MANAGEMENT SERVICES

SITUATIONAL PROBLEMS FOR CPALE

Compiled by Vhin

SITUATIONAL 1

Zaky Corporation produces a special line of cozy bed pillows. Zaky Corporation produces the pillows in batches. To
manufacture a batch of the pillows, Zaky Corporation must set up the machines and molds. Setup costs are batch-level costs
because they are associated with batches rather than individual units of products. A separate Setup Department is responsible
for setting up machines and molds for different styles of pillows.

Setup overhead costs consist of some costs that are variable and some costs that are fixed with respect to the number of
setup-hours. The following information pertains to January 2023.

Static Budget Actual

Pillows produced and sold 75,000 60,000
Batch size (number of units per batch) 420 500
Setup-hours per batch 7 6.2
Variable overhead cost per setup hour P14 P10.3
Total fixed setup overhead costs P30,500 P27,000

1. Calculate the efficiency variance for variable overhead setup costs.

a. P3,584 F
b. P3,584 U
c. P3,740 F
d. P3,740 U

2. Calculate the spending variance for variable overhead setup costs.

a. P3,441 F
b. P3,441 U
c. P2,752.8 F
d. P2,752.8 U

3. Calculate the flexible-budget variance for variable overhead setup costs.

a. P831.2 U
b. P831.2 F
c. P6,336.8 U
d. P6,336.8 F

4. Calculate the spending variance for fixed overhead setup costs.

a. P3,500 U
b. P3,500 F
c. P6,100 F
d. P6,100 U

5. Calculate the production-volume variance for fixed overhead setup costs.

a. P6,100 F
b. P6,100 U
c. P2,600 F
d. P2,600 U

Solutions:
1. Variable Overhead Efficiency Variance = SR (AH - SH)
= P14 x ((60.000/500 x 6.2) - (60.000/420 x 7))
= 3,584 F
2. Variable Overhead Spending Variance = AH (AR - SR)
= (60.000/500 x 6.2) x (P10.3 - P14)
= 2,752.8 F
3. Flexible Budget variance = Actual Costs Incurred - Flexible Budget; or
Flexible Budget Variance = Spending Variance + Efficiency Variance
Flexible Budget Variance = P3,584 F + P3,752.8 F = P6,336.8 F
4. Flexible-budget variance for fixed overhead setup costs = Actual costs incurred – Flexible-budget amount
Flexible-budget variance for fixed overhead setup costs = P30,500 – P27,000 = P3,500 F
5. Production Volume Variance = Budgeted fixed overhead – Fixed overhead allocated for actual units produced
Production Volume Variance = P30,500 – [((60,000/420) x 7) x (30,500)/((75,000/420) x 7)]
Production Volume Variance = P6,100 F
SITUATIONAL 2

Queens makes chocolate bars for vending machines. The chocolate bars are sold to vendors in cases of 45 bars. Although
Queens makes a variety of chocolate, the cost differences are insignificant, and the cases all sell for the same price. Queens
has spent P19,000,000 as its capital expenditure. By 2024, Queens expects to produce and sell 400,000 cases of chocolate
bars. The expected cost for 2024 are as follows:
• Variable production costs (per case) – P10
• Fixed production costs – P300,000
• Variable sales costs (per case) – P4
• Fixed sales costs – P500,000
• Fixed admin and operational cost – P250,000

Assuming that Queens prices the cases of chocolate at full cost plus a markup to generate profits equal to the target return
on capital expenditure.

1. What is the target operating income if Queens requires a 20% return on its Kings investment?
a. P3,600,000
b. P3,800,000
c. P4,000,000
d. P4,200,000

2. How much is the full cost per case of chocolate?

a. P12.63
b. P6.63
c. P16.63
d. P

3. What is the selling price Queens needs to charge to earn the target operating income?
a. P25
b. P25.45
c. P26
d. P26.13

Solutions:
1. Target operating income = 19,000,000 x 20% = P3,800,000
2. Full cost per case of chocolates = (VC + FC)/QTY sold
[((400,000) x (10 + 4) + (300,000 + 500,000 + 250,000) / 400,000)]
Full cost = P16.63

Revenue ₱ 10,450,000.00
Variable cost ₱ 5,600,000.00 (400,000 x 14)
Contribution margin ₱ 4,850,000.00
Fixed cost ₱ 1,050,000.00 (300k + 500k + 250k)
3. Operating income ₱ 3,800,000.00 (19,000,000 x 20%)
Selling Price = P10,450,000/400,000 = P26.13
SITUATIONAL 3

Frans is the new Chief Financial Officer at Jen and Berry’s Ice Cream. In order to further understand the company’s financial
standing, he requested information relating to the company’s operation from the year prior. Unfortunately, due to improper
management, there are several data missing in the report.

Total sales revenue ?

