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RAMON MAGSAYSAY TECHNOLOGICAL UNIVERSITY

College of Accountancy and Business Administration

Management Advisory Services 1

Name: Section: Date:

1. Assume that Grace Company presently produces and sells 20,000 units of Product G which represents only 80% of its

normal capacity of 25, 000 units. Its regular selling price is P50 per unit and its manufacturing, selling and administrative costs

are as follows:

Materials P 10

Labor 12

Variable overhead 8

Fixed overhead (P 60, 000/ 20, 000) 3

Variable selling and administrative costs 7

Fixed selling and administrative costs (P 40, 000/20, 000) 2

Total Unit Cost P 42

Grace company received an order from a provincial distributor for 3, 000 units. The customer asks for a special discount of

30%. It is expected that the company will incur no additional selling and administrative cost.

Should Grace Company accept the special order? Show your supporting computation.

2. Kapol Companys normal capacity is 60, 000 units. Since the past few months, it has utilized only one half of this cap acity.

For last month, the result of its operations is summarized in the following statement:

Sales (30, 000 units) P 1, 500, 000

Less variable costs 600, 000

Contribution Margin 900, 000

Less fixed costs 500, 000

Profit P 400, 000

Of the variable and fixed costs shown on the statement, are manufacturing costs; the balance represents selling and

administrative costs.

This month, a customer submitted a proposal to buy 35,000 units of Kapol Companys product at P25 per unit. The

only selling cost to be incurred fir this order is P4.00 per unit representing freight charges that will be shouldered by Kapol. If

this special order proves to be acceptable, Kapol is willing to reduce sales to regular customers so as not to exceed its normal

capacity.Should the order be accepted? Show your supporting computation.

3. Beth Neri Enterprises sells three products, Skinny, Bony and Thinny. Beth, the proprietor, is concerned about the losses

incurred by Thinny, and is considering to discontinue its production and sales.

Sales and costs data about Beth Neris three products are as follows:

Skinny Bony Thinny Total

Sales price per unit P 5 P 7 P 9 P 21

Variable cost per unit 2 3 7 12

Contribution margin per unit P 3 P 4 P 2 P 9

Fixed cost per unit 1 2 3 6

Profit (Loss) per unit P 2 P 2 (P 1) P 3

Fixed costs are allocated among the three products based on the floor area they occupy.

Beth is thinking that if she would eliminate Thinny, its loss of P1 per unit would likewise be eliminated thereby increasing her

total profit per unit from P3 [P2 + P2 P1] to P4 [P2 + P2].

Is Beths analysis correct? Show your supporting computation.

4. Rose Descaya operates a chain of bookstores with branches in Manila, Quezon City and Makati. A summary of operating

results of the three branches during a typical month is shown below:

MANILA MAKATI QUEZON CITY TOTAL

Sales P 300,000 P 400,000 P 500,000 P 1,200,000

Costs and Expenses:

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Variable P 120,000 P 160,000 P 200,000 P 480,000

Direct fixed costs 50,000 140,000 70,000 260,000

Allocated home office costs 90,000 120,000 140,000 350,000

Total cost and expenses P 260,000 P 420,000 P 410,000 P 1,090,000

Operating Profit (Loss) P 40,000 (P 20,000) P 90,000 P 110,000

Like in the previous months, Rose observed that the Makati Branch operated at a loss. Due to this, Rose is considering to close

the Makati branch, hoping that the loss would be eliminated. She disclosed her plan to her accountant who in turn informed her

that if she would push through with her plan, Makatis sales, variable cost and direct fixed costs would all be eliminated.However, total home office costs would not change; the amount allocated to Makati would just be absorbed by the other

branches.

Should Rose continue operating the Makati Branch despite its operating loss? Show your supporting

computation.

5. Mr. Rene Villiones operates a snack counter selling sandwiches and soft drinks to students of the school across his store, as

well as to his neighbors and passers-by. Each unit sale is composed of a sandwich and a cup of soft drinks which is sold at a lot

price of P15. Variable cost amounts to P8 per unit. Under normal conditions, Mr. Villiones sells an average of 3,000 units pe r

month, during which he incurs the following fixed costs:

Rent P 3,000

Allocated cost of utilities 2,000

Salary and sales clerk 1,500

Janitors salary 1,000

Security agencys billing 2,500

Total P 10,000A joint strike of teachers and students which started the other day dramatically reduced the sales of Mr. Villiones snack counter

to only 800 units because his customers would now be composed only of his neighbors and passers-by. Accordingly, the strike

would last for about a month. Mr. Villiones is considering shutting down operations for one month to avoid incurring losses

due to the reduced sales volume. He notes that if he shuts down his operations, his share in the allocated cost of utilities would

be reduced to P500, and he could avoid incurring salary of the sales clerk who would be asked to take a forced leave without

pay while the snack counter is closed. All the other fixed costs would be incurred despite the discontinuance of operations.

Should the snack counter be shut down for one month? Show your supporting computation.

6. The production manager of REFE Corp. is deciding on what to do with 5,000 units of scrap output. The company spent

P12, 500 in producing these items. Two options are available:

a. sell the product as a scrap per se at P0.88 each;b. rework the units at a cost of P6, 250 and then sell it for P2.50 per unit.

