Calla company produces skateboards that sell for P50 per unit.

The company currently has the capacity to produce 90,000

Direct materials P800,000

Direct labor 640,000
Overhead 960,000
Selling expenses 560,000
Administrative expenses 480,000
Total costs and expenses P3,440,00

A new retail store has offered to buy 10,000 of its skateboards for P45 per unit. The is in a different market from the Calla’s
A of its costs in anticipation of this additional business reveal the following:

•Direct materials and direct labor are 100% variable

•Thirty percent of overhead is fixed at any production level from 80,000 units to 90,000 units; the remaining 70% of annual overhead cost
•Selling expenses are 60% variable with respect to number of units sold, and the other 40% of selling expenses are fixed.
•There will be an additional P2 per unit selling expense for this order.
•Administrative expenses would increase by P1,000 fixed amount.

Required:

1.Should the company accept this special order? What nonfinancial factors should the company consider?
2.Assume that the new customer wants to buy 15,000 units instead of 10,000 units—itwill only buy 15,000 units or none and

Calla Company
Incremental Receivables 450,000.00
Incremental Cost (30.6x10,00) -306000
Add: 1. Yes, because the incremental profit of Calla compan
Selling Expenses -1000
Additional Selling Expenses (2x10,000) -20000
Incremenrtal Profit 123,000.00

Calla Company
Market Price (45-32.6) 12.40
Total units 15,000 2. The Profit will be P88,000.
Cost Margin 186,000.00
Less:
Administrative Expenses -1000
Opportunity cost -97000 ------------- Selling price 50
Total Profit 88,000.00 Variablecost 30.6
Cost margin 19.4
(15,000-10,000) 5000
Lost Cost Margin 97000
as the capacity to produce 90,000 skateboards per year, but is selling 80,000 skateboards per year. Annual costs for 80,000 skateboard

a different market from the Calla’s regular customers and it would not affect regular sales.

maining 70% of annual overhead cost are variable with respect to volume.
0% of selling expenses are fixed.

mpany consider?
only buy 15,000 units or none and will not take a partial order. How does this change your answer for part 2?

ncremental profit of Calla company is P123,000.

osts for 80,000 skateboards follow.
(Outsourcing)Fibre technologies manufacture fiberglass housings for portable generations. One part of a housing is a meta
Company management is considering purchasing the latch from an external vendor. The following data are available for ma

Cost per unit to manufacture

Direct material P1.60
Direct labor 1.36
Variable overhead 0.72
Fixed overhead-applied 1.12
Total cost 4.8

Cost per unit to purchase

Purchase price 3.92
Freight charges 0.08
Total cost 4.00

Required:
a.Assuming that all of Fibre Technologies internal production cost are avoided if the company purchases rather than latch, what would be
b.Assume that some of Fibre Technologies fixed overhead cost could not be avoided if it purchases rather than makes the latches. How m

a
Fiber Technologies
MAKE BUY
(4.8x120,000) (4.0x120,000)
576000 480000
96000 is the net annual cost advantage of purchasing the latches

b
Fiber Techonologies
MAKE BUY
(3.68X120,000) (4.0X120,000)
441600 480000
38400
120,000 units
0.32 FOH that must be avoidable
part of a housing is a metal latch. Currently, the company produces the 120,000 metal latch units required annually.
g data are available for making the decision.

her than latch, what would be the net annual cost advantage to purchasing the latches?
an makes the latches. How much of the peak overhead must be avoidable for the company to be indifferent as to making or buying latches?
or buying latches?
Sherwood company is currently manufacturing part Z911, producing 40,000 units annually. The part is used in the productio

Direct materials P9.00

Direct labor 3.00
Variable overhead 2.50
Fixed overhead 4.00
Total cost P18.5

Of the total fixed overhead assigned to Z911, P88,000 is direct overhead (the lease of production machinery and salary of p
The remaining fixed overhead is common fixed overhead. An outside supplier has offered to sell the part to Sherwood for P