Number of units produced and sold 125,000 units
Selling price ?
Operating income P50,000
Total investment in assets P70,000
Variable cost per unit P2.85
Fixed costs P150,000

1. Compute the total sales revenue:

a. P556,000
b. P50,000
c. P556,250
d. P406,250

2. Compute the ROI:

a. 79%
b. 21.43%
c. 28.57%
d. 7.14%

3. Compute the mark-up percentage from full costs of the product:

a. 12%
b. 9.88%
c. 11.50%
d. 8.88%

4. Assuming that Frans is planning to reduce the company fixed cost by P50,000 and variable cost by P0.5 per unit
while continuing and selling 125,000 units. Using the same markup percentage in number 3, calculate the ice
cream’s new selling price:
a. P4
b. P4.07
c. P4.09
d. P3.97

5. Assuming that the changes made in number 4 caused a drop in the product’s quality. The drop in quality resulted
in a 10% decrease of ice cream sold. Calculate the operating income (loss):
a. P54,375
b. P(54,375)
c. P45,625
d. P(45,625)

Solutions:
1. Operating Income = Sales Revenue - Variable Cost - Fixed Cost; Let X = Sales Revenue
50,000 = X – (125,000 x 2.85) -150,000
X = P556,250
2. Rate of return on investment = Operating income/ Investment in assets
ROI = 50,000/700,000 = 7.14%
3. Mark up percentage = [(Price - Full cost)/Full cost]
*Selling Price = 556,250/125,000 = 4.45
**Full cost = 2.85 + (150,000/125,000) = 4.05
Mark up percentage = [(4.45* – 4.05**)/4.05] = 9.88%
4. New full cost per unit = [(150,000-50,000) + (125,000 x 2.85)] / 125,000 = 3.65
New selling price = 3.65 x 1.0988 = 4.01
5. New units sold = 125,000 x 90% = 112,500
(112,500 x 3.65) – 356,250 – 100,000 = (45,625)
SITUATIONAL 4
Jovan Inc. produces tables. The budgeted sales for the upcoming year and the inventory data are as follows:
• Unit Price: P14
• Expected unit sales: 105,000
• Units in beginning inventory: 6,000
• Units in expected ending inventory: 12,000

Each table need two pound of wood which costs P5 per pound. The beginning inventory of materials is 3,500 pounds. Jovan
Inc. wants to have 5,000 pounds of woods in inventory at the end of the quarter. Each rack produced requires 30 minutes of
direct labor time, Direct labor is billed at P9 per hour.

1. How much is the sales budget for the first quarter?

a. P540,000
b. P1,386,000
c. P1,470,000
d. P945,000

2. How much is the production budget (units to be produced) for the first quarter?
a. 110,000 units
b. 115,000 units
c. 99,000 units
d. 111,000 units

3. How much is the direct materials purchases budget for the first quarter?
a. P1,117,500
b. P1,107,500
c. P997,500
d. P1,157,500

4. How much is the direct labor budget for the first quarter?
a. P445,500
b. P495,000
c. P499,500
d. P517,500

Solutions:
Sales Budget
Units 105,000 Direct Materials Purchases Budget
Unit Price 14 Units to be produced 111,000
Sales 1,470,000 Material requirments per unit 2
Production needs 222,000
Production Budget Desired ending inventory 5,000
Sales (in units) 105,000 Total Needs 227,000
Desired ending inventory 12,000 Less: Beginning inventory 3,500
Total Needs 117,000 Materials to be purchased 223,500
Less: Beginning Inventory 6,000 Cost per pound 5
Units to be produced 111,000 Total Purchase Cost 1,117,500

Direct Labor Budget

Units to be produced 111,000
Labor hours per unit 0.50
Total hours needed 55,500
Cost per hour 9
Total direct labor cost 499,500
SITUATIONAL 5

Maan Coffee shops sell tea, coffee, and milk at the same price although the production costs vary for each type of drink.
Here is the data from one of the stores for December 2022 are as follows:
DRINK BUDGETED
TYPE SP per unit VC per unit CM per unit Sales Volume
Tea P5 P2 P3 35,000
Coffee P5 P2.4 P2.6 45,000
Milk P5 P3 P2 20,000

DRINK ACTUAL
TYPE SP per unit VC per unit CM per unit Sales Volume
Tea P5 P1.9 P3.1 33,750
Coffee P5 P2.2 P2.8 45,000
Milk P5 P3.4 P1.6 20,000

1. Compute the total sales-volume variance for December 2022:

a. P38,000 F
b. P38,000 U
c. P30,500 F
d. P30,500 U

2. Compute the total sales quantity variance for December 2022:

a. P32,750 F
b. P32,750 U
c. P32,500 F
d. P32,500 U

3. Compute the total sales mix variance for December 2022

a. P2,250 F
b. P2,250 U
c. P6,750 F
d. P6,750 U

Solutions:
Budget Price per unit VC per unit CM per unit Sales Volume Sales Mix
Tea ₱ 5.00 ₱ 2.00 ₱ 3.00 35,000 35%
Coffee ₱ 5.00 ₱ 2.40 ₱ 2.60 45,000 45%
Milk ₱ 5.00 ₱ 3.00 ₱ 2.00 20,000 20%
₱ 7.60 100,000

Actual
Price per unit VC per unit CM per unit Sales Volume Sales Mix
Tea ₱ 5.00 ₱ 1.90 ₱ 3.10 33,750 30%
Coffee ₱ 5.00 ₱ 2.20 ₱ 2.80 56,250 50%
Milk ₱ 5.00 ₱ 3.40 ₱ 1.60 22,500 20%
112,500
1. Sales volume variance
Tea (33,750 - 35,000) x 3 3,750 U
Coffee (56,250 - 45,000) x 2.6 29,250 F
Milk (22,500 - 20,000) x 2 5,000 F
Total 30,500 F

2. Sales quantity variance

Tea (112,500 – 100,000) x 3 x 35% 13,125 F
Coffee (112,500 – 100,000) x 2.6 x 45% 14,625 F
Milk (112,500 – 100,000) x 2 x 20% 5,000 F
Total 32,750 F

3. Sales Mix variance

Tea (30% - 35%) x 112,500 x 3 16,875 U
Coffee (50% - 45%) x 112,500 x 2.60 14,625 F
Milk -0-
Total 2,250 U
SITUATIONAL 6

IKEA is concerned because of the decrease in sales in 2023. Both variable/unit and total fixed manufacturing costs for 2022
and 2023 remained constant at P78 and P7,800,000, respectively. The company’s production capacity is 320,000 units.

