Management Accounting - Relevant Costing/Incremental Analysis

ARAS

Answer the following problems. Round off your answers to two decimal places.

Problem A
Cleveland Cavaliers Co. manufactures Part LBJ for use in its production cycle. Details
regarding Part LBJ are as follows:
Direct Material
P 456,000
Materials Handling Cost
15% of materials cost
Direct Labor Cost per hour
3
Overhead per unit
16
Direct Labor hours
76,000
hours
Nonmanufacturing
Expenses
304,000
Normal
Capacity
38,000 units
Annual Production
38,000 units
Budgeted Fixed Overhead
342,000
Fixed Nonmanufacturing Expenses per unit
3
Miami Heat Co. has offered to sell Cleveland Cavaliers Co. 20,000 units of Part LBJ
for P 52.
Production of 35,000 units or less of any type of product requires fixed
manufacturing expenses of P 171,000. If production exceeds such amount,
additional P 171,000 shall be incurred. The materials handling cost pertain to the
cost of receiving and inspecting incoming materials and other components which
are excluded in the overhead. If the part is outsourced, facilities used to make
20,000 units of Part LBJ could be used to produce 17,000 units of another product,
D-Flash, which sells at P 45 and has variable costs of P 27. Savings of P 105,000 is
expected in outsourcing the Part LBJ.
1. Should the company buy or make the product? What is the net
advantage/disadvantage of buying/making the product?

Problem B
Atlanta Hawks Co. Ltd has manufacturing capacity of 300,000 units per year. Its
single product costs P 200 and sells at P 240. Washington Wizards Co. has offered to
buy 23,000 units at P 195. The company's annual fixed costs are P 24,000,000. It is
estimated that it will sell 290,000 units yearly.
The following cases are independent of each other unless otherwise stated.
2. Assume that the idle capacity could be rented out for P 2,800,000, what
is net advantage/disadvantage of rejecting the special sales order?
3. If the company accepts the special sales, they will have to offer 20%
discount to Boston Celtics Co., one of their regular customers, in its

ARAS

Page 1

Management Accounting - Relevant Costing/Incremental Analysis

ARAS

12,000 units purchase. What decision is advantageous to Atlanta Hawks?

(Accept/Reject) Indicate the net advantage of the decision.

Problem C
Golden State Warriors Co. has 9,000 available direct labor hours. It is producing two
popular products with the following production and costs data:
Stephen
Selling Price
P 50
Direct Materials
11
Direct Labor
10
Factory Overhead at 9/machine hr
10.80
Variable expenses
21
Sales in units
3,000

Curry
P 76
22
15
4.50
15
2,700

Fixed overhead rate is P 2 per machine hour and direct Labor is P 5 per hour.
The following cases are independent of each other unless otherwise stated.
4. At what level in units should the company sell its two products?
5. Disregard the market limit. If the company wants to produce and sell
3,000 units of STEPHEN, at what selling price should it sell CURRY to break
even or earn zero profit?
6. Disregard the direct labor hour capacity limit. If the firm has 6,000
available machine hours, what profit will the company realized?

Problem D
Memphis Grizzlies LLC currently operates three divisions which had operating
results for the fiscal year ended July 31, 20XY.
Sales
Variable Costs
Contribution
Margin
Traceable Costs
Division Margin
Allocated Costs
Profit/(Loss)

ARAS

North Division
P 2,460,000
1,230,000
???

Central Division
P 1,200,000
680,000
???

South Division
P 3,800,000
1,425,000
???

Total
P7,460,000
3,335,000
4,125,000

800,000
???
550,000
???

720,000
???
400,000
???

1,200,000
???
370,000
???

