1. TOTAL ANALYSIS VS.

DIFFERENTIAL ANALYSIS
Leviticus Company has a single product called Palo. The company currently sells 8,000 units of Palo at P40 per unit. The company’s costs at this
level of activity are given below:
Variable costs P10
Direct labor 8
Variable overhead 5
Variable selling expense 2
Fixed overhead 50,000
Fixed selling expenses 30,000
Required:
1. What is Leviticus Company’s present profit?
Sales (8000*40) 320,000
VC(8000*25) (200,000)
CM(8000*15) 120,000
FC (80,000)
NI 40,000
2. Leviticus Company could increase its sales by 25% if it spends P20,000 for advertisements. Determine the effect on company profit using:
a. Total analysis
Sales (320,000*1.25) 400,000
VC(200,000*1.25) (250,000)
CM(120,000*1.25) 150,000
FC (80,000)
NI 70,000
Advertisement Cost (20,000)
Adjusted profit 50,000

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 Increase in profit 10,000

b. Differential analysis
Increase in CM(120,000*25%) 30,000
Increase in advertisement cost (20,000)
Increase in profit 10,000

2. MAKE OR BUY (OUTSOURCING DECISION)

Numbers company is trying to decide whether it should continue to produce an engine component or buy it from supplier for P2,200 each.
Demand for the coming year is 20 units. The costs of producing a single unit of the engine component are as follows:
Direct materials P1,000
Direct labor 800
Factory overhead (75% fixed) 1,000
If Numbers buys the components, the facility now used to make the components can be rented out to another firm for P5,000.
Required:
1. Should Numbers make or buy the components?
Relevant Cost Approach
Costs to make Costs to buy
DM 1,000
DL 800
VOH 250
FOH 0 0
Purchase price 2,200
Total cost/unit 2,050 2,200
No. of units 20 20
Total cost 41,000 44,000
Opportunity cost 5,000
Total Cost 46,000 44,000

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 Difference (46,000-44,000) 2,000
 Numbers should buy the components
2. How much is the difference between the cost of making or buying the components?
46,000-44,000 = 2,000
3. ACCEPT OR REJECT (SPECIAL ORDER DECISION)
Deuteronomy Company produces a single product. The cost of producing and selling a single unit of this product at the company’s normal activity
level of 50,000 units per month is as follows:
Direct materials P32.50 per unit
Direct labor 7.20 per unit
Variable manufacturing overhead 1.30 per unit
Fixed manufacturing overhead P1,045,000 per month
Variable selling and admin. exp. 1.90 per unit
Fixed selling and admin. exp. P365,000 per month
The regular selling price of the product is P75.00 per unit.
An order has been received from a customer for 3,000 units at a special discounter price of P65.60 per unit. This order would have no effect on
normal sales and would not change the total fixed costs. The variable selling and administrative expense would be P0.30 less per unit on this
order than on normal sales.
Required: Should Deuteronomy accept or reject the special order? Explain.
DM 32.50
DL 7.20
VOH 1.30
VS&A 1.90
Total 42.90
S&A (0.30)
Minimum selling price 42.60

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  Deuteronomy may still accept the special order without incurring any loss because the customer offers a price of P65.60 and the
minimum selling price is P42.60.

4. TOTAL ANALYSIS VS. DIFFERENTIAL ANALYSIS

Gemini Company sells I-phone at a price of P28,000 per unit. The costs per unit are:
Direct materials P8,000
Direct labor 6,000
Variable overhead 4,000
Fixed overhead 2,000
Total P20,000
A special order 1,000 units was received from Exodus, a well-known cell phone dealer. Additional shipping costs for this sale are P2,000 per unit.
Required:
What is the minimum selling price per unit for the special order if:

A. Gemini is operating at full capacity?

Minimum selling price:
DM P8,000
DL 6,000
VOH 4,000
Shipping costs 2,000
CM lost (28,000-20,000) 8,000
28,000

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 B. Gemini has excess capacity?
Minimum selling price:
DM P8,000
DL 6,000
VOH 4,000
Shipping costs 2,000
Total 20,000
5. SHUTTING DOWN OPERATIONS

