ATENEO DE MANILA UNIVERSITY

JOHN GOKONGWEI SCHOOL OF MANAGEMENT

ACC101: COST ACCOUNTING

INVENTORY VALUATION AND RELEVANT COSTING

PROBLEM SET #4 M.D. WONG
AY 2016-20167 | 1ST SEMESTER

DIRECTIONS: Answer the following questions with solutions in clean A4 sheets of paper; no need to print this
questionnaire. Box your final answers. (Ignore the number in the parenthesis at the start of each problem)
Part I: Short Problems
1. (34-35) The Blade Division of Axe Company produces hardened steel blades. One-third of Blade's 30,000 unit
output is sold to the Forestry Products Division of Axe; the remainder is sold to outside customers. Blades'
estimated operating profit for the year is:

The Forestry Division has an opportunity to purchase 10,000 blades of the same quality from an outside
supplier on a continuing basis. The purchase price would be $1.25.
a. If the Blade Division is now operating at full capacity and can sell all its units to outside customers at the
present selling price, what is the differential cost to Axe of requiring that the blades be made internally
and sold to the Forestry Division?
b. Should the Axe Company allow its Forestry Division to purchase the blades from the outside supplier at
$1.25 per unit?
2. (33) The Regal Baking Company is considering the expansion of its business into door-to-door delivery service.
This would require an additional $12,500 in labor costs per month. Company-owned vehicles now used to make
morning deliveries to restaurants could be used in the afternoons to make the home deliveries. However, it is
estimated that an additional $5,000 would be required per month for gas, oil, and maintenance. It is further
estimated that the home delivery use of the trucks would be allocated 45% of the existing $6,500 fixed vehicle
costs. What is the differential delivery cost per month for expanding into the home delivery market?
3. (32) The following information relates to the Tram Company for the upcoming year.

The cost of goods sold includes $1,200,000 of fixed manufacturing overhead; the operating expenses include
$100,000 of fixed marketing expenses. A special order offering to buy 50,000 units for $7.50 per unit has
been made to Tram. Fortunately, there will be no additional operating expenses associated with the order and
Tram has sufficient capacity to handle the order. How much will operate profits be increased if Tram accepts
the special order?
4. (33) The Regal Baking Company is considering the expansion of its business into door-to-door delivery service.
This would require an additional $12,500 in labor costs per month. Company-owned vehicles now used to make
morning deliveries to restaurants could be used in the afternoons to make the home deliveries. However, it is
estimated that an additional $5,000 would be required per month for gas, oil, and maintenance. It is further
estimated that the home delivery use of the trucks would be allocated 45% of the existing $6,500 fixed vehicle
costs. What is the differential delivery cost per month for expanding into the home delivery market?

ATENEO DE MANILA UNIVERSITY

JOHN GOKONGWEI SCHOOL OF MANAGEMENT
ACC101: COST ACCOUNTING

INVENTORY VALUATION AND RELEVANT COSTING

PROBLEM SET #4 M.D. WONG
AY 2016-20167 | 1ST SEMESTER

5. (32) The following information relates to the Tram Company for the upcoming year.

The cost of goods sold includes $1,200,000 of fixed manufacturing overhead; the operating expenses include
$100,000 of fixed marketing expenses. A special order offering to buy 50,000 units for $7.50 per unit has
been made to Tram. Fortunately, there will be no additional operating expenses associated with the order and
Tram has sufficient capacity to handle the order. How much will operate profits be increased if Tram accepts
the special order?

6. (36-37) The CJP Company produces 10,000 units of item S10 annually at a total cost of $190,000.

The XYZ Company has offered to supply 10,000 units of S10 per year for $18 per unit. If CJP accepts the
offer, $4 per unit of the fixed overhead would be saved. In addition, some of CJP's facilities could be rented to
a third party for $15,000 per year.
a. What are the relevant costs for the "make" alternative?
b. At what price would CJP be indifferent to XYZ's offer?

7. (47) The operations of Blink Corporation are divided into the Adams Division and the Carter Division.
Projections for the next year are as follows:

Operating income for Blink Corporation as a whole if the Carter Division were dropped would be?

