SISC/QSF-OCD-007

Rev 005 6/5/14 Date: _______________

Midterm Examination
First Semester, AY 2020-2021
STRATEGIC COST MANAGEMENT

Name: ____________________________________ Student Number:

_______________
Course: ___________________________________ Subject:
______________________

Integrity is one’s refusal to cheat.

My actions define my character.

_______________________
Signature of Student

______________________________________________________________________
_____
Write the capital letter answer choice on the given sheet provided.
1. Plainfield Company manufactures part G for use in its production cycle. The cost
per unit for 10,000 units of part G are as follows:

Direct materials P 3
Direct labor 15
Variable overhead 6
Fixed overhead 8
Total P32

Verona Company has offered to sell Plainfield 10,000 units of part G for P30 per
unit if Plainfield accepts Verona’ offer, the released facilities could be used to save
P45,000 in relevant costs in the manufacture of part H. In addition, P5 per unit of
the fixed overhead applied to part G would be totally eliminated. What alternative
is more desirable and by what amount is it more desirable?

Alternative Amount
a. Manufacture P10,000
b. Manufacture P15,000
c. Buy P35,000
d. Buy P65,000
1. C
What alternative make or buy, is more desirable and by what amount?
An excellent way of determining which alternative is more desirable is by
comparing each alternative's relevant costs. The total unit variable production
costs is P24 (i.e., P3 + P15 +P6). Fixed costs are expenses which change from an
alternative to another and is therefore relevant. An analysis of the relevant costs
of the alternatives, make or buy, is shown as follows:
Make Buy
 Purchase price (10,000 units x P30)
P300,000
Variable production costs (10,000 x P24) P240,000
Avoidable fixed overhead (10,000 x P5) P 50,000
Savings from released facilities
(45,000)
Net relevant costs P290,000 P255,000
Savings (P290,000-255,000) P 35,000

2. Great Electronics is operating at 70% capacity. The plant manager is considering

making component 501 now being purchased for P110 each, a price that is
projected to increase in the near future. The plant has the equipment and labor
force required to manufacture the component. The design engineer estimates that
each component requires P40 of direct materials and P30 of direct labor. The plant
overhead is 200% of direct labor peso cost, and 40% of the overhead is fixed cost.
A decision to manufacture component of

a. P26 c. P(20)
b.P16 d. P4

2. D.
The gain (loss) for each component if component 501 is manufactured by the
company. It is a case of make or buy decision. The alternative that gives the lower
relevant cost will be selected A relevant costs analysis is shown below:
Cost to make Cost to buy
Purchase price
P110,000
Direct materials 40.00
Direct labor 30.00
Variable overhead (P30x200%x60%) 36.00
Unit relevant cost P106.00
P110,000
Advantage of making, per unit (P110-P106) P 4.00
3. Efren corporation uses part BIX in the assembly of a major product line. The cost
of produce one BIX is presented below:

Direct materials P4,000

Material handling (20% of direct materials) 800
Direct labor 32,000
Overhead 48,000
Total manufacturing costs 84,800
Materials handling which is not included in manufacturing overhead represents the
direct variable costs of the receiving department that are applied to direct materials
and purchased components on the basis of their costs. The company’s annual
overhead budget is one-third variable and two-thirds variable fixed. Ten units of
BIX at a unit price of P60,000. If products BIX is purchased from Zim, the released
facilities would be used to produce product CZX and generate a profit of P208,000.
a.P208,000 c.P512,000
b.P302,000 d.P16,000
3. D.
The net opportunity cost of the better alternative, make or buy. Whichever
alternative that would give a lower relevant costs would be the better choice in the
short-run analysis of maximizing profit, the relevant cost analysis is presented
below:

Cost to MAKE Cost to BUY

Purchase price P60,000
Direct materials 4,000
Materials handling (20%xP4,000) 800
(20%xP4,000) 12,000
Direct labor 32,000
Variable overhead (48,000 x 1/3) 16,000
Profit from product CZX if the part is
purchase (P208,000/10) (20,800)
Unit relevant costs P52,000 P51,200
X No. of units needed 10 units 10 units
Total relevant cost P528,000 P512,000
Less: Cost to buy P512,000
Net opportunity costs making the parts P16,000
4. Stanton manufacturers a particular computer component. Manufacturing cost per
units are as follows:

Direct materials P50

Direct labor 500
Variable overhead 250
Fixed overhead 400
Total manufacturing costs P1,200

Fredix, Inc. has contracted Syanton with an offer to sell 10,000 of the component
for P1,100 per unit. If Syanton accepts the proposals, P2,500.000 of the fixed
overhead will be eliminated. Should syanton make or buy the component and why?

a.Buy due to savings of P1,000,000.

b. Make due to savings of P500,000.
c. Buy due to savings of P2,500,000.
d. Make due to savings of P3,000,000.

4.B

Should Syanton make or buy a component part?

The total unit variable costs of production (which includes direct materials, direct
labor, and variable overhead) is P800 (P50 + P500 + P250). Below is the relevant
costs analysis:

Purchase costs (10,000 x P1, 100) Make Buy

Variable mfg. Costs (10,00 x P800) P8,000,000 P11,000,000
Avoidable fixed overhead 2,500,000
Total relevant costs P10,500,000 11,000,000
Less: Cost to make 10,500,000
Net advantage of making P21,500,000

5. The Blade Division of Dan Corporation produces hardened steel blades. One-third
of the Blade Division’s output is sold to the Lawn Products Division of Dana, the
remainder is sold to outside customers. The Blade Division’s estimated sales and
standard cost data for the fiscal year ending June 30, 2013, are as follows:

Lawn Products Outsiders

Sales P15,000 P40,000
Variable costs (10,000) (P20,000)
Fixed costs (3,000) (6,000)
 Gross margin P 2,000 P14,000
Unit sales 10,000 20,000

The Lawn Production Division has an opportunity to purchase 10,000 identical

quality blades from an outside supplier at a cost of P1.25 per unit on a continuing
basis. Assume that the Blade Division cannot sell any additional products to
outside customers. Should Dana allow its Lawn Products Division to purchase the
blades from the outside supplier, and why?

A. Yes, because buying the blades would save Dana Company P500.
B. No, because making the blades would save Dana Company P1,500.
C. Yes, because buying the blades would save Dana Company P2,500.
D. No, because making the blades would save Sana Company P2,500.

5.D
Should Dan allow its Law Products Division to purchase the blades from the
outside supplier
and why?

The unit variable cost to make is P1,00 (i.e., P10,000 / 10,000 units). The outside
supplier offering to at P15. It would be advantage not to allow Lawn Products
Division to buy blades from an outside supplier and save P2,500, as follows:

Relevant cost to make (10,000 units x P1.00 P10,000

- Relevant cost to buy (10,000 x P1,25) 12,500
Advantage of making the blades P2,500

6. The following standard costs pertain to a component part manufactured by Atoy

Company:

Direct materials P2
Direct labor 5
Factory overhead 20
Standard cost per unit P27

Factory overhead is applied at P1 per standard machine hour. Fixed capacity cost
is 60% of applied factory overhead, and is not affected by any “make or buy”
 decision. It would cost P25 per unit to buy the part from an outside supplier. In the
decision to “make or buy'', what is the total relevant unit manufacturing cost to be
considered?

A. P2
B. P15
C. P18
D. P27

6.B

Total relevant cost of manufacturing.