2,720,000
1,405,000
1,320,000
85,000

Page 2

Management Accounting - Relevant Costing/Incremental Analysis

ARAS

Additional information:
One third of the traceable costs of Central or South Division would remain if
either is closed.
One fifth of North Division direct fixed costs will remain if it is closed.
Memphis Grizzlies allocate traceable costs to each store based on machine
hours and square meters of land occupied.
Management estimates that closing Central Division would result in a 7%
decrease in South Division sales and 40% increase in North Division sales.
Some of the materials used in North Division are purchased from Central
Division. Closing Central Division will require outsourcing those materials for
P 450,000. Central Division sells 24,000 pounds of materials yearly to North
Division for P 7.50 per pound.
7. What division/s should Memphis Grizzlies close? What is the resulting
profit of such implementation?
8. Memphis Grizzlies is considering the relocation of Central Division. If
the company do so, it will have to incur total relocation costs of P 300,000.
The management predicts that Central Division's sales and variable costs
would increase by 60% and 20% respectively. However, higher
transportation costs of materials that it sells to North Division will result
to price increase of the materials to P 9 per pound. Should the company
consider relocating the Central Division? What is the incremental profit in
the first year of implementation?
9. What will be the profit in the year after implementation?

Problem E
Los Angeles Lakers Corp. produced three main products. Its production and costs
data are given below:
KOBE
Sales price (per unit)
After Processing
Before Processing
Costs
Before Processing
After Processing
Unit produced and sold

P 300
250

SHAQ

MAGIC
550

530

220
190

200,000
1,000,000 900,000
320,000
1,065,000 1,090,000
2,000
4,000

7,500

10. Which product/s should be processed further to maximize profit? What

is will be the profit if the most profitable decisions are made?
Problem F

ARAS

Page 3

Management Accounting - Relevant Costing/Incremental Analysis

ARAS

San Antonio Spurs had been experiencing a slowdown in business activities in March
and April and is considering a temporary shutdown during those months. The
company's only product has selling price of P 290 and contribution margin of P 200.
Variable marketing expenses, monthly fixed overhead and fixed expenses are P
400,000, 360,000, 210,000 respectively. Total annual sales is P 128,760,000 and
total sales in March and April is 44,000 units. If the company shuts down its
operation, P200,000 monthly security and safety costs and P 160,000 set up costs
will be incurred. In addition, regular fixed overhead and fixed expenses decrease to
40% and 70% respectively.
11. How much is the total shutdown costs?
12. What selling price would make the company indifferent between
shutting down and continuing?
Problem G
Brooklyn Nets Co. has a single product called Deek. The company normally
produces and sells 16,000 Deeks each year at a selling price of P64 per unit. The
company's unit costs at this level of activity are given below:
Direct Materials
Direct Labor
Manufacturing Overhead
Total Variable Costs
Total Period Costs
Total Fixed Costs
Variable Period Costs
Per unit cost

P 320,000
144,000
233,600
576,000
150,400
272,000
38,400
53

13. Assume that Brooklyn Nets has sufficient capacity to produce 24,000
Deeks each year. New York Knicks Co. wants to purchase 5,000 Deeks.
Import duties on the Deeks would be P 2.70 per unit, and costs for permits
and licenses would be P 15,000. The only selling costs that would be
associated with the order would be P 6.40 per unit shipping cost. What is
the per unit break-even price on this order?
14. The company has 500 Deeks on hand that have some irregularities and
therefore considered to be "seconds." Due to the irregularities, it will be
impossible to sell the units at the normal price through regular
distribution channels. What unit cost figure is relevant for determining
minimum selling price?

ARAS

Page 4

Management Accounting - Relevant Costing/Incremental Analysis

ARAS

Suggested answers:
1) BUY, net advantage of 22,000
2) 2,965,000 advantage
3) Reject, advantage of 411,000
4) Stephen - 2,700; Curry - 1,200
5) 44.80
6) 55,650
7) Central Division, 262,750
8) *YES, (105,600)
The company will have incremental loss only in the FIRST YEAR of implementation.
Thereafter, the company would have an annual incremental profit of 194,400
(230400-36000)
9) 279,400
10) SHAQ and MAGIC, 1,995,000
11) 1,142,000
12) 199.975
13) 45.70
14) 9.40

ARAS

Page 5