The net advantage or disadvantage to the company if proposal b is followed is:

a. P6, 250 advantage

b. P1, 850 advantage

c. P4, 400 disadvantage

d. P6, 250 advantage

e. none of the above

Gabriel Company is considering to buy a new machine that will reduce the number of production workers and the sales price of

the product. It is estimated that the fixed costs will increase to P200, 000. Due to depreciation allowance; variable costs will

decrease to 85% due to the reduction of workers; and the sales price will be reduced by P10.00

The following data are from the current operations:Fixed expenses P180, 000.00

Variable costs 85.00

Selling price per product 199.95

7. Gabriels profit at 2,000-unit sales volume will be:

a. P49, 900

b. P59, 600

c. P45, 000

d. P35, 400

e. answer not given

8. The new profit of the company if it does not acquire the machine and does not lay-off any worker, instead reduces sales

price by 10% and increases volume to 3,500 units will be:

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a. P 9, 920.00

b. P187, 325.00

c. P116, 000.00

d. P178, 523.00

e. answer not given

Dinalupihan Company has available production capacity of 18,000 hours. This facility can be used to produce 3 products in

any combination. Total fixed cost is P18, 000. The other pertinent data are as follows:

PRODUCTS A B C

Selling price P25 P35 P30

Variable cost 15 27 14

No. of hours required/unit 5 2 4

Market limit in peso sales value none P87, 500 P90, 000

9. The best possible combination of products is: (in peso value)

a. A200 units; B3, 000 units; C2, 500 units

b. A1, 000 units; B12, 000 units; C5, 000 units

c. AP10, 000; BP 12, 000; CP175, 000

d. AP 5, 000; BP180, 000; CP87, 500

e. answer not given

10. The net profit associated with the best combination of product is:

a. P70, 000

b. P52, 000

c. P26, 000

d. P 8, 000

e. answer not given

From the accounting records of Baguio, Inc. the following data on costs for the quarter ended December 31, 2013 were

determined:

VARIABLE COSTS FIXED COSTS

Direct materials P600, 000

Direct labor 800, 000

Factory overhead 160, 000 P100, 000

Marketing expenses 140, 000 60, 000

Administrative expenses 100, 000 40, 000

Sales for the quarter totaled P2, 400, 000.

The company is considering two alternative proposals that would change certain cost items. Proposal R would

increase fixed costs by P20, 000 with sales and variable costs remaining the same. Proposal S would involve acquiring modern

equipment at an annual increase of fixed costs of P50, 000

With the expectation of saving the same amount in each of the direct materials and direct labor cost.

11. If proposal R is adopted, the companys profit would be:

a. P190, 000

b. P380, 000

c. P300, 000

d. P412, 500

e. answer not given12. If proposal S is adopted, the companys profit would be:

a. P206, 250

b. P250, 000

c. P412, 500

d. P380, 000

e. answer not given

Bataan Company manufactures Part H used in the finishing operation. The cost per unit of 1, 000 units of Part H are:

Prime Costs P75.00

Factory Overhead 35.00 (of which 15% is fixed)

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Baguio Company has offered to sell Bataan 1, 000 units of Part H for P220.00 per unit. If Bataan accepts Baguios

offer, the released facilities could be used to save P95, 000 in relevant costs in its manufacture of Part B. In addition, 75% of

fixed overhead applied to Part H would be totally eliminated.

13. The alternative that is more desirable and the corresponding net cost savings is:

Alternative Net Cost savings

a. manufacturer P16, 312.50

b. manufacturer P10, 000.00

c. buy P10, 000.00

d. buy P16, 312.50e. answer not given

14. When incremental revenue are more than incremental costs, additional order must be accepted if:

a. regular market cannot be distinguished from special order market and other unit costs are increased .

b. regular market can be distinguished from special order market and other unit costs are unaffected.

c. regular customers are expected to demand the same terms given to the special customer.

d. other unit costs are increased and idle capacity is decreased.

e. no idle capacity exists.

15. Incremental or marginal costs are useful to management in making which of the following types of decision?

a. capital outlay decision

b. make or buy decision

c. lease purchase decision

d. none of the above

e. all of the above

16. All are not examples of imputed costs except:

a. lease value of company owned machinery

b. salaries of departmental managers

c. monthly rental bills

d. cost of advertising

e. delivery expenses

17. They refer to the value assigned to an item but which have not been the result of any transaction:

a. direct costs

b. avoidable costs

c. out of pocket costs

d. sunk costs

e. imputed costs18. Costs which will require the expenditure of cash or the incurrence of a liability as a consequence of a management

decision:

a. direct costs

b. avoidable costs

c. out of pocket costs

d. sunk costs

e. imputed costs

19. In quantitative analysis, the following concepts are usually applied except:

a. the only relevant costs or revenues are those expected future costs or revenues that differ across alternatives.

b. all costs incurred in the past (past or sunk costs) are irrelevant, although their future tax ramifications are relevant.

Such past costs may be used only as a basis for predicting the cost and revenue associated with alternative courses of

future action

c. opportunity cost, the income obtainable from an alternative use of a resource, must be considered.d. none of the above.

e. all of the above.

20. Following are examples of alternative choice problems except:

a. sell as is or process further

b. continue or discontinue producing a product line

c. accept or reject a special order

d. make or manufacture a part of the major product line

e. continue or shut down

To God be the Glory!.. Princess Claris J. Araucto,CPA