The most recent monthly income statement for Joshua store is given below:
A Branch B Branch TOTAL
Sales P1,200,000 P800,000 P2,000,000
Less: Variable expenses (840,000) (360,000) 1,200,000
Contribution margin P360,000 P440,000 P 800,000
Less: Traceable fixed expenses (210,000) (180,000) (390,000)
Segment margin P150,000 P260,000 P410,000
Less: Common fixed expenses (180,000) (120,000) (300,000)
Profit (Loss) (30,000) P140,000 P110,000
Joshua store considers eliminating A branch. If A branch were eliminated, then its traceable fixed expenses could be avoided. The total common
fixed expenses are merely allocated and would be unaffected.
A. What will be the profit (loss) if A branch is eliminated?
SM lost (150,000)

B. Assume that if A branch is closed, 20% of its traceable fixed expense would continue unchanged. Also, closing of A branch would result in
a 20% decrease in sales of B branch. What will be the overall decrease in profit?
CM lost (360,000) Decrease in CM (440,000*20%) 88,000
Fixed Cost (210,000*80%) 168,000 SM lost (150,000)
Decrease (192,000) Decrease (62,000)

Overall decrease (192,000+62,000) = (254,000)

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 6. PRODUCT ELIMINATION POINT
Judges Company expects that sales will drop below the current level of 5,000 units per month. An income statement prepared for the monthly
sales of 5,000 units show the following:

Sales (5,000@ P3) P15,000

Less:
Variable costs (5,000@ P2) 10,000
Fixed costs 5,000
Profit/(loss) 0
If plant operations are suspended, a shutdown cost (i.e., plant maintenance and taxes) of P2,000 per month will remain as incurred. Since there is
no immediate possibility of profit under present conditions, the problem of the company is just how to minimize the loss.
Required:
1. What is the shutdown point in units?
Fixed cost 5,000
Shutdown cost (2,000)
Avoidable FC 3,000
CM per unit (3-2) ÷ 1.00
Shutdown point (units) 3,000
2. Should the company continue or shutdown operations if the company expects demand to be:
a. 4,000 units?
CM(4,000*1) 4,000
FC (5,000)
Profit (1,000)
 The company should continue operations because it can save P1000 when they continue since the shutdown cost is P2,000.

b. 2,000 units?
CM(2,000*1) 2,000
FC (5,000)

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 Profit (3,000)
 The company should shut down operations because it will incur more loss if they continue.
7. SELL OR PROCESS FURTHER
Ruth company produces four products for a joint cost of P10,000. The firm could sell the products at the split-off point for the following amounts:
M – P15,000
I – 10,000
L – 2,000
O–0
At present, the products are processed beyond the split-off point and they are sold as follows:
Products Sales Additional processing cost
M P40,000 P28,000
I 30,000 16,000
L 20,000 14,000
O 2,500 3,000

Required:
1. Which product/s should the firm sell at split-off point?
M I L O
Sales after processing further 40,000 30,000 20,000 2,500
Sales at split-off point (15,000) (10,000) (2,000) (0)
Increase/Decrease in sales 25,000 20,000 18,000 2,500
Further processing cost (28,000) (16,000) (14,000) (3,000)
Net advantage/disadvantage (3,000) 4,000 4,000 (500)
Split off Process further Process further Split off
2. If the company takes the most profitable action, then what will be its profit?
M profit 15,000
I profit (30,000-16,000) 14,000

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 L profit (20,000-14,000) 6,000
O profit 0
Common cost (10,000)
Total profit 25,000
8. BEST PRODUCT COMBINATION
Samuel Co. Produces three products: A,B and C. One machine is used to produce the products. The contribution margins, sales demands, and
time on machine (in hours) are as follows:
Market limit Unit contribution margin Hours on machine
A 100 units P20 10 per unit
B 80 units P18 5 per unit
C 150 units P25 10 per unit
There are 2,400 hours available on the machine during the week. Total fixed cost is P5,000.
Required: How much is the profit associated with the best product combination?
A B C Best product combination:
CM per unit 20 18 25 80 units of Product B
÷ Machine hrs 10 5 10 150 units of Product C
CM per hr 2 3.6 2.5 50 units of Product A
Ranking 3 1 2
B C A Total CM from best product combination
Market limit 80u 150u B (80*18) 1,440
x Machine hrs 5 10 C (150*25) 3,750
No. of hours 400 1500 A (50*20) 1,000
Remaining hrs (2,400) (2,000) 500 hrs Profit 6,190
Total remaining hours 2,000 500 ÷ 10 hrs
50 units

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