RELEVANT COSTING with LINEAR PROGRAMMING

Question 1

1. 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

Answer 1

d. Avoidable costs associated with the segment

Question 2

2. 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

Answer 2

c. P 25,000
Solution: Segment margin = CM – avoidable fixed cost = 20,000 – (50,000 – 5,000) = (P 25,000)

Question 3

3. 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

Answer 3

c. 3,200 units
Solution: Special order margin = Regular sales margin → 4,000 (16 – 8) = x (18 – 8)

Question 4

4. 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

Question 5

5. 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

Answer 5

a. P 830
Solution: Minimum price (with excess capacity) = (455 + 30) + 300 + 45

Question 6

6. 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

Answer 6

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

Question 8

8. 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

Answer 8

d. how well the alternatives help achieve company goals in relation to the costs incurred for these systems