ATENEO DE MANILA UNIVERSITY

JOHN GOKONGWEI SCHOOL OF MANAGEMENT
ACC101: COST ACCOUNTING

INVENTORY VALUATION AND RELEVANT COSTING

PROBLEM SET #4 M.D. WONG
AY 2016-20167 | 1ST SEMESTER

8. (48) Bryon Industries manufactures 20,000 components per year. The manufacturing cost of the components
was determined as follows:

An outside supplier has offered to sell the component for $17. If Bryon purchases the component from the
outside supplier, the manufacturing facilities would be unused and could be rented out for $10,000. If Bryon
purchases the component from the supplier instead of manufacturing it, the effect on income would be?
9. (49) Albany Industries produces two products. Information about the products is as follows:

The company's fixed costs totaled $70,000, of which $15,000 can be directly traced to Product 1 and $40,000
can be directly traced to Product 2. The effect on the firm's profits if Product 2 is dropped would be a?
10. (52) Miller Industries has two divisions: the West Division and the East Division. Information relating to the
divisions for the year just ended is as follows:

Common fixed expenses have been allocated equally to each of the two divisions. Miller's segment margin for
the West Division is?
11. (54) Chetek Industries manufactures 15,000 components per year. The manufacturing cost of the components
was determined to be as follows:

Assume Chetek Industries could avoid $40,000 of fixed manufacturing overhead if it purchases the component
from an outside supplier. An outside supplier has offered to sell the component for $34. If Chetek purchases
the component from the supplier instead of manufacturing it, the effect on income would be a?

ATENEO DE MANILA UNIVERSITY

JOHN GOKONGWEI SCHOOL OF MANAGEMENT
ACC101: COST ACCOUNTING

INVENTORY VALUATION AND RELEVANT COSTING

PROBLEM SET #4 M.D. WONG
AY 2016-20167 | 1ST SEMESTER

12. (55) The operations of Superior Corporation are divided into the Northrup Division and the Hawley Division.
Projections for the next year are as follows:

Operating income for Superior Corporation, as a whole, if the Hawley Division were dropped would be?
13. (58) The Winwood Company manufactures two products: Q and T. The costs and revenues are as follows:

Total demand for Product Q is 14,000 units and for Product T is 9,000 units. Machine time is a scarce
resource. During the year, 54,000 machine hours are available. Product Q requires 5 machine hours per unit,
while Product T requires 3 machine hours per unit.
How many units of Products Q and T should Winwood produce?
14. (59) Roswell Inc has 5,400 machine hours available each month. The following information on the company's
three products is available:

If market demand exceeds the available capacity, in what sequence should orders be filled to maximize the
company's profits?
15. (61-62) The Clapton Company manufactures two products: Alpha and Beta. The costs and revenues are as
follows:

Total demand for Alpha is 10,000 units and for Beta is 6,000 units. Machine hours is a scarce resource. During
the year, 50,000 machine hours are available. Alpha requires 4 machine hours per unit, while Beta requires 2.5
machine hours per unit.
a. How many units of Alpha and Beta should Clapton produce?
b. What is the maximum contribution margin Clapton can achieve during a year?
16. (104) Delhoyo Corporation, a manufacturing company, has provided data concerning its operations for
September. The beginning balance in the raw materials account was $37,000. Raw materials purchases during
the month totaled $57,000. Manufacturing overhead cost incurred during the month was $102,000, of which
$2,000 consisted of raw materials classified as indirect materials. The direct materials cost for September was
$63,000. What is the ending balance raw materials?

ATENEO DE MANILA UNIVERSITY

JOHN GOKONGWEI SCHOOL OF MANAGEMENT
ACC101: COST ACCOUNTING

INVENTORY VALUATION AND RELEVANT COSTING

PROBLEM SET #4 M.D. WONG
AY 2016-20167 | 1ST SEMESTER

17. (105) Gest Inc. has provided the following data for the month of November. The balance in the Finished Goods
inventory account at the beginning of the month was $49,000 and at the end of the month was $45,000. The
cost of goods manufactured for the month was $226,000. The actual manufacturing overhead cost incurred
was $74,000 and the manufacturing overhead cost applied to Work in Process was $70,000. The adjusted cost
of goods sold that would appear on the income statement for November is?
18. (106) Assume that the following events occurred at a division of Admiral Enterprises for the current year.
--- Purchased $900,000 in direct materials.
--- Incurred direct labor costs of $520,000.
--- Determined that manufacturing overhead was $820,000.
--- Transferred 75% of the materials purchased to Work-in-Process Inventory.
--- Completed work on 60% of the work in process. Costs assigned equally across all work-in-process.
--- The inventory accounts have no beginning balances. All costs incurred were debited to the appropriate
account and credited to Accounts Payable.
Compute the transfers-in, transfer-out, and ending balance of the Work-in-Process Inventory account.
19. (108) Smith and Blarney Refiners began business on July 1. The following operations data are available for July
and the one product the company produces:

