BM1915

NAME: Franchesca B. Montemayor DATE: SCORE:

ACTIVITY

1. After several years producing and selling at a capacity of 50,000 units, Milton Company faced a year
with projected sales and production of 38,000 units. A potential customer offered to purchase 7,000
units at a price of P18 each. The normal sales price is P30 each.
Direct material P9.00
Direct labor 6.50
Variable manufacturing overhead 2.00
Fixed manufacturing overhead 3.75
Total P21.25

Should Milton accept the order? Justify your answer.

Variable manufacturing costs:

Direct materials P9.00
Direct labor 6.00

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Variable manufacturing overhead 2.00 P17.5

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Selling price of special order P18.00

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Relevant cost per unit 17.5
Contribution margin per unit .50

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x Units to be sold
Incremental income
7,000
P3,500
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ANSWER:
Milton Company must accept the order since their profit increase in 3,500. The relevant cost per unit is
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P17.50, but the selling price is P18.00.

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2. Fuji Company is currently manufacturing part A123, producing 40,000 units annually. The part is used
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in the production of several products made by the company. The cost per unit for A123 is as follows:
Direct material P9.00
Direct labor 3.00
Variable manufacturing overhead 2.50
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Fixed manufacturing overhead 4.00

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Total P18.50

Of the total fixed overhead assigned to A123, P88,000 is avoidable (the lease of production machinery
and salary of a production line supervisor–neither of which will be needed if the line is dropped). The
remaining fixed overhead is a common fixed overhead. An outside supplier has offered to sell the part
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to Fuji for P16. There is no alternative use for the facilities currently used to produce the part.
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Should Fuji Company make or buy part A123? Justify your answer.
Cost to make Cost to buy Difference
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Direct materials P9.00

Direct labor 3.00
Variable manufacturing overhead 2.50
Fixed manufacturing overhead
4.00
Cost to buy P16.00
Relevant cost per unit P18.50 P16.00 P2.50
x units 40,000 40,000 40,000
Total P740,000 P640,000 P100,000
ANSWER:
This study source was downloaded by 100000815444829 from CourseHero.com on 11-17-2021 06:43:28 GMT -06:00
Fuji company should buy part A123 because it will save P100,000 instead of manufacturing the
product.
https://www.coursehero.com/file/78305865/Montemayor-06-Activity-1docx/
 3. The following information is available for Titan Company. Based on this information, the management
is considering eliminating product line C. They assumed that by operating only product lines A and B,
they would have higher profits. It was also determined that if product line C is discontinued, 80% of the
fixed overhead can be avoided and 70% of the fixed selling and administrative expenses can also be
avoided.

Product A Product B Product C

Sales P100,000 P300,000 P200,000
Cost of Goods Sold
Direct Materials 25,000 75,000 80,000
Labor 20,000 40,000 50,000
Variable Overhead 10,000 20,000 15,000
Fixed Overhead 5,000 15,000 35,000
Total 60,000 150,000 180,000
Gross Profit 40,000 150,000 20,000
Selling and Administrative
Variable 12,000 30,000 10,000
Fixed 8,000 40,000 30,000
Total 20,000 70,000 40,000
Net Income (Loss) P20,000 80,000 (20,000)

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Based on the above data, should product line C be continued or eliminated? Justify your answer.

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Sales P200,000

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Variable Costs:
Direct materials 80,000

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Direct labor 50,000
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Manufacturing overhead 15,000
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Selling and Administrative 10,000 155,000
Contribution margin P45,000
Avoidable fixed overhead (60%) 28,000
Avoidable fixed S&E (50%) 21,000 49,000
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Direct contribution margin (P4,000)

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ANSWER:
Product C should be eliminated since the contribution margin is (P45,000) is less than the fixed costs
to be avoided (P49,000). Which means that the direct margin is negative, and the rule was the product
should be eliminated.
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06 Activity 1 *Property of STI

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