MAKE OR BUY DECISION

Illustration 11-3:

Relevant cost in Making Relevant cost in Buying

Direct Material 120,000 Purchase price per unit 170
Direct Labor 100,000 No. of parts 2,000
V-FOH 60,000 Purchase Price 340,000
Avoidable F-FOH Ignore
Relevant Cost 280,000

Tinanggal na 'yung fixed cost kasi whether we make or buy, gagastos tayo no'n.
NOTE: Kung anong mas mura, do'n ka.

Exercise 3.
Relevant cost in Making: Relevant cost in Buying
DM 6 Purchase Price per unit 20
DL 8
V - FOH 1
F - FOH Ignore
F - FOH, common but allocated Ignore
Relevant cost in Making 15 Relevant cost in Buying 20

15,000 Units Per Year

Make Buy
DM 90,000 Purchase price per unit 20
DL 120,000 No. of unit produce 15,000
V - FOH 15,000
F - FOH 30,000
F -FOH, common but allocated Ignore
Relevant Costs 255,000 Relevant Costs 300000

But if there is a need on launching new product and there's a segment margin of P65,000

Relevant Costs in Making 255,000 Relevant Costs in Buying 300,000

Segment Margin 65,000
Relevant Costs 320,000 Relevant Costs 300,000

Illustration 4.

Make Buy
V - FOH 12,000 Purchase price 20,000
F - FOH 9,000 F-FOH 3,000
Total Costs 21,000 Total Costs 23,000

If the company chooses to buy, the net operating income would decrease by 2,000

Illustration 5.
Make Buy
DM 120,000 Purchase Price 270,000
DL Ignore F - FOH 30,000
F - FOH 100,000
V - FOH 30,000
Total Costs 250,000 Total Costs 300,000

There is a $1 disadvantage if the company chooses to buy.

ADD OR DROP A PRODUCT LINE / SEGMENT

NOTE: Focus sa Segment Margin, if negative, drop na.

Illustration 11-4
Total Operating Income 134,800
Less: Product C's Segment Margin -60,000
Add: Salaries Expense 40,000
Company's Operating Income 114,800

If the company drop the Product C, the total net operating income will
decrease by 20,000.

Illustraion 2.

Continue Drop
Contribution Margim 25,000 Contribution Margin 25,000
Fixed Costs -50,000 Fixed Costs -21,000
Operating Income
Profit -25,000 Profit 4,000

If the company drop the product, the profit will increase by 4,000.

Illustration 3.

Western
Sales 500,000
Variable costs -200,000
Contribution Margin 300,000
Direct Fixed Costs -150,000
Operating Income 150,000
Allocated Corporate Costs -305,000
Total Operating Income -155,000
Hindi na cinompute 'yung sa Eastern kasi if tinanggal na raw siya, magkano ang net income
ng company nila. E kahit pala umalis or nandyan pa rin 'yung Eastern, magrremain na 305k
yung Corporate Costs. So if tinanggal 'yung corporate costs, western na lang 'yung
mag-aabsorb ng Corporate Costs na 'yon.

Illustration 4.

Continue Discontinue
Contribution Margin 48,000 Contribution Margin 48,000
Fixed Costs -96,000 Fixed Costs -42,000
Operating Income -48,000 Operating Income 6,000

There is an increase of 6,000 if the business discontinue.

Illustration 5.

Continue Discontinue
Contribution Margin 24,000 Contribution Margin 24,000
Fixed Costs -48,000 Fixed Costs -21,000
Operating Income -24,000 Operating Income 3,000

If discontinued, the profit will increase by 3,000

SELL NOW OR PROCESS FURTHER

NOTE: Sinong mas malaking SP, do'n ka.

Illustration 11-5
 A B C
Revenue from further processing 20,000 45,000 15,000
Cost of further processing -25,000 -30,000 -5,000
Profit from further processing -5,000 15,000 10,000
Sell now Process Process

Illustration 2.
Aling Nena Corporation produces three main products. Its production and costs data are given:
Product W G M
Unit sale price before processing 250 530 190
Unit sale price after processing 300 550 220
Cost of separate processing 120,000 65,000 190,000
Units produced and sold 2,000 4,000 7,500
Which of the product should be processed further?