In 2022, the company produced 320,000 units and sold 180,000 units at a price of P125 per unit. There was no beginning
inventory in 2022. In 2023, the company made 320,000 units and sold 122,000 units at a price of P125. Selling and
administrative expenses were all fixed at P435,000 each year.

1. How much is the operating income (loss) of IKEA in 2022 using the variable costing?
a. P3,637,500
b. P2,325,250
c. P225,000
d. P(55,229,000)

2. How much is the operating income (loss) of IKEA in 2022 using the absorption costing?
a. P3,637,500
b. P2,325,250
c. P225,000
d. P(55,229,000)

3. How much is the operating income (loss) of IKEA in 2023 using the variable costing?
a. P3,637,500
b. P2,325,250
c. P225,000
d. P(55,229,000)

4. How much is the operating income (loss) of IKEA in 2023 using the absorption costing?
a. P3,637,500
b. P2,325,250
c. P225,000
d. P(55,229,000)

Solutions:
Income statement using variable costing
2022 2023
Sales 22,500,000.00 15,250,000.00
Variable COGS:
Beginning inventory - 10,920,000.00
Variable manufacturing cost 24,960,000.00 24,960,000.00
Cost of goods available for sale 24,960,000.00 35,880,000.00
Less: Ending inventory (10,920,000.00) 26,364,000.00
Variable COGS (14,040,000.00) (62,244,000.00)
Contribution margin 8,460,000.00 (46,994,000.00)
Fixed manufacturing cost (7,800,000.00) (7,800,000.00)
Fixed selling and administrative (435,000.00) (435,000.00)
Operating income 225,000.00 (55,229,000.00)

Income statement using absorption costing

2022 2023
Sales 22,500,000.00 15,250,000.00
COGS:
Beginning inventory - 14,332,500.00
Variable manuf cost 24,960,000.00 24,960,000.00
Allocated fixed manuf cost 7,800,000.00 7,800,000.00
COGAS 32,760,000.00 47,092,500.00
Adjustment for PVV - -
Deduct End. Inventory (14,332,500.00) (34,602,750.00)
COGS 18,427,500.00 12,489,750.00
Gross margin 4,072,500.00 2,760,250.00
Fixed Selling and administrative (435,000.00) (435,000.00)
Operating income 3,637,500.00 2,325,250.00
SITUATIONAL 7

The following are forecasts of sales and purchases for a company.

Sales Purchases
April P80,000 P30,000
May 90,000 40,000
June 85,000 30,000

All sales are on credit. Records show that 70 percent of the customers pay the month of the sale, 20 percent pay the month
after the sale, and the remaining 10 percent pay the second month after the sale. Purchases are all paid the following month
at a 2 percent discount. Cash disbursements for operating expenses in June were P5,000.

1. Compute the total cash receipts in June.

a. P85,500
b. P44,200
c. P77,500
d. P82,500

2. Compute the total cash disbursements in June.

a. P50,000
b. P44,200
c. P41,300
d. P40,000

3. Compute the net increase (decrease) in cash for the month of June.
a. P44,200
b. P(44,200)
c. P41,300
d. P(41,300)

Solutions:

Cash Receipts:
From current month sale (June) (.7 × 85,000) P59,500
From 1 month prior sale (May) (.2 × 90,000) 18,000
From 2 month prior sale (April) (.1 × 80,000) 8,000
Total cash receipts P85,500
Cash Disbursements:
May purchases @ 98% (less discount) (.98 × 40,000) P39,200
Operating expenses 5,000
Total cash disbursements P44,200
Net increase in cash for June P41,300
SITUATIONAL 8
Book & Bible Bookstore desires to buy a new coding machine to help control book inventories. The machine sells for
P36,586 and requires working capital of P4,000. Its estimated useful life is five years and will have a salvage value of
P4,000. Recovery of working capital will be P4,000 at the end of its useful life. Annual cash savings from the purchase of
the machine will be P10,000.

1. Compute the net present value at a 14% required rate of return.

a. (P2,104)
b. P2,104
c. (P4,180)
d. P4,180

2. Compute the internal rate of return.

a. 11%
b. 11.5%
c. 12%
d. 13%

3. Determine the payback period of the investment.

a. 4 years
b. 4.06 years
c. 5 years
d. 3.66 years

Solutions:

Predicted PV Factor @ PV of Cash

Cash Flows Year(s) 14% Flows
Investment P(36,586) 0 1.000 P(36,586)
Working capital needed (4,000) 0 1.000 (4,000)
Annual operations 10,000 1-5 3.433 34,330
Working capital returned 4,000 5 0.519 2,076
Salvage value 4,000 5 0.519 2,076
Net present value P(2,104)

Trial and error is required. Because net present value is negative in part a, the internal rate of return is less than
14%. Start by trying 12%.

