ACYMAG1

Exercise Set #2
Term 1, AY2023-2024
Adapted from: (1) Hansen, D.R. and Mowen, M.M. (2018). Cornerstones of Cost Management, 4th edition.
Mason, OH: South Western Cengage Learning. (2) Hilton, R.W. & Platt, D.E. (2017). Managerial
Accounting: Creating Value in a Global Business Environment, 11th edition. New York, NY: McGraw-Hill
Education. (3) Warren, C.S., Reeve, J.M., & Duchac, J.E. (2018). Managerial Accounting, 14th edition,
student edition. Cengage Learning Asia Pte Ltd.

INSTRUCTIONS:
1. You have to write the answers to the requirements on clean pages of your columnar
notebook using a blue or black ballpen only.
2. Answer chronologically.
3. Properly label the exercise number, requirement number, and the amounts.
4. Include peso sign accordingly.
5. Unless necessary, do not include decimal points for amounts.
6. Rule and double-rule amounts as needed.
7. Solutions in good form are required for all problems, unless otherwise specified.
8. For proper correcting of errors and other formatting guidance, please observe the
“Accounting Do’s and Don’ts” uploaded in the course files section of AnimoSpace.
9. Submit notebook to your professor during in-person exam schedules, unless as otherwise
instructed by your professor.

RUBRIC FOR ASSESSMENT:

CRITERIA EXEMPLARY SATISFACTORY DEVELOPING BEGINNING RATING
(97-100) (80-96) (70-79) (Below 70)
Completeness The student solves The student The student The student
[90%] all problems assigned solves all of the solves majority does not solve
and presents all problems but not all of the majority of the
solutions in good assigned. problems problems
accounting form. assigned. assigned.
Neatness and The student solves The student The student The student
Orderliness problems in an solves problems somewhat solves does not solve
[10%] orderly manner and in an orderly problems in an problems in an
labels all amounts manner. orderly manner. orderly
and solutions. manner.
TOTAL:

EXERCISE 1. Each year, Basu Company produces 18,000 units of a component. An outside
supplier has offered to supply the part for ₱1.38. The unit cost is: Direct materials, ₱0.78;
Direct labor, ₱0.34; Variable overhead, ₱0.13; and Fixed overhead, ₱2.75.

1. Assume that none of the fixed cost is avoidable. List the relevant cost/s of (a) internal
production and of (b) external purchase.
2. What if ₱18,540 of fixed overhead is rental of equipment used only in production of the
component that can be avoided if the component is purchased? Which alternative is
more cost effective and by how much?
EXERCISE 2. Sequoia Paper Products manufactures boxed stationery for sale to specialty
shops. Currently, the company is operating at 90 percent of capacity. A drugstore chain has
offered to buy 30,000 boxes of Sequoia’s blue-bordered thank-you notes as long as the box can
be customized with the drugstore chain’s logo. While normal selling price is ₱6.00 per box, the
chain has offered just ₱3.10 per box. Sequoia can accommodate special order without affecting
current sales. Unit cost for a box of thank-you notes follows: Direct materials, ₱1.87; Direct
labor, ₱0.33; Variable overhead, ₱0.08; and Fixed overhead, ₱2.10. Fixed overhead is ₱420,000
per year and will not be affected by the special order. Normally, there is a commission of 5
percent of price; this will not be paid on special order since the chain is dealing directly with the
company. The special order will require additional fixed costs of ₱14,300 for the design and
setup of the machinery to stamp the chain’s logo on each box.

1. List the relevant benefits and costs of each alternative being considered.
2. Which alternative is more cost effective and by how much?

EXERCISE 3. Piedmont Industries currently manufactures 40,000 units of part JR63 each
month for use in production of several of its products. The facilities now used to produce part
JR63 have a fixed monthly cost of ₱165,000 and a capacity to produce 74,000 units per month.
If the company were to buy part JR63 from an outside supplier, the facilities would be idle, but
its fixed costs would continue at ₱45,000. The variable production costs of part JR63 are ₱12
per unit.

1. If Piedmont Industries continues to use 40,000 units of part JR63 each month, it would
realize a net benefit by purchasing part JR63 from an outside supplier only if the
supplier’s unit price is less than what amount?
2. If Piedmont Industries is able to obtain part JR63 from an outside supplier at a unit
purchase price of ₱14, what is the monthly usage at which it will be indifferent between
purchasing and making part JR63?

EXERCISE 4. Jason works full-time for UPS and runs a lawn-mowing service part-time after
work during the months of April through October. Jason has three men working with him, each
of whom is paid ₱6 per lawn mowing. Jason has 30 residential customers who contract with him
for once-weekly lawn mowing during the months of May through September, and twice-per-
month mowings during April and October. On average, Jason charges ₱40 per lawn mowed.

