1

Shelley & Company has 24,000 defective units of a product that cost P8 per unit to manufacture,
and can sold for P4 per unit. These units can be reworked for P2 per unit and sold at their full price
of P12 each. If shelley reworks the defective units, how much incremental net income will result?

Solution:
Sales Revenue after rework 24000 12 288,000.00
Sales Revenue without rework 24000 4 96,000.00
Differential Revenue 192,000.00
Additional Cost 24000 2 48,000.00
Additional Profit 144,000.00

Alternative Question:
What would be more beneficial to the Company, sell the defective units or rework them first?

Rework

Sales Revenue after rework 288,000.00

Additional Cost 48,000.00
Profits for reworked goods 240,000.00

Sales Revenue without rework 96,000.00

 SUNK Cost Past cost

raw material

work in process

finished goods defective or not

 2 A business is operating at 90% capacity and is currently purchasing a part which is being used in its manufacturing o
P15 per unit. The unit cost for the business to make the part is P20, including fixed costs, and P12, not including fixe
30,000 units of the part are normally purchased during the year but could be manufactured using unused capacity,
the amount of differential cost, increase or decrease, from making the part rather than purchasing it?

Solution:
Variable cost to make parts 30000 12 360,000.00
Cost to buy 30000 15 450,000.00
Cost savings if the Company chose to make parts (90,000.00)

Alternative Question:
If the unit cost to make the part is P20 EXCLUDING fixed costs, what would be the better choice?

Variable cost to make parts 30000 20 600,000.00

Cost to buy 30000 15 450,000.00
Cost savings if the Company chose to buy 150,000.00
used in its manufacturing operations for
and P12, not including fixed costs. If
ed using unused capacity, what would be
urchasing it?

RELEVANT COST
VC 12 pesos
FC 8 pesos
 3
Venus Company, a manufacturer of lamps, budgeted its production and sale of 400,000 lamps at P20 per unit for th
budgeted at P8 per unit, and fixed manufacturing costs at P5 per unit. A special order offering to buy 40,000 lamps
April. Venus has sufficient plant capacity to manufacture the additonal quantity of lamps; however, the production
workforce on an overtime basis at an additional cost of P1.50 per lamp. Venus will not incur any selling expenses as
Company would have a unit relevant cost of:

Solution:
Regular Variable Cost 8.00
Overtime Premium 1.50
Relevant Cost 9.50

Follow-up question:
How much would be the additional profits if the Company accepts the special order?

Revenues from special order 40000 11.5 460,000.00

relevant cost 40000 9.5 380,000.00
Additional Profits 80,000.00

Alternative Question 1:
If the Company does not have enough sufficient plant capacity to manufacture the additonal quantity and the comp
unit of lamp, would they accept or reject the special order?

Total
Normal Revenues 40000 20 800,000.00
Revelant Cost 40000 12 480,000.00
Profits 320,000.00

Revenues from special order 40000 11.5 460,000.00

Relevant Cost 40000 8 320,000.00
140,000.00

Normal Revenues are higher, hence it would be better if the company rejects the special order.
000 lamps at P20 per unit for the year. Variable manufacturing costs were
er offering to buy 40,000 lamps for P11.50 each was received by Venus in
mps; however, the production would have to be done by the present
ot incur any selling expenses as a result of the special order. Venus

Special Under Contract

Commitment
40,000
11.50

dditonal quantity and the company incurs variable selling cost of P4 per
 4

Pagkilatan Co. mines three products. Gold Ore sells for P1 million per ton, Variable costs are P600,000 per ton, and
margin for 2021 was P1.2 million. The management of Pagkilatan Co. was considering dropping the mining of Gold
and would be eliminated if the segment was dropped. If Gold Ore were dropped, net income for Pagkilatan Co. wou

Solution:
It would lose the segment margin of P1.2 million.

The amount of fixed expenses were already deducted form the segment margin.

5 AJ Company plans to discontinue a division with a P200,000 contribution to overhead. Overhead allocated to the di
eliminated. Should AJ Company discontinue the division?

Continue Discontinue
Solution:
Contribution Margin 200,000.00
Avoidable Fixed Cost 500,000.00 50,000.00 450,000.00
Controllable Segment Margin (250,000.00) (50,000.00)

Discontinue
are P600,000 per ton, and fixed mining costs are P6 million. The segment
opping the mining of Gold Ore. Only one-half of the fixed expenses are direct
ome for Pagkilatan Co. would

Sales 1M
VC 600K
CM 4,200,000.00
FC 3,000,000.00
Net income 1,200,000.00 Segment Margin

verhead allocated to the division is P500,000, of which P50,000 cannot be

Sales
VC
CM
FC
Net income
 5 FIT Company produces and sells 140,000 units monthly except for the monthsof July and August when when the nu
decline to 10,000 units per month. Management contemplates of temporarily shutting down operations in the mon
the belief that the business will be spared of more losses during the period. If the business temporarily shuts down
amounting to P220,000 per month would still be incurred. Restarting the operations will cost the business P300,000
costs. The business incurs a total of P24 million annual fixed costs allocated evenly over a 12 month period. This fixe
by 60% during the months the operations are shut down.

Other sales and cost data are as follows:

Unit sales price 300.00
Unit Variable production costs 140.00
Unit variable expenses 40.00

Q1: How much is the total shut down cost?

Allocated Fixed Cost 24,000,000.00 1/6 40% 1,600,000.00

Security and Maintenance 220,000.00 2 440,000.00
Restart Up cost 300,000.00
Shut Down Cost 2,340,000.00

Q2: What is the shutdown point?

Fixed cost for 2 months 24,000,000.00 1/6 4,000,000.00 Continue
Shut Down Cost 2,340,000.00 Discontinue
1,660,000.00
Unit Contribution Margin 300.00 140.00 40.00 120.00
Shutdown Point 13833.33333333

Loss from continuing operations is equal shut down cost

Q3 Should the business Continue or Shut down?

Contribution margin 10000 2 120 2,400,000.00
Fixed cost and expenses 4,000,000.00
Loss from continuing operations (1,600,000.00) Continue
Shutdown costs 2,340,000.00 Discontinue
Advantage from continuing operations 740,000.00

Continue
13834 units Continue and discontinue

20,000
 August when when the numberof units sold normally
own operations in the months of July and August with
s temporarily shuts down, security and maintenance
cost the business P300,000 for mobilization and other
12 month period. This fixed cost is expected to drop

Sales
Continue VC
Discontinue CM 120
Continue FC 1660
Income

Discontinue
 6 Baby Company produces a product that can be sold for P250,000 at an intermediate stage. If Baby finishes the prod
will incur P75,000 of additional material costs and another P15,000 in labor and overhead costs. When finished, ba
able to sell the product for P350,000.

Solution Process Sell Additional

Additional Sales 350,000.00 250,000.00 100,000.00
Additional Cost 90,000.00
Additional Profit 10,000.00

Process Further
stage. If Baby finishes the product, they
head costs. When finished, baby will be

Sell Process Further

350,000.00
90,000.00
250,000.00 260,000.00