Predicted PV Factor @ PV of Cash

Cash Flows Year(s) 12% Flows
Investment P(36,586) 0 1.000 P(36,586)
Working capital needed (4,000) 0 1.000 (4,000)
Annual operations 10,000 1-5 3.605 36,050
Working capital returned 4,000 5 0.567 2,268
Salvage value 4,000 5 0.567 2,268
Net present value P-0-

With a zero net present value, the internal rate of return is 12%.

Payback period = (P36,586 + P4,000)/P10,000 = 4.06 years.

SITUATIONAL 9

CASE I - Demy Hospital has been considering the purchase of a new x-ray machine. The existing machine is operable for
five more years and will have a zero-disposal price. If the machine is disposed now, it may be sold for P150,000. The new
machine will cost P640,000 and an additional cash investment in working capital of P75,000 will be required. The new
machine will reduce the average amount of time required to take the x-rays and will allow an additional amount of business
to be done at the hospital. The investment is expected to net P50,000 in additional cash inflows during the year of acquisition
and P160,000 each additional year of use. The new machine has a five-year life, and zero disposal value. These cash flows
will generally occur throughout the year and are recognized at the end of each year. Income taxes are not considered in this
problem. The working capital investment will not be recovered at the end of the asset's life.

CASE II - The Comil Corporation recently purchased a new machine for its factory operations at a cost of P550,530. The
investment is expected to generate P135,000 in annual cash flows for a period of eight years. The required rate of return is
14%. The old machine has a remaining life of eight years. The new machine is expected to have zero value at the end of the
eight-year period. The disposal value of the old machine at the time of replacement is zero.

CASE III - A company is looking to purchase and replace a fixed asset for P220,000. It will sell the asset that will be
replaced for P41,000 but will incur a P10,000 gain upon that sale. It must also commit P30,000 of working-capital to the
investment. The firm's tax rate is 30%.

1. Under Case I, what is the net present value of the investment, assuming the required rate of return is 18%? Would
the hospital want to purchase the new machine?
a. P42,350; yes
b. (P157,850); no
c. P157,850; yes
d. P69,920; yes

2. Under Case II, what is the internal rate of return?

a. 14%
b. 16%
c. 18%
d. 20%

3. Under Case III, what is the amount of the relevant initial investment?
a. P220,000
b. P212,000
c. P179,000
d. P182,000

Solutions:

Case I
Yr. 0 (P150,000 - $640,000 - $75,000) × 1.000 = -565,000
Yr. 1 P50,000 × 0.847 = 42,350
Yr. 2 P160,000 × 0.718 = 114,880
Yr. 3 P160,000 × 0.609 = 97,440
Yr. 4 P160,000 × 0.516 = 82,560
Yr. 5 P160,000 × 0.437 = 69,920
Net present value at 18% (P157,850)

Case II
P550,530 = P135,000x
x = 4.078
Chart criteria for eight years is 4.078 = 18%

Case III
(P220,000) purchase price + P41,000 sale of old asset - P(10,000 x 30%) tax on gain on sale of old asset - P30,000
working-capital investment = P212,000
SITUATIONAL 10

CASE I
Red Rose Manufacturers Inc. is approached by a potential customer to fulfill a one-time-only special order for a product
similar to one offered to domestic customers. The company has excess capacity. The following per unit data apply for
sales to regular customers:

Variable costs:
Direct materials P120
Direct labor 90
Manufacturing support 155
Marketing costs 75
Fixed costs:
Manufacturing support 175
Marketing costs 65
Total costs 680
Markup (45%) 306
Targeted selling price P986

CASE II
Dantley's Furniture manufactures rustic furniture. The cost accounting system estimates manufacturing costs to be P180 per
table, consisting of 80% variable costs and 20% fixed costs. The company has surplus capacity available. It is Back Forrest's
policy to add a 55% markup to full costs. Dantley's Furniture is invited to bid on a one-time-only special order to supply
120 rustic tables.

CASE III
A recent college graduate has the choice of buying a new car for P37,500 or investing the money for four years with an 11%
expected annual rate of return. He has an investment of P43,000 in equities and bonds which yields 10% expected annual
rate of return.

CASE IV
Rubium Micro Devices currently manufactures a subassembly for its main product. The costs per unit are as follows:

Direct materials P51.00

Direct labor 35.00
Variable overhead 38.00
Fixed overhead 31.00
Total P155.00

Crayola Technologies Inc. has contacted Rubium with an offer to sell 10,000 of the subassemblies for P140.00 each. Rubium
will eliminate P93,000 of fixed overhead if it accepts the proposal.

CASE V
Giant Company has three products, A, B, and C. The following information is available:

Product A Product B Product C

Sales P60,000 P98,000 P23,000
Variable costs 38,000 53,000 12,000
Contribution margin 22,000 45,000 11,000
Fixed costs:
Avoidable 6000 19,000 5000
Unavoidable 11,000 12,000 9400
Operating income P5000 P14,000 P(3400)

Giant Company is thinking of dropping Product C because it is reporting a loss.

