minimum price
Baxter should accept for RST under these conditions (ignoring the P15 price
mentioned previously)?

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67. The Samuels Company normally produces 150,000 units of Product LM per year. Due to an
economic downturn, the company has some idle capacity. Product LM sells for P15 per unit.

The firm's production, marketing, and administration costs at its normal capacity are:

Per Unit
Direct material P1.00
Direct labor 2.00
Variable overhead 1.50
Fixed overhead
(P450,000/150,000 units) 3.00
Variable marketing costs 1.05
Fixed marketing and administrative costs
(P210,000/150,000 units) 1.40
Total P9.95

Required:
a. Compute the firm's operating income before income taxes if the firm
produced and sold 110,000 units.

b. For the current year, the firm expects to sell the same number of units as it
sold in the prior year. However, in a trade newspaper, the firm noticed an
invitation to bid on selling LM to a state government. There are no marketing
costs associated with the order if Davis is awarded the contract. The company
wishes to prepare a bid for 40,000 units at its full manufacturing cost plus P
0.25 per unit. How much should it bid? If Davis is successful at getting the
contract, what would be its effect on operating income?

c. Assume that the company is awarded the contract on January 2, and in

addition it also receives an order from a foreign vendor for 40,000 units at
the regular price of P15 per unit. The foreign shipment will require the firm to
incur its normal marketing costs. The government contract contains a 10-day
escape clause (i.e., the firm can reject the contract within 10 days without any
penalty). If the firm accepts the government contract, overtime pay at 1 1/2
times the straight time rate will be paid on the 40,000 units. In addition, fixed
overhead will increase by P60,000 and variable overhead will behave in its
normal pattern. The company has the capacity to produce both orders.
Decide the following:

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1. Should the firm accept the foreign offer? Show the effect on operating income
of accepting the order.

2. Assuming the foreign order is accepted, should the firm accept the
government order? Show the effect on operating income of accepting the
government order.

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