In make or buy decisions, the relevant costs of manufacturing includes variable
production costs, avoidable fixed costs, and all other incremental costs of manufacturing.
Given the data in this problem. The relevant cost of manufacturing is P15 computed as
follows:

P15 computed as follows:

Direct materials P2
Direct labor P5
Variable overhead (P20 x 40%) 8
Relevant manufacturing unit cost P15

7. Red Nose Company makes hoses for its sprayers. Unit costs applicable to these
hoses are:

Direct materials P35.00

Direct labor 20.00
General and Administrative cost 16.00
Fixed manufacturing overhead 21.00
Variable manufacturing overhead 9.00

Five thousand units (5,000) are required for the year. The space that is used for
the hose production can be used as a warehouse and will save a rental cost of
P48,000 per year. The hoses can be bought for P70.00 a piece. Should Red Nose
Co. buy or make the hoses? Why?

A. Buy because there will be savings of P3.60 per hose.

B. Make, there will be a savings of P6.00 per hose.
 C. Make, because there will be savings of P31.00 per hose.
D. Buy, because there will be savings of P31.00 per hose

7.A

Should the company make or buy the hoses?

In the short-term profit analysis, whichever alternative that gives a lower total relevant
cost will be chosen to generate savings and increase the income of the business. The
relevant costs analysis is shown below:

Cost to make Cost to buy

Units purchase price P P 70.00
Unit direct materials 35.00
Unit direct labor cost 20.00
Unit variable manufacturing overhead 9.00
Savings in rental (48,000/5,000) (9.60)
Net relevant costs P 64.00 P60.40
Less: Cost to buy P 60.40
Net advantage of buying per unit P 3.60

The company should buy the hoses and save an amount of P3.60 per hose or a total
savings of P18,000 (i.e., 5,000 x P3.60). The fixed manufacturing overhead is not
expected to change between the alternative and is considered irrelevant in the analysis.
Avoidable fixed overhead is, however, to be included in the make or buy costs analysis.
The general and administrative cost, since the problem is silent, is considered as fixed
and is also an irrelevant cost.

8. The Blue Plate Company is operating at 50% capacity producing 100,000 units
ceramic plates a year. With the economic boom that the country is expected to
have in the coming year, the company plans to utilize 75% of capacity. Part of the
manufacturing process is hand-painting which has a variable cost of material at
P4.50 and labor at P5.50 per plate. This painting process has variable overhead
and is set at P500 per 100 plates. No increase in fixed factory overhead is expected
even with the substantial increase in production. An offer to sub-contract the
incremental hand painting job was a given at P10.50 per plate but the company
will have to lease an equipment at P10,000 annual rental. The plate sell for P50.00
a piece at the contribution margin rate of 45% Should Blue Plate Company sub-
contract? Why?

A. No because the company will lose P135,000

 B. Yes, because the company will save P165,000
C. Yes, because the company will earn P15,000 more.
D. No, because there is no benefit for the company.

8.C

Should the company subcontract the additional units to be produced?

The company is presently operating at 50% capacity producing 100,000 units. It

wants to increase its production. To 75%. One of the production processes in
producing the product may be subcontracted at. P10.50 per unit. The company
should rent equipment for P10,000 if the process is sub-contracted. The costs and
short-term profit analyses are as follows.

A. Production at 75% capacity (100,000/50% x 75%) 150,000 units

Less: Present production at 50% capacity 100,000 units
Incremental units to be produced 50,000 units

B. Relevant costs analysis: Cost to make Cost to

sub-contract

Materials (50,000 x P4.50) P225,000

Labor (50,000 x P5.50) 275,000
Variable overhead (50,000 x P1.00) 50,000
Sub-contract price (50,000 x P10.50) P 525,000
Equipment rental 10,000
Total relevant costs 550,000 P 535,000
Less: Relevant costs to sub-contract 535,000
Savings from sub-contracting P 15,000

The company should sun-contract the additional 50,000 units and earn a
savings of P15.000

9. Part BX is a component that Motors & Engines Company uses in the assembly of
motors. The cost to produce one BX is presented below:

Direct material P 4,000

Materials handling (20% of direct materials) 800
Direct labor 32,000
Overhead (150% of direct materials) 48,000
Total manufacturing costs P 84,400
 Material handling which is not included in manufacturing overhead, represents the
direct variable costs of the receiving department that are applied to direct materials
and purchased components on the basis of their cost. The company’s annual
overhead budget is one-third variable, and two-thirds fixed. Motors and Engines
Company offers to supply BX at a unit price of P60,000. Should the company buy
or manufacture part BX?