1. Under Case I, what is the minimum acceptable price of this special order?
a. P440
b. P306
c. P450
d. P680

2. Under Case II, what is the lowest price Dantley's Furniture should bid on this special order?
a. P16,200
b. P17,280
c. P21,600
d. P29,160

3. Under Case III, If the graduate decides to purchase the car, the best estimate of the opportunity cost of that decision
is:
a. P4,300
b. P16,500
c. P43,000
d. P18,920

4. Under Case IV, should Rubium make or buy the subassemblies? What is the difference between the two
alternatives?
a. buy; savings = P93,000
b. buy; savings = P107,000
c. make; savings = P67,000
d. make; savings = P243,000

5. Under Case V, assuming Giant drops Product C and does NOT replace it, operating income will:
a. increase by P3,400
b. increase by P5,000
c. decrease by P6,000
d. decrease by P14,400

Solutions:
1. Case I - Minimum acceptable price = P120 + P90 + P155 + P75 = P440

2. Case II - P180 × 80% × 120 tables = P17,280

3. Case III - P37,500 × 11% × 4 years = P16,500 cost of the opportunity not chosen.

4. Case IV
Cost to buy: 10,000 × P140.00 = P1,400,000
Cost to make: [(P51.00 + $35.00 + P38.00) × 10,000 + P93,000] = P1,333,000
Cost savings = P1,400,000 - P1,333,000 = P67,000; make the subassemblies

5. Case V - Dropping Product C would mean Giant gives up P11,000 in contribution margin while only saving
P5,000 in avoidable fixed costs. Without Product C, operating income would be P6,000 less than currently
reported.
SITUATIONAL 11

CASE I
Rosewood company sells wooden carvings for P390 each. The direct materials cost per unit is P150 and the direct labor is
2 hours at a rate of P30 per hour. Manufacturing overhead is applied on the basis of labor hours at a rate of P38 per hour.
Rosewood makes and sells 1,900 units per period.

CASE II
Ruben intends to sell his customers a special round-trip airline ticket package. He is able to purchase the package from the
airline carrier for P140 each. The round-trip tickets will be sold for P210 each and the airline intends to reimburse Ruben
for any unsold ticket packages. Fixed costs include P5,255 in advertising costs.

CASE III
Tony Manufacturing produces a single product that sells for P80. Variable costs per unit equal P40. The company expects
total fixed costs to be P82,000 for the next month at the projected sales level of 2,700 units. In an attempt to improve
performance, management is considering a number of alternative actions. Each situation is to be evaluated separately.
Suppose that management believes that a 11% reduction in the selling price will result in a 11% increase in sales.

CASE IV
Globus Autos sells a single product. 8,300 units were sold resulting in P83,000 of sales revenue, P20,000 of variable costs,
and P14,000 of fixed costs.

CASE V
Stadium EATS Inc. currently sells hot dogs. During a typical month, the stand reports a profit of P9,000 with sales of
P50,000, fixed costs of P21,000, and variable costs of P0.64 per hot dog.

Next year, the company plans to start selling nachos for P3 per unit. Nachos will have a variable cost of P0.72 and new
equipment and personnel to produce nachos will increase monthly fixed costs by P8,808. Initial sales of nachos should
total 5,000 units. Most of the nacho sales are anticipated to come from current hot dog purchasers, therefore, monthly
sales of hot dogs are expected to decline to P20,000.

After the first year of nacho sales, the company president believes that hot dog sales will increase to P33,750 a month and
nacho sales will increase to 7,500 units a month.

1. Under Case I, how many units must Rosewood sell to breakeven?

a. 402 units
b. 963 units
c. 371 units
d. 803 units

2. Under Case II, for every P28,000 of ticket packages sold, operating income will increase by: (Do not round
intermediary calculations and round the final calculation to the nearest whole number.)
a. P9,333
b. P29,400
c. P18,667
d. P28,000

3. Under Case III, If the proposed reduction in selling price is implemented, operating income will:
a. decrease by P14,494
b. increase by P9,266
c. decrease by P23,760
d. increase by P14,494

4. Under Case IV, if variable costs decrease by P1.00 per unit, the new margin of safety is: (Round intermediate
calculations to the nearest cent.)
a. P83,000
b. P20,000
c. P66,721
d. P69,000

5. Under Case V, Determine the monthly breakeven sales in peso before adding nachos.
a. 21,500 units
b. 21,875 units
c. 22,325 units
d. 23,475 units
6. Under Case V, Determine the monthly breakeven sales during the first year of nachos sales, assuming a constant
sales mix of 1 hotdog and 2 units of nachos.
a. 5,400 hot dogs and 10,800 units of nachos
b. 6,000 hot dogs and 12,000 units of nachos
c. 6,500 hot dogs and 13,000 units of nachos
d. 5,000 hot dogs and 10,000 units of nachos

Solutions:
1. Unit Contribution Margin 390 - 150 - (2 × P30) = P180
Fixed cost per period = (2 × P38) × 1,900 units = P144,400
Breakeven = FC / CM = P144,400 / P180 = 803 units

2. P28,000 × [(P210 - P140 / P210)] = P9,333

3. Reduction in revenues = P80 × 11% = P8.8 × 2,700 units = (P23,760)

Increase in contribution = 2,700 units × 11% = 297 units × (P71.2 − P40) = P14,494
Change in operating income (P9,266)

