BM2021

NAMES: Jerho J. Abao DATE: SCORE:

ACTIVITY
(11 items x 5 points)

1. Paul Company is contemplating to close the operations of the club temporarily. Due to heavy rains
brought by La Niña, the expected demand of the club was reduced, which is expected to last for six (6)
months. Assume the typical monthly operating revenues and costs of the club operations of Paul
Company:

Selling price per membership P400

Variable costs per membership 270
Contribution margin 130
Fixed costs per month P150,000
Fixed costs avoided if stop operations 70,000
Additional costs during the shutdown 40,000
period for six (6) months
Estimated restarting costs 100,000

If it continues operating, the company will be forced to reduce the membership selling price by 12.50%.
a. Determine the shutdown costs.

Unavoidable fixed costs during the shutdown period (P150,000-P70,000) x 6 P480,000

months)
Additional costs incurred 40,000
Restarting costs 100,000
Total shutdown costs P620,000

b. Determine the shutdown savings.

Total normal fixed costs to operate (P150,000 x 6 months) 900,000

Total Shutdown Costs 620,000
Shutdown Savings P280,000

c. Determine the shutdown point.

Shutdown point = Shutdown savings

Contribution margin per unit

= P280,000
130
= P2,153.85

d. If the demand of the club is 3,600 memberships, should the company shutdown or continue
operations? Justify your answer.

The club's demand stands at 3,600 memberships, surpassing the shutdown threshold. Thus, it is
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more feasible for the company to persist with operations, even if it means sustaining a loss.

2. ABC Company uses a joint process to produce products A, B, and C. The joint production costs for 201A
were 500,000 and were allocated using relative sales value at the split-off point method.

Each product maybe sold at its split-off point or processed further.Additional processing costs are entirely
variable.

Additional
Sales Value at Final Sales
Products Processing
Split-off Value
A P300,000 P130,000 420,000
B 120,000 100,000 230,000
C 250,000 140,000 400,000
P670,000 P370,000 P1,050,000

a. To maximize profit, which product/s should be sold at split-off point and be processed further,
respectively?

PRODUCT A PRODUCT B PRODUCT C

Final Sales Value P420,000 P230,000 P400,000
Sales value off spin-off 300,000 120,000 250,000
Increase in sales value 120,000 110,000 150,000
Additional costs 130,000 100,000 140,000
Differential Income (P10,000) P10,000 P10,000

b. If the alternative were to sell at split-off point or to process further all products, which
alternative would be recommended?

Processing further is the preferable option as it generates a total additional income of

P10,000 across all products.

3. Maxwell Company manufactures and sells three (3) product lines with contribution margin per unit and
the required production time as follows:

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CM per Machine hour per

unit unitof product
ProductA P5.00 2.5 hours
ProductB 3.00 3 hours
ProductC 4.00 1 hour

The company has a capacity of 20,000 machine hours a month. The market can absorb P4,000 units of
product A, 6,000 units of B, and 10,000 units of C.

a. Determine the contribution margin per hour of each product.

Product A P5.00/2.5 hours = P2.00

Product B P3.00/3 hours = P1.00

Product C P4.00/1 hour = P4.00

b. What is the most profitable product line based on the contribution margin per machine hour?
Justify your answer.

CM per unit Machine hour per CM per machine Ranking

unit off product hour
Product A P5.00 2.5 hours P2.00 3rd
Product B 3.00 3 hours 1.00 2nd
Product C 4.00 1 hours 4.00 1st

c. Compute the maximum contribution margin for the month that will meet the conditions stated.

Units off Machine Hours CM per Machine Total CM

Product
Product A 10,000 10,000 P4.00 P40,000
Product B 4,000 10,000 P2.00 20,000
Product C 0 0 P1.00 0
14,000 20,000 P60,000

Due to limited resources, Ikea Company must prioritize the production of its most profitable
products. All 10,000 units of product C and 4,000 units of product A will be manufactured. No machine
hours were available for the production of product B, resulting in zero units produced for this product.

4. Trask Industries, Inc. is considering replacing it sold machine with a book value of P150,000 and still has a
remaining useful life of three (3) years. The old machine will be replaced with a new one that will cost
P375,000, with a three-year useful life and no salvage value.

The annual operating costs of the old machine amount to P180,000, which can be reduced by 55% if a
new machine isacquired. The old machine will have no disposal value after three (3) years but can be
disposed of now at P60,000.

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a. Ignoring the time value of money and income taxes, determine the differential cost.
Cost off new machine P375,000
Add: Operating costs (180,000 x 45% x 3) 243,000
Less: Disposal value off old machine 60,000
Total relevant cost to replace 558,000
Total relevant cost to retain (180,000 x 3) 540,000
Differential Cost P18,000

b. Should the machine beretained or replaced?

Decision: It's more cost-effective to keep the old equipment alongside the new, as the total
relevant cost of replacement exceeds the total relevant costs associated with retaining the old
machine.
CRITERIA POINTS
Correct accounts and amounts
Rubric for problem-solving: used. 3
Computed final amounts are correct and balanced. 2
TOTAL 5

Rubric for short-answer:

CRITERIA PERFORMANCE INDICATORS POINTS
Content Provided pieces of evidence,
supporting details, and factual 3
scenarios
Organization Expressed the points in a clear and
of ideas logical arrangement of ideas in the 2
paragraph
TOTAL 5

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