All production at Smith and Blarney is sold as it is produced (i.e., there are no finished goods inventories).
Required:
(a) Compute cost of goods sold for July.
(b) What is the value of the work-in-process inventory on July 31?
20. Scranton produces a cleaning solvent. Production of 200,000 gallons was started in February, 170,000 gallons
were completed. Material costs were $138,220 for the month while conversion costs were $116,380. There
was no beginning work-in-process; the ending work-in-process was 60% complete.
Required:
(a) What is the total cost of the product that was completed and transferred to finished goods?
(b) What is the value of the ending work-in-process?

ATENEO DE MANILA UNIVERSITY

JOHN GOKONGWEI SCHOOL OF MANAGEMENT
ACC101: COST ACCOUNTING

INVENTORY VALUATION AND RELEVANT COSTING

PROBLEM SET #4 M.D. WONG
AY 2016-20167 | 1ST SEMESTER

Part 2: Long Problems

#1 Hi-Speed Electronics manufactures low-cost, consumer-grade computers. It sells these computers to various
electronics retailers to market under store brand names. It manufactures two computers, the Lightning 2.0 and the
Lightning 2.4, which differ in terms of speed, memory, and hard drive capacity. The following information is
available:

The average wage rate is $30 per hour. The plant has a capacity of 32,000 direct labor-hours.
A nationwide discount chain has approached Hi-Speed with an offer to buy 2,000 Lightning 2.0 computers and
2,000 Lightning 2.4 computers if the unit prices are lowered to $350 and $450, respectively.
Required:
a. If Hi-Speed accepts the offer, how many direct labor-hours will be required to produce the additional
computers?
b. How much will the profit increase (or decrease) if Hi-Speed accepts this proposal? All other prices will remain
the same.
Suppose that the customer has offered instead to buy up to 3,000 each of the two models at $350 and $450,
respectively.
c. How many of each product should be manufactured and sold? Assume current demand will not be affected by
the special order. Also assume that the company cannot increase its production capacity to meet the extra
demand.
d. How much will the profits change if this order is accepted instead?

#2 Carson Corporation produces and sells three products. The three products, Alpha, Beta, and Gamma, are sold in
a local market and in a regional market. At the end of the first quarter of the current year, the following income
statement (in thousands of dollars) has been prepared:

Management has expressed special concern with the regional market because of the extremely poor return on
sales. This market was entered a year ago because of excess capacity. It was originally believed that the return on
sales would improve with time, but after a year, no noticeable improvement can be seen from the results as
reported in the above quarterly statement. In attempting to decide whether to eliminate the regional market, the
following information has been gathered:

ATENEO DE MANILA UNIVERSITY

JOHN GOKONGWEI SCHOOL OF MANAGEMENT
ACC101: COST ACCOUNTING

INVENTORY VALUATION AND RELEVANT COSTING

PROBLEM SET #4 M.D. WONG
AY 2016-20167 | 1ST SEMESTER

All administrative costs and fixed manufacturing costs are common to the three products and the two markets and
are fixed for the period. Remaining marketing costs are fixed for the period and separable by market. All fixed costs
have been arbitrarily allocated to markets.
Required:
a. Assuming there are no alternative uses for the Carson Corporation's present capacity, would you recommend
dropping the regional market? Why or why not?
b. Prepare the quarterly income statement showing contribution margins by products. Do not allocate fixed costs
to products.
c. It is believed that a new product can be ready for sale next year if the Carson Corporation decides to go ahead
with continued research. The new product can be produced by simply converting equipment presently used in
producing product Gamma. This conversion will increase fixed costs by $40,000 per quarter. What must be the
minimum contribution margin per quarter be for the new product to make the changeover financially feasible?

#3 Brewer Corp. is considering dropping its talking dog product line due to continuing losses.
Revenue and cost data for the talking dog line for the past year follow:

If the talking dog is discontinued, then Brewer could avoid $110,000 per year in fixed costs.
Required:
(1.) What is the change in annual operating income from discontinuing the talking dog product line?
(2.) Assuming all other conditions stay the same, at what level of annual sales of the talking dog (in units) should
Brewer be indifferent to discontinuing or continuing the product line?
(3.) Suppose that if the talking dog is dropped, the production and sale of other products would increase so as to
generate a $15,000 increase in the contribution margin received from the other products. If all other conditions
are the same, what is the change in annual operating income from dropping the talking dog?