4. Variable cost per unit = P20,000 / 8,300 = P2.41

Contribution margin percentage = [P10.00 − (P2.41 − P1.00)] / P10.00 = 0.86
New breakeven point = [P10.00 − (P2.41 − P1.00)] / P10.00 = 0.86; P14,000 / 0.86 = P16,279
Old breakeven point = P10.00 - 2.41 = P8 / P10.00 = 1; P14,000 / 1 = P14,000
Margin of safety = P83,000 - P16,279 = P66,721

5. Contribution margin = P21,000 + P9,000 = P30,000

Variable costs= P50,000 - P30,000 = P20,000

Units sold = P20,000/P0.64 = 31,250 units

Selling price = P50,000/31,250 = P1.60 per unit
Unit Variable costs = P20,000/31,250= P0.64

Let N = Breakeven units

P1.60N - P0.64N - P21,000 = 0
P0.96N - P21,000 = 0
N = P21,000/P0.96 = 21,875 units

6. Ratio equal to 1 hot dog to 2 units of nachos.

N = Breakeven number of units of hot dogs
2N = Breakeven number of units of nachos
P3(2)N + $1.60N - P0.72(2N) - P0.64N - P29,808 = 0
P7.60N - P2.08N - P29,808 = 0
N = P29,808/P5.52 = 5,400 hot dogs
Therefore, 5,400 hot dogs and 10,800 units of nachos need to be sold to break even.
SITUATIONAL 12

Suppose you invest P20,000 by purchasing 200 shares of Abbott Labs (ABT) at P50 per share, 200 shares of Lowes (LOW)
at P30 per share, and 100 shares of Ball Corporation (BLL) at P40 per share.

1. The weight on Abbott Labs in your portfolio is:

a. 50%
b. 40%
c. 30%
d. 20%

2. The weight on Lowes in your portfolio is:

a. 40%
b. 20%
c. 50%
d. 30%

3. The weight on Ball Corporation in your portfolio is:

a. 50%
b. 40%
c. 20%
d. 30%

4. Suppose over the next year Ball has a return of 12.5%, Lowes has a return of 20%, and Abbott Labs has a return of
-10%. The return on your portfolio over the year is:
a. 0%
b. 7.5%
c. 3.5%
d. 5.0%

5. Suppose over the next year Ball has a return of 12.5%, Lowes has a return of 20%, and Abbott Labs has a return of
-10%. The value of your portfolio over the year is:
a. P21,000
b. P20,000
c. P20,700
d. P21,500

Solutions:
1. Value of portfolio = 200 × P50 + 200 × P30 + 100 × P40 = P20,000
xi = value of security/value of portfolio = (200 × P50) / P20,000 = .50 or 50%

2. Value of portfolio = 200 × P50 + 200 × P30 + 100 × P40 = P20,000

xi = value of security/value of portfolio = (200 × P30) / P20,000 = .30 or 30%

3. Value of portfolio = 200 × P50 + 200 × P30 + 100 × P40 = P20,000

xi = value of security/value of portfolio = (100 × P40) / P20,000 = .20 or 20%

4. Explanation:
Stock Weight Return W×R
ABT 0.5 -0.1 -0.05
LOW 0.3 0.2 0.06
BLL 0.2 0.125 0.025
Rp = 0.035

5. Explanation:
Stock Weight Return W×R
ABT 0.5 -0.1 -0.05
LOW 0.3 0.2 0.06
BLL 0.2 0.125 0.025
Rp = 0.035
Value of portfolio = 20000(1 + .035) = P20,700
SITUATIONAL 13

Luther Industries has 25 million shares outstanding trading at P18 per share. In addition, Luther has P150 million
in outstanding debt. Suppose Luther's equity cost of capital is 13%, its debt cost of capital is 7%, and the corporate
tax rate is 40%.

1. Luther's unlevered cost of capital is closest to:

a. 7.0%
b. 9.8%
c. 10.8%
d. 11.5%

2. Luther's after-tax debt cost of capital is closest to:

a. 4.2%
b. 5.4%
c. 7.0%
d. 9.8%

3. Luther's weighted average cost of capital is closest to:

a. 9.8%
b. 10.8%
c. 11.5%
d. 13.0%

Solutions:
E D $18×25 $18×25
1. rU = rE + rD = (13%)+ (7%)=11.5%
E+D E+D $18×25+$150 $18×25+$150

2. Effective after-tax interest rate = r (1 - Tc) = .07(1 - .40) = .042 or 4.2%

𝐸 𝐷 $18×25 $18×25
3. 𝑟𝑈 = 𝑟 + 𝐸+𝐷 (1 − 𝑇𝑐 ) = $18×25+$150 (13%) + $18×25+$150 (7%)(1 − .4) = 10.8%
𝐸+𝐷 𝐸
SITUATIONAL 14

Consider two firms, Chihuahua Corporation and Bernard Industries that are each expected to pay the same P1.5 million
pesos dividend every year in perpetuity. Chihuahua Corporation is riskier and has a cost of capital of 15%. Bernard
Industries is not as shaky as Chihuahua, so Bernard has a cost of capital of only 10%. Assume that the market portfolio is
not efficient. Both stocks have the same beta and the CAPM would assign them both an expected return of 12% to both.

