MANAGEMENT ACCOUNTING II

PROBLEM SOLVING QUIZ- October 8, 2020

INSTRUCTIONS: Answer the given problem. Show your solutions.

PROBLEM 1
Identify whether the following costs are relevant or irrelevant. Specify as well whether it is incremental,
avoidable, opportunity, sunk or committed cost :
1. research and development costs incurred in the prior months
2. contribution margin of the decrease in regular sales for accepting a special order.
3. alternative usage of plant space
4. cost of inventory acquired several years ago
5. joint production costs incurred
6. depreciation of equipment used in production
7. salary of a manager of a product line that is being considered to be dropped
8. 8.rental costs of additional space for the production of a new product
9. cost of special device that is necessary if a special order is accepted
10. direct materials, direct labor and overhead incurred on units produced.
11. further processing costs
12. allocated main office expenses to different departments
13. prime costs of units ordered by one-time customers
14. current market value of old equipment being considered for disposal
15. rental of factory being used by the company for regular production in which special orders will
likewise be produced

PROBLEM 2
Pauloleng Lines is considering the acquisition of two new trucks. Because of improved mileage, these
vehicles are expected to have a lower operating cost per mile than the trucks the company plans to
replace. Management is studying whether the firm would be better-off keeping the older vehicles or
going ahead with the replacement, and has identified the following decision factors to evaluate:

a. Cost and book value of the old trucks

b. Moving revenues, which are not expected to change with the acquisition
c. Operating costs of the new and old vehicles
d. New truck purchase price and related depreciation charges
e. Proceeds from sale of the old vehicles
f. The 8% return on alternative investments that Clancy will forego by tying up cash in the new
trucks
g. Drivers' wages and fringe benefits
Required:
Classify the seven decision factors listed into the following categories (note: factors may be used more
than once):
1. Relevant costs.
2. Opportunity costs.
3. Sunk costs.
4. Factors to be considered in the decision.

PROBLEM 3
Ching company manufactures all the component parts used in its production of product A. however, to
save on cost, the company is planning to buy one of the component parts from an outside supplier who
has offered to sell 2,000 units at P33/ unit. The cost to manufacture 1 unit of this particular component
is:
Direct Materials P35
Direct Labor 12
Variable overhead 8
Fixed overhead 5
Required:
1. the cost savings if Ching company buys from outside supplier of that particular component will
be?
2. If Ching will decide to purchase from the outside supplier, it needs to incur P3 on receiving and
holding cost of purchased goods, what will be the effect on the net income? What should be the
maximum purchased price of the supplier?
3. Considering the previous item, what if lucky company is considering the offer because it can
save 20% in fixed overhead costs if it purchase the product from the outside supplier, should the
company make or buy the component?
4. Considering the two previous item, another consideration of Ching is the possible leasing of the
idle facility for P20,000. Should the company make or buy the component? What is the
maximum purchase price?

PROBLEM 4
A Manufacturer who sells its product at P150 per unit has the following costs based on full capacity
operation of 10,000:
Direct materials P20
Direct labor 30
Overhead( 60% fixed) 50
Selling and administrative 20
A special order for 2,000 units was received. It was anticipated that the additional selling costs that shall
be incurred is P6 for shipping.
Required:
1. The manufacturer has more than the sufficient capacity to manufacture the special order. What
could be the minimum price to be considered by the manufacturer in the negotiation?
2. What is the total advantage/disadvantage if the manufacturer accepted the special order at a
discounted price of P85?
3. What is the manufacturer is currently able to sell 9,000 units, what should be the minimum price
to be considered by the manufacturer?

PROBLEM 5
The management of Pauloleng Company is considering whether one of the department’s in its retail
stores should be eliminated, the contribution margin in the department is P150,000 per year. Fixed
expense of the department is P170,000 per year; wherein P120,000 is traceable while the balance being
part of the allocated corporate overhead. It is estimated that 80% of the traceable fixed expenses will be
eliminated if the department is discontinued while the Pauloleng will be able to save P20,000 in
corporate overhead cost if the retail department will be closed.

Required:
1. If the department is eliminated, what will be the impact on the company’s overall net operating
income?
2. Considering that Pauloleng has another department, the wholesaling department which is
expected to have a 20% increase in current sales of P200,000 while its contribution margin ratio
will increase from 40% to 45% as the result of dropping the retail stores, compute the impact on
the company’s overall net operating income.
3. Disregarding the previous item, if the retail stores will be dropped, it is expected that Pauloleng’s
logistics division will have an increase in costs amounting to P20,000 and it will also be required
to give out separation benefits and other penalties totaling P45,000. Compute the impact on the
company’s overall net operating income.

PROBLEM 6
Pauloleng has been producing burgers for a number of years now. A regular burger can already be sold
at P100.00 or it can be further processed into a cheese burger which sells for P150.00, a Big Mac which
sells for P180.00, and the famous Mushroom Melt which can be sold for P240.00. a regular burger can
be produced at a total per unit cost of P80.00.
Cheese Burger Big Mac Mushroom Melt
Additional Processing costs P40.00 P120.00 P90.00
Current Unit Sales 5,000 3,000 2,000

Required:
a. What products should be processed further?
b. By how much was the company losing for further processing unprofitable product line?
c. If the unprofitable product line will be dropped and all units sales of such will be transferred to
the most profitable product line, by how much would the company’s net income
increase/decrease?
PROBLEM 7
Pauloleng Company produces 3 products: J, A, N. the selling price, variable costs, and contribution
margin for one unit of each product follow:
PRODUCT
J A N
Selling Price P60 P90 80
Less: Variable Costs:
Direct Materials 27 14 40
Direct Labor 12 32 16
Variable Manufacturing Overhead 3 8 4
Contribution Margin P18 P36 P20

Due to a strike in the plant of one of its competitors, demand for the company’s products far exceeds its
capacity to produce. Management is trying to determine which product(s) to concentrate on next week
in filling its backlog of orders. The direct labor rate is P8 per hour, and only 3,000 hours of labor time are
available each week.

Required:
1. Compute the amount of contribution margin that will be obtained per hour of time spent on each
product.
2. Which orders would you recommend that the company work on next week- the orders for
product X, Y, or product Z? Show computations.