A. Buy, due to advantage of P24,800 per units

B. Manufacture, due to advantage of P7,200
C. Buy, due to advantage of P12,800 per units
D. Manufacture, due to advantage of P19,200 per unit.

9.D
Should the company buy or make part BX?

Below is the relevant costs analyses:

Make Buy
Purchase P 60.000
Direct Materials P 4,000
Materials handling (20% x P 4,000) 800
(20% X P20,000) 12,000
Direct Labor 32,000
Variable overhead (1/3 x P48,000) 16,000
Total relevant costs P52,800 P72,000
Less: Relevant costs to make 52,800
Net advantage of making P19,200

The fixed overhead is irrelevant in the analysis because it remains to be incurred

regardless of decision to be made. Materials handling cost is relevant because it
changes from one option to another.

10. Essence Producers, Inc., manufactures various scents out of Philippine flowers
and plants. It also manufactures exotic oils that it subsequently uses in the scents
production. The cost per unit of measure for 15, 000 units of exotic oils are as
follows:

Direct materials P20

Direct labor 34
Variable factory overhead 24
Unavoidable fixed factory overhead 32
Total P110
 Extra Pills, Inc. offered Essence to supply 15,000 units of measure of the exotic oil
for P1,260,000. Assuming the facilities for exotic oils have no alternative use,
essence Producers, Inc., should.

A. Continue to produce exotic oils at P1,170,000 relevant costs against purchase

cost of P1,260,000
B. Produce 7,500 units and buy 7,500 units from Xtra Oils to save P300,000.
C. Buy from Xtra Oils, Inc. at P1, 260,000 against cost to produce of P1,650,000
or savings of P390,000.
D. Produce 7,500 units and buy 7,500 units from Xtra Oil save P240,000

10.A

A decision to make or buy a product

To decide whether to make or buy a part, the net relevant costs of making and
buying should be tabulated and compared. The alternative that results to lower
relevant costs would be the better alternative. In this case, the relevant cost
analysis, shall be:

Relevant costs of making (15,000 x P78) P1,170,000

Relevant costs of buying 1,260,000
Net advantage of making P90,000

11. Union Company manufactures plugs used in its electrical gadgets at a cost of P108
per unit that includes P24 of fixed overhead. It needs 30,000 of these plugs yearly,
and Divisive Corp. offers to sell these items to Union at P99 per unit. If the union
decides to purchase the plugs, P180, 000 of the annual fixed overhead applied will
be eliminated, and the company may be able to rent the facility previously used for
manufacturing the plugs. If the union purchases the plugs but does not rent the
unused facility, the company would.
A. Save P6.00 per unit
B. Lose P18.00 per unit
C. Save P9.00 per unit
D. Lose P9.00 per unit

11.D
 Effect on company’s profit if the company purchases the plugs but does not rent
the unused facility.
Make Buy
Unit purchase price P 99
Unit variable production cost (108-P24) P 84
Avoidable fixed overhead P180,000/30,000 units 6
Net relevant units costs P 90 P 99
Net advantage P 9

The company would be losing production capacity. At times, it buys the same
product from a third party. Below are pertinent information:

12. Maeburg Inc. has excess production capacity. At times, it buys the same product
form third party. Below are pertinent information.

Selling price per unit P70.00

Fixed cost per unit 20.00
Variable cost per unit 35.00

The most it should pay for buying this product it currently makes would be the
A. Selling price of P70.
B. Total variable cost of producing the product of P35.00 per unit
C. Total variable cost per unit of P35.00 plus the reduced fixed cost per unit after
accounting for the effects of the added volume.
D. Total cost of production or P55.00 per unit.

12.B

The most (maximum amount) that a company should pay for buying a product that
it currently makes.

