1. The material used to produce the new product is highly specialized.

A
manufacturer of this material is offering to sell it at P8 per unit to the company.
Oldcastle is currently manufacturing the material with the following costs:
Material cost (per unit)
Direct Materials
Direct Labor
Variable manufacturing overhead
Fixed manufacturing overhead

P5.00
2.00
2.00
1.00

Assuming that all fixed costs related to the material will be saved if the company
bought it from the manufacturer, should Oldcastle buy or continue to make the
material?
Oldcastle should buy the material. The total manufacturing cost that would be incurred
will be a greater amount from the buying price.
To get the total manufacturing costs, add all the direct materials, direct labor and
manufacturing overhead costs. All relevant costs will be included. It was stated that all of
its fixed manufacturing overhead will be saved if the company accepted the offer to buy,
hence it could be concluded that these costs are classified as traceable, not common,
meaning that there are no irrelevant costs that need to be added in buying.

Direct Materials
Direct Labor
Variable
manufacturing
overhead
Fixed manufacturing
overhead
Total Cost per unit

Make
Php 5.00
2.00
2.00
1.00
Php 10.00

Buy
Php 8.00

Taking everything into account, it would be beneficial for the company to buy the said
highly specialized material, for it would decrease the cost to Php 8.00, giving them a
savings or net advantage of Php 2.00 per unit bought.

2. During the first year of operations, the company Oldcastle determined that their
plant capacity is not enough to cater to the demand of the new product because
most of their capacity is used to manufacture an old product. Details of the old
product are as follows:
Manufacturing cost

Direct Materials
Direct Labor
Variable manufacturing overhead
Marketing cost
Variable

P20.00
9.00
12.00
8.00

The old product is being sold for P100 per unit. To produce the old product, the
company needs to allot 4 hours per unit while to produce the new product, the
company needs to allot 8 hours per unit. Assuming an unlimited demand for both
products, which product should the company produce first?
Selling Price
Variable Costs
Contribution Margin
No. of hrs needed per
unit
CM per hour

Old Product
Php 100.00
(49.00)
Php 51.00
/4

New Product
Php 170.00
(35.00)
Php 135.00
/8

Php 12.75

Php 16.875

Selling price of the new product is greater than the old one, but comparing these
two would never be the best basis for there were different costs for each kind.
Given the situation that on the first year, the old product needs 4 hours while the
new product needs 8 hours, it could be seen that production in four hours is
greatly beneficial than producing in eight hours, assuming that all other factors
remain the same. Nevertheless, the case was different, since the new product has
a relatively greater amount in contribution margin.
Greater contribution margin means that the company will be profitable in
producing the said product. Since the demand is unlimited, basing the answer in
the number of hours seems the logical thing to do.
All things considered, it is best for the company to produce the new product first,
rather than the old one. The contribution margin of the old product (12.75), is
lower to the new ones margin (16.875).