RELEVANT COSTING with LINEAR PROGRAMMING Flashcards
1
Q
- A segment should be kept if segment revenues exceed
a. Fixed costs
b. Segment variable costs
c. Segment variable costs and fixed costs
d. Avoidable costs associated with the segment
A
d. Avoidable costs associated with the segment
2
Q
- Bacardi plans to shut down a division with a P 20,000 contribution margin. Overhead allocated is P 50,000, P 5,000
of which cannot be eliminated. What is the increase in income by discontinuing the division?
a. P 5,000
b. P 20,000
c. P 25,000
d. P 30,000
A
c. P 25,000
Solution: Segment margin = CM – avoidable fixed cost = 20,000 – (50,000 – 5,000) = (P 25,000)
3
Q
- Tanduay currently sells 10,000 units of product M for P 18.00 each. Variable costs are P 8.00 per unit. A discount
store has offered P 16.00 for 4,000 units of product M. If Tanduay accepts the special order, it will lose some sales
at the regular price. Determine the number of units Tanduay could lose before the order became unprofitable.
a. 2,000 units
b. 2,667 units
c. 3,200 units
d. 5,000 units
A
c. 3,200 units
Solution: Special order margin = Regular sales margin → 4,000 (16 – 8) = x (18 – 8)
4
Q
- Firms may be asked to accept a special order of their product for a reduced price if:
a. The order is small
b. Excess capacity exists
c. It can be concealed from the government
d. The plant is producing at maximum capacity
A
5
Q
- Johnnie Company is approached by a customer to fulfill a large one-time-only special order for a product similar to
one offered to regular customers. The following per unit data apply for sales to regular customers:
Direct materials P 455
Direct labor 300
Variable manufacturing support 45
Fixed manufacturing support 100
Total manufacturing costs P 900
Mark-up (60%) 540
Targeted selling price P 1,440
Johnnie has excess capacity. If Johnnie accepts the order, direct materials cost will increase by P 30 per unit. What
is the minimum acceptable price of this one-time-only special order?
a. P 830
b. P 900
c. P 930
d. P 1,470
A
a. P 830
Solution: Minimum price (with excess capacity) = (455 + 30) + 300 + 45
6
Q
- Walker Company uses 8,000 units of a certain part in production each year. Presently, this part is purchased from
an outside supplier at P 12 per unit. For some time now, there has been idle capacity in the factory that could be
utilized to make this part. The following are the unit costs of making this part internally:
Direct materials P 3.25
Direct labor 2.75
Variable manufacturing overhead 2.00
Fixed manufacturing overhead 5.00
The above fixed manufacturing overhead represents an allocation of existing costs to this part. However, there would be an increase of P 12,000 in fixed manufacturing overhead costs for the salary of a new supervisor. If Walker
outsources the part from the outside supplier, what is the effect on a per-unit basis?
a. P 2.50 savings
b. P 3.50 savings
c. P 1.00 loss
d. P 2.50 loss
A
d. P 2.50 loss
Solution: Relevant cost to make = 3.25 + 2.75 + 2 + (12,000 ÷ 8,000) vs. Relevant cost to buy = 12
7
Q
A
8
Q
- The primary criterion when faced with a resource allocation decision is:
a. cost minimization
b. achievement of organizational goals
c. reduction in the amount of time required to perform a particular job
d. how well the alternatives help achieve company goals in relation to the costs incurred for these systems
A
d. how well the alternatives help achieve company goals in relation to the costs incurred for these systems