The maximum amount that a company should pay for a product that it also makes
currently should at least equal to incremental cost plus opportunity cost attendant
to making the product. Since the company has excess capacity, the maximum
amount that the company should be willing to pay at an outside supplier for a
product that it currently makes should not exceed is variable cost of production
which amounts to P35, hence, choice-letter “b” is correct.

Choice-letter “a” is correct because buying the product at P70 per unit would entail
an additional cost of P35 (i.e, P70-P35) and would be definitely unfavorable on the
part of the company. Choice letter “c” is incorrect because fixed costs are assumed
to be unchanged from one level of production to another. And if ever fixed costs
 are reduced on account or savings from fixed costs should be treated as deduction
in arriving at the maximum amount to be paid to the supplier. Choice-letter “d” is
also incorrect because the total cost of production includes fixed costs and are
considered irrelevant, it does not change, and does not affect the decisions.

13. The ABC Company manufactures components for use in producing one of its
finished products. When 12,000 units are produce, the full cost per unit is P35,
separated as follows:

Direct materials P5
Direct Labor 15
Variable overhead 10
Fixed overhead 5

The XYZ Company has offered to sell 12,000 components to ABC for P37 each. If
ABC accepts the offer, some of the facilities currently being used to manufacture
the components can be rented as warehouse space for P40,000. However, P3 of
the fixed overhead currently applied to each component would have to be covered
by ABC’s other products. What is the differential cost to the ABC Company of
purchasing the components from the XYZ Company?

A. P 8,000
B. P 20.000
C. P 24,000
D. P 44,000

13.B

The differential cost of purchasing the component.

The unit variable cost is P30. The avoidable fixed overhead is P2 (i.e., P 5 - P 3)
The relevant costs of making and buying are as follows:
Make Buy
Purchase price (12,000 x P 37)
P444,000
Variable production costs (?12,000 x P30) P360,000
Avoidable fixed overhead (12,000 x P2) 24,000
Rental income (
40,000)
 Net relevant costs P384,000 P404,000
Savings (P404,000 - P384,000) P 20,000

The differential cost, as used here, refers to the difference in the net relevant costs
of
producing and purchasing the part.

14. Listed below are company’s monthly unit costs to manufacture and market a
particular
product.

Manufacturing cost:

Direct materials P2.00

Direct labor 2.40
Variable indirect 1.60
Fixed indirect 1.00

Marketing cost:

Variable 2.50
Fixed 1.50

The company must decide whether to continue making the product or buy it from
an outside
supplier. The supplier has offered to make the product at the same level of quality
that the
company can make it. Fixed marketing would be unaffected, but variable marketing
costs
would be reduced by 30% if the company were to accept the proposal. What is the
maximum amount per unit that in the company can pay the supplier without
decreasing its operating profit?

A. P8.50
B. P6.75
C. P7.75
D. P5.25

14.B

The maximum amount per unit that a company should pay its supplier without
decreasing
its operating profit.
 The maximum amount per unit that it should be paid to outside supplier should be
the
net unit cost of making the part. The net relevant cost of making is P6.75 computed
as follows:

Units variable production costs (P2 + P2.40 + P1.60) P6.00

In increase in variable expense (P2.50 x 30%) 0.75
Net relevant cost of making P6.75

The company should not pay more than its cost of producing the part.

Question 29 and 30 are based on the following information. S business need a

computer
application that can be either developed internally or purchased. Suitable software
from a vendor costs P29,000. Minor modifications and testing can be conducted
by the
system staff as part of their regular workload.

If the software is developed internally, a system analyst should be assigned full

time,
and a contactor would assume the analysts responsibilities. The hourly rate
for the regular analyst is P25. The hourly rate for the contractor P22. The contractor
would occupy an empty office. The office has 100 square feet, and occupancy cost
is P45 per square foot.