Recently, LStar Property Management Services asked Jason to mow the lawn at each of its 20
rental houses every two weeks during the months of May through September. LStar has offered
to pay ₱20 per lawn mowing, and would forego the lawn edging that normally takes Jason’s
team about half of its regular mowing time. If Jason accepts the job, he can assign a two-man
team to mow the rental house yards, and will have to buy an additional power lawn mower for
about ₱350 used. Fuel to run the additional mower will be about ₱0.50 per yard. If Jason
accepts the special order, by how much will his income increase or decrease?
EXERCISE 5. Feinan Sports manufactures sporting equipment, including weight-lifting gloves.
A national sporting goods chain recently submitted a special order for 4,600 pairs of weight-
lifting gloves. Feinan was not operating at capacity and could use the extra business.
Unfortunately, the order’s offering price of ₱12.80 per pair was below the cost to produce them.
The controller was opposed to taking a loss on the deal. However, the personnel manager
argued in favor of accepting the order even though a loss would be incurred; it would avoid the
problem of layoffs and would help maintain the community image of the company. The full cost
to produce a pair of weight-lifting gloves is as follows: Direct materials, ₱7.50; Direct labor,
₱3.90; Variable overhead, ₱1.60; and Fixed overhead, ₱3.10. No variable selling or
administrative expenses would be associated with the order. Non-unit-level activity costs are a
small percentage of total costs and are therefore not considered.

1. Assume that the company would accept the order only if it increased total profits.
Should the company accept or reject the order? Provide supporting computations.
2. Suppose that Feinan has negotiated with the potential customer, and has determined
that it can substitute cheaper materials, reducing direct materials cost by ₱0.95 per unit.
In addition, the company’s engineers have found a way to reduce direct labor cost by
₱0.50 per unit. Should the company accept or reject the order? Show computations.

EXERCISE 6. Carleigh is a pork processor. Its plants, located in the Midwest, produce several
products from a common process: sirloin roasts, chops, spare ribs, and the residual. The roasts,
chops, and spare ribs are packaged, branded, and sold to supermarkets. The residual consists
of organ meats and leftover pieces that are sold to sausage and hot dog processors. The joint
costs for a typical week are as follows: Direct materials, ₱84,500; Direct labor, ₱29,000; and
Overhead, ₱20,000.

The revenues from each product are as follows: Sirloin roasts, ₱68,000; Chops, ₱71,000; Spare
ribs, ₱33,000; and Residual, ₱9,800.

Carleigh’s management has learned that certain organ meats are a prized delicacy in Asia. They
are considering separating those from the residual and selling them abroad for ₱52,000. This
would bring the value of the residual down to ₱2,650. In addition, the organ meats would need
to be packaged and then air freighted to Asia. Further processing cost per week is estimated to
be ₱27,500 (the cost of renting additional packaging equipment, purchasing materials, and
hiring additional direct labor). Transportation cost would be ₱12,100 per week. Finally, resource
spending would need to be expanded for other activities as well (purchasing, receiving, and
internal shipping). The increase in resource spending for these activities is estimated to be
₱3,120 per week.

1. What is the gross profit earned by the original mix of products for one week?
2. (a) Should the company separate the organ meats for shipment overseas or continue to
sell them at split-off? (b) What is the effect of the decision on weekly gross profit?
EXERCISE 7. Betram Chemicals Company processes a number of chemical compounds used in
producing industrial cleaning products. One compound is decomposed into two chemicals:
anderine and dofinol. The cost of processing one batch of compound is ₱74,000, and the result
is 6,000 gallons of anderine and 8,000 gallons of dofinol. Betram can sell the anderine at split-
off for ₱11 per gallon and the dofinol for ₱6.75 per gallon. Alternatively, the anderine can be
processed further at a cost of ₱8 per gallon (of anderine) into cermine. It takes 3 gallons of
anderine for every gallon of cermine. A gallon of cermine sells for ₱60.

1. Which alternative is more cost effective and by how much?

2. What if the production of anderine into cermine required additional purchasing and
quality inspection activity? Every 500 gallons of anderine that undergo further
processing require 20 more purchase orders at ₱10 each and 15 more quality inspection
hours at ₱25 each. Which alternative would be better and by how much?

EXERCISE 8. Fiorello Company manufactures two types of cold-pressed olive oil, Refined Oil
and Top Quality Oil, out of a joint process. The joint (common) costs incurred are ₱92,500 for a
standard production run that generates 30,000 gallons of Refined Oil and 15,000 gallons of Top
Quality Oil. Additional processing costs beyond the split-off point are ₱2.40 per gallon for
Refined Oil and ₱1.95 per gallon for Top Quality Oil. Refined Oil sells for ₱4.25 per gallon, while
Top Quality Oil sells for ₱8.30 per gallon.