Required:
1.Should Sherwood Company make or buy part Z911?
2.What is the most Sherwood would be willing to pay an outside supplier?
3.If Sherwood brought the part, by how much would income increase or decrease?
4.Now suppose that all of the fixed overhead is common fixed overhead
a)Should Sherwood Company make or buy part Z911?
b)What is the most Sherwood would be willing to pay an outside supplier?
c)If Sherwood brought the part, by how much would income increase or decrease?
art is used in the production of several products made by Sherwood. The cost per for Z911 is as follows:

machinery and salary of production line supervisor—neither of which will be needed if the line is dropped).
he part to Sherwood for P16. There is no alternative use for the facilities currently used to produce thepart.
CAPACITY CONSTRAINT.AB manufacturing can produce either of two products, Product A and Product B, with its existing
AB has 10 grinding machines, each of which can be operated 200 hours per month. Followingare the comparative per-unit

Product A Product B
Selling price 11.00 17.50
Variable cost 7.00 10.00
Grinding time, hours 2.00 2.50

Required:
1.If AB can sell as many units of either product as it can make with its limited supply of grinding machines, which product s
2.The selling price of Product B has only risen to P17,50. AB’s manager now estimated that the maximum sales volume of B
They also believe that at the P11 price, they can sell of product A they can make. How should AB use it grinding machine ca

1
Product CM GT/hr CM/hr
A 4.00 2.00 2
B 7.50 2.50 3 The product should AB make is the product B, its co
x2400
Total Contribution Margin 7200

2
24,000.00 Product A 750
22,500.00 Product B 9000
1,500.00

1500/2 = 750
and Product B, with its existing machinery. Making either product requires the use of grinding machines.
gare the comparative per-unit data for the two products:

ing machines, which product should AB make and what will AB’s total contribution margin be per month if it makes that product?
he maximum sales volume of B at that price is 9,000 unit per year.
d AB use it grinding machine capacity over the coming year? (That is, how many of each product should AB produce?)

AB make is the product B, its contribution margin is 7,200

makes that product?
CONTINUE OR SHUT DOWN OPERATIONS.Beng company produces burglar alarms. The company’s normal capacity is 2
The company’s unit costs at this level of activity are given below:

Direct materials 15.00

Direct labor 16.00
Variable overhead 4.60
Fixed overhead 10.00
Variable selling expenses 2.40
Fixed selling expenses 8.00
Total 56.00

One of the materials used in the production of burglar alarms is obtained from a foreign supplier. Civil unrest in the supplie
Beng Company has enough of the material on hand to continue to operate at 40% of normal levels for six-month period. A
Closing the plant would reduce fixed overhead cost by 80% during the six month period; the fixed selling cost would continu
However, additional shut-down cost of P9,000 would be incurred during the shut down period for the maintenance.

Required:
1.What would be the peso advantage or disadvantage of closing the plant during the six-month period?
2.Compute the shutdown point in units.
pany’s normal capacity is 20,000 units. It produces and sells 20,000 units each year at a selling price of P60 per unit.

. Civil unrest in the supplier’s country has caused a cut-off in material shipment that is expected to last for six months.
els for six-month period. As an alternative, the company could close the plant down entirely for six months.
selling cost would continue at 60% of their normal level while the plant was closed.
the maintenance.
1
Contribution to overhead 40,000.00
Allocation overhead (1,000,000x0.10) 10,000.00
50,000.00 increase
2
d. opportunity cost

3
Sales 1,000,000.00
Mfg & selling cost - 700,000.00
Uncollectibles - 150,000.00
Collectibles - 50,000.00
100,000.00
65%
65,000.00
4
d. with the cost of buying the parts

5
Allocated overhead 32,000.00
14,000.00
Total 18,000.00

Contribution to overhead 16,000.00

18,000.00
- 2,000.00 increase in profit