W G M
Sale after processing 100,000 80,000 225,000
Cost of processing further -120,000 -65,000 -190,000
Profit from further processing -20,000 15,000 35,000
Split off Process Process

Exercise 6.
 A B C
Sales 50,000 90,000 60,000
Sales value 80,000 150,000 75,000
Sales after processing 30,000 60,000 15,000
Processing Costs -35,000 -40,000 -12,000
Profit from processing further -5,000 20,000 3,000
Sell now Process Process

SPECIAL SALES PRICING

Illustration 1.

Differential Approach
Sales Revenue [400 x P32] 12,800
Less Incremental Costs:
Manufacturing costs [400 x P24] -9,600
Selling administrative [400 x P1.25] -500
Incremental Profit 2,700

Total Project Analysis:

Did not accept Accept
Sales 80,000 92,800
Variable Costs -53,000 -63,100
Contribution Margin 27,000 29,700
Fixed Costs -19,500 -19,500
Net Income 7,500 10,200
The company's profit will increase by 2,700 if special order was accepted.

Illustration 2.

Did not accept Accept

Sales 1,200,000 1,380,000
Variable costs -600,000 -750,000
Contribution Margin 600,000 630,000
Fixed Costs -450,000 -450,000
Net Income 150,000 180,000

Profit will increase by 30,000

Illustration 3.

Did not accept Accept

Sales 1,500,000 2,850,000
Variable costs -495,000 -1,650,000
Contribution Margin 1,005,000 1,200,000
Fixed costs -495,000 -495,000
Net Income 510,000 705,000

Illustration 4.
Illustration 5.

Do not Accept Accept

Sales 200,000 218,000
Variable costs -148,000 -166,500
Contribution Margin 52,000 51,500
Fixed costs -23,000 -23,000
Net Income 29,000 28,500

at 4,000 at 4,800
Sales 200,000 232,000
Variable costs -148,000 -177,600
Contribution Margin 52,000 54,400
Fixed costs -23,000 -23,000
Net Income 29,000 31,400
CHAPTER 11
SHUT DOWN OR CONTINUE OPERATIONS
Illustration 1.

1. Shutdown Costs
Unavoidable fixed costs 450,000
Additional shutdown cost 20,000
Estimated cost of resuming 75000
Shutdown costs 545,000

2. Shutdown Savings
Fixed cost @ normal op. 600,000
Shutdown costs -545,000
Shutdown Savings 55,000

3. Shutdown point
Fixed Costs if operation continues 600,000
Shutdown Costs -545,000
Total 55,000
Divided by CM 35
Shutdown Point 1,571 books

Illustration 2.
ABC Company now operating below 50% of its practical capacity, expects that the v
8,000 units per month. An operating statement prepared for the monthly sales of 8
Sales 80,000
 Less: Variable costs (8k units at P8) -64,000
Non-variable costs -16,000
Net Income 0

At 4,000 units, should management decide whether to continue operations or shut

cost of P10,000 per month will be incurred? Provide comparative analysis that at 4
loss is lower than P10,000 shut down cost.

Fixed cost if operation continues - Shutdown costs

Contribution Margin per unit

Fixed costs 16,000

Shutdown cost -10,000
6,000
Divided by (P10 - P8) 2
Shutdown Point 3,000 units

at 3,000
Sales 30,000
Variable cost -24,000
Contribution Margin 6,000
Fixed cost -16,000
Net Income -10,000
 A
Sales 80,000
Sales Value -39,370
Profit for processing further 40,630
Further Cost -25,000
Net Income 15,630
Additional Revenue 60,000
Net Income 75,630
RATIONS

actical capacity, expects that the volume of sales will drop below
repared for the monthly sales of 8,000 units shows the following:
her to continue operations or shut down if the shut down
ide comparative analysis that at 4,000 units, the net operating

at 4,000
40,000
-32,000
8,000
-16,000
-8,000
B C Total
108,000 66,000 254,000
-53,150 -32,480 -125,000
54,850 33,520 129,000
-40,000 -25,000
14,850 8,520
36,000 30,000
50,850 38,520