MangiareBuono, a supermarket chain, has asked Fiorello to supply it with 30,000 gallons of Top
Quality Oil at a price of ₱8 per gallon. MangiareBuono plans to have the oil bottled in 16-ounce
bottles with its own MangiareBuono label. If Fiorello accepts the order, it will save ₱0.23 per
gallon in packaging of Top Quality Oil. There is sufficient excess capacity for the order.
However, the market for Refined Oil is saturated, and any additional sales of Refined Oil would
take place at a price of ₱3.10 per gallon. Assume that no significant non-unit-level activity costs
are incurred.

1. What profit is normally earned on one production run of Refined Oil and Top Quality Oil?
2. Should Fiorello accept the special order? Explain.

EXERCISE 9. Behar Company makes three types of stainless steel frying pans. Each of the
three types of pans requires the use of a special machine that has total operating capacity of
182,000 hours per year. Information on each of the three products is as follows:
Basic Standard Deluxe
Selling price ₱12.00 ₱17.00 ₱32.00
Unit variable cost ₱ 7.00 ₱11.00 ₱12.00
Machine hours required 0.10 0.20 0.50

The marketing manager has determined that the company can sell all that it can produce of
each of the three products.

1. What is the total contribution margin of the optimal product mix?

2. Suppose that Behar can sell no more than 300,000 units of each type at the prices
indicated. What would be the total contribution margin of the optimal product mix?
EXERCISE 10. The Lawn Shop sells plants, fertilizers, and other garden products. The store
has three departments: plants, chemicals, and tools. Certain information about the revenues
and expenses of the departments for the calendar year just ended follows:
Plants Chemicals Tools
Allocated indirect expenses ₱ 9,000 ₱ 1,000 ₱ 3,000
Direct expenses 50,000 3,000 15,000
Cost of goods sold 118,200 5,900 35,970
Sales 198,500 14,750 59,950
Sales returns and allowances 1,500 750 6,950

1. Based solely on accounting information, would you recommend that any departments be
closed? Support your answer with a contribution-format statement of profit or loss.
2. What information, other than accounting data, would you suggest the owners consider
in deciding whether to close any departments?

EXERCISE 11. Devern Assurance Company provides both property and automobile insurance.
The projected income statements for the two products are as follows:
Property Insurance Automobile Insurance
Sales ₱4,200,000 ₱12,000,000
Less: Variable expenses 3,830,000 9,600,000
Contribution margin ₱ 370,000 ₱ 2,400,000
Less: Direct fixed expenses 400,000 500,000
Segment margin ₱ ( 30,000) ₱ 1,900,000
Less: Common fixed expenses (allocated) 100,000 200,000
Operating income (loss) ₱ ( 130,000) ₱ 1,700,000

The president of the company is considering dropping the property insurance. However, some
policyholders prefer having their property and automobile insurance with the same company, so
if property insurance is dropped, sales of automobile insurance will drop by 12 percent. No
significant non-unit-level activity costs are incurred.

1. If Devern drops property insurance, by how much will income increase or decrease?
Provide supporting computations.
2. Assume that dropping all advertising for the property insurance line and increasing the
corporate advertising budget by ₱450,000 will increase sales of property insurance by 10
percent and automobile insurance by 8 percent. Should advertising be increased?
Provide supporting computations.
EXERCISE 12. Amy Chang wants to start a business supplying florists with field-grown flowers.
She has located an appropriate acreage and believes she can grow daisies, chrysanthemums,
and other assorted types during a nine-month growing period. By growing the flowers in a field
as opposed to a greenhouse, Amy expects to save a considerable amount on herbicide and
pesticide. She is considering passing the savings along to her customers by charging ₱1.25 per
standard bunch versus the prevailing price of ₱1.50 per standard bunch.

Amy has turned to her neighbor, Bob Winters, for help. Bob is an accountant in town who is
familiar with general business conditions. Bob gathered the following information for Amy:
• There are 50 growers within a one-hour drive of Amy’s acreage.
• In general, there is little variability in price. Flowers are treated as commodities, and one
aster is considered to be pretty much like any other aster.
• There are numerous florists in the city, and the amount that Amy would supply could be
easily absorbed by the florists at the prevailing price.

1. What type of market structure characterizes the flower-growing industry in Amy’s

region? Explain.
2. Based on #1, what price should Amy charge per standard bunch? Why?

EXERCISE 13. Kaune Food Products Company manufactures canned mixed nuts with an
average manufacturing cost of ₱52 per case (a case contains 24 cans of nuts). Kaune sold
150,000 cases last year to the following three classes of customer:

Customer Price per Case Cases Sold

Supermarkets ₱58 80,000
Small grocers ₱93 40,000
Convenience stores ₱88 30,000

The supermarkets require special labeling on each can costing ₱0.04 per can. They order
through electronic data interchange (EDI), which costs Kaune about ₱61,000 annually in
operating expenses and depreciation. Kaune delivers the nuts to the stores and stocks them on
the shelves. This distribution costs ₱45,000 per year.