1. The market value for Chihuahua is closest to:

a. P10.0 million
b. P12.5 million
c. P12.0 million
d. P15.0 million

2. The market value for Bernard is closest to:

a. P12.0 million
b. P10.0 million
c. P15.0 million
d. P12.5 million

3. The alpha for Chihuahua is closest to:

a. +2%
b. -5%
c. -3%
d. +3%

4. The alpha for Bernard is closest to:

a. +5%
b. -2%
c. -3%
d. +2%

Solutions:
Dividends $1.5 M
1. MV = Cost of Capital = .15 = $10M

Dividends $1.5 M
2. MV = Cost of Capital = .10
= $15M

3. Alpha = actual return - predicted return (from CAPM) = .15 - .12 = .03

4. Alpha = actual return - predicted return (from CAPM) = .10 - .12 = .-.02
SITUATIONAL 15

Taggart Transcontinental needs a P100,000 loan for the next 30 days. Taggart has three alternatives available:

Alternative #1: Forgo the discount on its trade credit agreement that offers terms of 2/5 net 35.

Alternative #2: Borrow the money from Bank A, which has offered to lead the firm P100,000 for one month at an APR of
9%. The bank will require a (no-interest) compensating balance of 10% of the face-value of the loan and will charge a P200
loan origination fee, which means that Taggart must morrow even more than the P100,000 they need.

Alternative #3: Borrow the money from Bank B, which has offered to lend the firm P100,000 for one month at an APR of
12%. The loan has a 1% origination fee.

1. The effective annual rate for Taggart if they choose alternative #1 is closest to:
a. 13.9%
b. 18.8%
c. 27.0%
d. 27.9%

2. The effective annual rate for Taggart if they choose alternative #2 is closest to:
a. 13.0%
b. 13.9%
c. 18.8%
d. 27.0%

3. The effective annual rate for Taggart if they choose alternative #3 is closest to:
a. 13.9%
b. 18.8%
c. 27.0%
d. 27.9%

4. Which alternative should Taggart choose?

a. Alternative #1 since it has the lowest EAR
b. Alternative #2 since it has the lowest EAR
c. Alternative #3 since it has the lowest EAR
d. Alternative #2 since it has the highest actual rate

Solutions:
1. The interest rate per period is P2/P98 = .020408. If the firm delays payment until the 35th day, it has use of the
funds for 30 days beyond the discount period. There are 365/30 = 12.167 30-day periods in one year. Thus, the
effective annual cost is (1 + .020408)12.167 - 1 = .2786 or 27.86%

2. Taggart must borrow more than the P100,000 they need because of the loan origination fee and compensating
balance. The amount that they will need to borrow is equal to (amount needed + fee) × (1 + compensating
balance percentage) = (P100,000 + P200) (1.1) = P110,220 (P10,020 is the compensating balance). The
amount that will need to be repaid (with interest) is equal to P110,220(1 + ) = P111,046.65. The actual

monthly interest rate paid is - 1 = .010267 or 1.0267%. Thus, the effective annual cost is

(1 + .010267)12 - 1 = .1304 or 13.04%

3. Taggart must borrow more than the P100,000 they need because of the loan origination fee. The amount that
they will need to borrow is equal to the amount needed (1 + fee percentage) = P100,000(1.01) = P101,000.
The amount that will need to be repaid (with interest) is equal to
P101,000(1 + ) = $102,010. The actual monthly interest rate paid is - 1 = .020100 or 2.01%.

Thus, the effective annual cost is (1 + 2.01)12 - 1 = .2697 or 26.97%

4. Choose alternative #2 since it has the lowest EAR.

SITUATIONAL 16

Financial statements for Marbet Company appear below:

Marbet Company
Statement of Financial Position
December 31, Year 2 and Year 1
(pesos in thousands)

Year 2 Year 1
Current assets:
Cash and marketable securities .................................. P 160 P 160
Accounts receivable, net ............................................ 180 160
Inventory .................................................................... 110 130
Prepaid expenses........................................................ 40 40
Total current assets........................................................ 490 490
Noncurrent assets:
Plant & equipment, net .............................................. 1,910 1,870
Total assets .................................................................... P2,400 P2,360

Current liabilities:
Accounts payable ....................................................... P 120 P 150
Accrued liabilities ...................................................... 80 50
Notes payable, short term .......................................... 200 200
Total current liabilities .................................................. 400 400
Noncurrent liabilities:
Bonds payable............................................................ 500 500
Total liabilities ........................................................... 900 900
Stockholders’ equity:
Preferred stock, P10 par, 8% ..................................... 120 120
Common stock, P5 par............................................... 200 200
Additional paid-in capital–common stock ................. 280 280
Retained earnings....................................................... 900 860
Total stockholders’ equity ............................................. 1,500 1,460
Total liabilities & stockholders’ equity ......................... P2,400 P2,360

Marbet Company
Income Statement
For the Year Ended December 31, Year 2
(pesos in thousands)

Sales (all on account) ................................................... P1,600

Cost of goods sold ........................................................ 1,120
Gross margin ................................................................ 480
Selling and administrative expense .............................. 190
Net operating income ................................................... 290
Interest expense ............................................................ 50
Net income before taxes ............................................... 240
Income taxes (30%)...................................................... 72
Net income ................................................................... P 168

1. Marbet Company's working capital (in thousands of pesos) at the end of Year 2 was closest to:
a. P90
b. P1,500
c. P490
d. P600