The small grocers order in smaller lots that require special picking and packing in the factory;
the special handling adds ₱25 to the cost of each case sold. Sales commissions to the
independent jobbers who sell Kaune products to the grocers average 8 percent of sales. Bad
debts expense amounts to 9 percent of sales.

Convenience stores also require special handling that costs ₱30 per case. In addition, Kaune is
required to co-pay advertising costs with the convenience stores at a cost of ₱15,000 per year.
Frequent stops are made to each convenience store by Kaune delivery trucks at a cost of
₱30,000 per year.

1. Calculate the total cost per case for each of the three customer classes. (Round unit
costs to four significant digits.)
2. Using the costs from Requirement 1, calculate the profit per case per customer class.
Does the cost analysis support the charging of different prices? Why or why not?
EXERCISE 14. Ventana Window and Wall Treatments Company provides draperies, shades,
and various window treatments. Ventana works with the customer to design the appropriate
window treatment, places the order, and installs the finished product. Direct materials and
direct labor costs are easy to trace to the jobs. Below is Ventana’s income statement last year:
Revenues ₱226,700
Less: Cost of goods sold:
Direct materials ₱114,000
Direct labor 38,000
Overhead 26,000 178,000
Gross profit ₱ 48,700
Less: Selling and administrative expenses 32,000
Operating income ₱ 16,700

Ventana wants to find a markup on cost of goods sold that will allow them to earn about the
same amount of profit on each job as was earned last year.

1. What is the markup on cost of goods sold (COGS) that will maintain the same profit as
last year? (Round the percentage to two significant digits.)
2. A customer orders draperies for a remodeling job. Job Z will have the following costs:
Direct materials, ₱1,230; Direct labor, ₱250, and Applied overhead, ₱175. What price
will Ventana quote given the answer in #1? (Round the price to the nearest peso.)
3. If Ventana wants to calculate a markup on direct materials cost, since it is the largest
cost of doing business, what bid price will it use for Job Z? (Round to nearest peso.)

EXERCISE 15. Arthur Quillen Construction Company is a general contractor that specializes in
custom residential housing. Each job requires a bid that includes Quillen’s direct costs and
subcontractor costs as well as an amount referred to as “overhead and profit.” Quillen’s bidding
policy is to estimate the costs of direct materials, direct labor, and subcontractors’ costs. These
are totaled, and a markup is applied to cover overhead and profit. In the coming year, the
company believes it will be the successful bidder on 10 jobs with total revenues of ₱8,740,000
and costs as follows: Direct materials, ₱2,250,000; Direct labor, ₱1,900,000; and
Subcontractors, ₱3,450,000. This will give overhead and profit of ₱1,140,000.

1. Given the preceding information, what is the markup percentage on total direct costs?
2. Suppose Quillen is asked to bid on a job with estimated direct costs of ₱570,000. What
is the bid?
EXERCISE 16. Durian Company recently began production of a new product, X, which
required the investment of ₱1,500,000 in assets. The costs of producing and selling 5,000 units
of X are estimated as follows:

Variable costs per unit:

Direct materials ₱120
Direct labor 30
Factory overhead 50
Distribution and administrative expenses 35

Fixed costs:
Factory overhead ₱250,000
Distribution and administrative expenses 150,000

The company is currently considering establishing a selling price for X. The company president
has decided to use the cost-plus approach to product pricing and has indicated that X must
earn a 15% rate of return on invested assets.

REQUIRED:
1. What is the amount of desired profit from the production and sale of X?
2. Assuming that the product cost concept is used, what is X’s:
a. Cost amount per unit?
b. Mark-up percentage?
c. Selling price?
3. Assuming that the total cost concept is used, what is X’s:
a. Cost amount per unit?
b. Mark-up percentage? Round to two decimal places.
c. Selling price? Round to nearest peso.
4. Assuming that the variable cost concept is used, what is X’s:
a. Cost amount per unit?
b. Mark-up percentage? Round to two decimal places.
c. Selling price? Round to nearest peso.
5. Assume that as of August 1, 3,000 units of X have been produced and sold during the
current year. Analysis of the domestic market indicates that 2,000 additional units are
expected to be sold during the remainder of the year at the normal product price
determined under the product cost concept. On August 3, the company received an
offer from a customer for 800 units of X at ₱225 each. The customer will market the
units under its own brand name and no variable distribution and administrative
expenses associated with the sale will be incurred by the company. The additional
business is not expected to affect the domestic sales of X, and the additional units could
be produced using existing factory, distribution, and administrative capacity.
a. Prepare a differential analysis of the proposed sale to the customer.
b. Based on the differential analysis in part (a), should the proposal be accepted?