2. Marbet Company's current ratio at the end of Year 2 was closest to:
a. 0.37
b. 1.20
c. 1.23
d. 0.44
3. Marbet Company's acid-test ratio at the end of Year 2 was closest to:
a. 0.85
b. 2.27
c. 0.31
d. 0.44

4. Marbet Company's accounts receivable turnover for Year 2 was closest to:
a. 9.3
b. 13.3
c. 6.6
d. 9.4

5. Marbet Company's average collection period for Year 2 was closest to:
a. 27.4 days
b. 39.1 days
c. 55.4 days
d. 38.8 days

6. Marbet Company's inventory turnover for Year 2 was closest to:

a. 13.3
b. 6.6
c. 9.4
d. 9.3

7. Marbet Company's average sale period for Year 2 was closest to:
a. 38.8 days
b. 55.4 days
c. 39.1 days
d. 27.4 days

Solutions:
1. Working capital = Current assets − Current liabilities = P490 − P400 = P90 (in thousands)
2. Current ratio = Current assets ÷ Current liabilities = P490 ÷ P400 = 1.23
3. Acid-test ratio = Quick assets* ÷ Current liabilities = P340 ÷ P400 = 0.85
*Quick assets = P160 + P180 = P340
4. Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = P1,600 ÷ P170 = 9.4
*Average accounts receivable = (P160 + P180) ÷ 2 = P170
5. Accounts receivable turnover = Sales on account ÷ Average accounts receivable* = P1,600 ÷ P170 = 9.4
*Average accounts receivable = (P160 + P180) ÷ 2 = P170
Average collection period = 365 days ÷ Accounts receivable turnover; 365 ÷ 9.4 = 38.8 days
6. Inventory turnover = Cost of goods sold ÷ Average inventory* = P1,120 ÷ P120 = 9.3
*Average inventory = (P130 + P110) ÷ 2 = P120
7. Inventory turnover = Cost of goods sold ÷ Average inventory* = P1,120 ÷ P120 = 9.3
*Average inventory = (P130 + P110) ÷ 2 = P120
Average sale period = 365 days ÷ Inventory turnover = 365 ÷ 9.3 = 39.1 days
SITUATIONAL 17

Financial statements for Orahood Company appear below:

Orahood Company
Statement of Financial Position
December 31, Year 2 and Year 1
(pesos in thousands)

Year 2 Year 1
Current assets:
Cash and marketable securities .............................. P 200 P 170
Accounts receivable, net ........................................ 170 140
Inventory ................................................................ 120 120
Prepaid expenses .................................................... 20 30
Total current assets .................................................... 510 460
Noncurrent assets:
Plant & equipment, net........................................... 1,530 1,540
Total assets ................................................................ P2,040 P2,000

Current liabilities:
Accounts payable ................................................... P 170 P 160
Accrued liabilities .................................................. 60 50
Notes payable, short term....................................... 270 290
Total current liabilities .............................................. 500 500
Noncurrent liabilities:
Bonds payable ........................................................ 290 300
Total liabilities ....................................................... 790 800
Stockholders’ equity:
Preferred stock, P10 par, 10% ................................ 100 100
Common stock, P5 par ........................................... 200 200
Additional paid-in capital–common stock ............. 280 280
Retained earnings ................................................... 670 620
Total stockholders’ equity ......................................... 1,250 1,200
Total liabilities & stockholders’ equity ..................... P2,040 P2,000

Orahood Company
Income Statement
For the Year Ended December 31, Year 2
(pesos in thousands)

Sales (all on account)................................................. P1,740

Cost of goods sold ..................................................... 1,210
Gross margin ............................................................. 530
Selling and administrative expense ........................... 210
Net operating income ................................................ 320
Interest expense ......................................................... 30
Net income before taxes ............................................ 290
Income taxes (30%) ................................................... 87
Net income................................................................. P 203

Dividends during Year 2 totaled P153 thousand, of which P10 thousand were preferred dividends. The market price
of a share of common stock on December 31, Year 2 was P80.
1. Orahood Company's earnings per share of common stock for Year 2 was closest to:
a. P7.25
b. P2.14
c. P4.83
d. P5.08

2. Orahood Company's dividend yield ratio on December 31, Year 2 was closest to:
a. 4.2%
b. 4.5%
c. 2.1%
d. 4.8%

3. Orahood Company's return on total assets for Year 2 was closest to:
a. 11.1%
b. 10.0%
c. 9.0%
d. 10.5%

4. Orahood Company's times interest earned for Year 2 was closest to:
a. 9.7
b. 17.7
c. 6.8
d. 10.7

Solutions:
1. Earnings per share = ($203 − $10) ÷ (40 shares + 40 shares*)/2 = $4.83 per share
*Number of common shares outstanding = P200 ÷ P5 per share = 40 shares
2. Dividend yield ratio = Dividends per share ÷ Market price per share
Dividends per share = P143 ÷ 40 shares = P3.58 per share
Dividend yield ratio = P3.58 ÷ $80 = 4.5%
3. Return on total assets = Adjusted net income ÷ Average total assets
Return on total assets = P224* ÷ P2,020** = 11.1%
* Adjusted net income = P203 + [P30 × (1 − 0.30)] = P224
** Average total assets = (P2,000 + P2,040) ÷ 2 = P2,020
4. Times interest earned = Net operating income ÷ Interest expense
Times interest earned = P320 ÷ P30 = 10.07