Computer time is charged using a predetermined rate. The organization has

sufficient excess
computer capacity for either software development or modification/testing of the
purchased software. Other related data are as follows:

Internal Purchased
Development Software

System analyst time in hours

Development 1000 N/A
Modification and testing N/A 40
Computer charges P 800 P250
Additional hardware purchased P3,200 N/A
Incidental supplies P 500 P200
 15. When applying the cost benefit approach to a decision, the primary criterion is
how
well management goals will be achieved in relation to costs. Costs include all
expected.

A. Variable costs for the courses of action but not expected fixed costs
because only the expected variable costs are relevant.
B. Incremental out of pocket costs as well as all expected continuing costs that
are common to all the alternative courses of action.
C. Future costs that differ among the alternative courses of action plus all
qualitative factors that cannot be measured in numerical terms.
D. Historical and future costs relative to the courses of action including all
qualitative factors that cannot be measured in numerical forms.

15.C

Cost used in cost benefit approach.

Costs used in cost benefits analysis are relevant costs. They include future costs
that differ
from the alternative courses of action, choice letter “c” is correct
Choice letter “a” is incorrect because fixed costs that relate to the future and may
change
between alternative courses of actions are also relevant. Choice letter “b” is
incorrect
because costs that are common to all alternative courses of action do not differ
and
are irrelevant. Choice letter “d” is definitely incorrect because historical costs
are always irrelevant in decision making. They cannot be changed and therefore
do not vary
between alternatives.

16. Based solely on the cost figures presented, the cost of developing the
computer
application will be

A. P3,500 less than acquiring the purchased software package.

B. P500 less than acquiring the purchased software package.
C. P1,550 more than acquiring the purchased software package.
D. P3,550 more than acquiring the purchased software package.

16.A
 The cost of developing the computer application.
The choice given indicate the cost of internally developing the software that should
be compared with the cost of purchasing it. The relevant costs of the alternatives
are:

Internal
Development Purchasing
Purchase price
P29,000
Systems development (1,000 hrs. x P22) P22,000
Additional hardware 3,200
Incidental supplies 500
200
Net relevant costs P25,700 P29,200
Savings (P29,200 - P25,700) P 3,500

The cost of systems modification and testing is an allocated cost from the regular
workload of the system analyst, and is irrelevant. Computer charge are also
allocated costs (or transfer costs) and do not require additional expenditures,
given idle capacity. These costs are also irrelevant

Question 31 through 33 are based on the following information. Richardson Motors

uses production of large diesel engines. The cost to manufacture one unit of T305
is
presented below.

Direct material P2,000

Materials handling (20% of direct material cost) 400
Direct labor 16,000
Manufacturing overhead (150% of direct labor) 24,000
Total manufacturing cost P42,000

Material handling, which is not included in manufacturing overhead, represents

the direct variable costs of the receiving department that are applied to direct
materials and purchased components on the basis of their cost. Richardson’s
annual manufacturing overhead is one third variable and two third fixed. Simpson
Casting,
one of Richardson’s reliable vendors, has offered to supply T305 at a unit price
Of P30,000.
 17. If Richardson Motors purchases the ten T305 units from Simpson Casting, the
capacity
Richardson used to manufacture these parts and would be idle. Should Richardson
decide to
purchase the parts from Simpson, the out of pocket cost per cost per unit of T305
would.

A. Decrease P6,400
B. Increase P 3,600
C. Increase P 9,600
D. Decrease P4,400

17.C

The out of pocket cost per unit if Richardson purchases T305 part.
The out of pocket cost, as referred to in this problem, is the additional cost per unit
incurred by the company if they purchased the part, compute as follows:

Cost to Make Cost to buy

Purchase price P30,000
Direct materials P 2,000
Materials handling 400 6,000 (20%x
P30,000)
Direct labor 16,000
Variable overhead (1/3xP24,000) 8,000
Net relevant costs P26,400 P36,000
Savings P9,600

The company would pay P9,600 more per unit if it purchases the part.

18. Assume Richardson Motors is able to rent all idle capacity for P50,000 per
month
if Richardson decides to purchase the 10 units from Simpson Castings,
Richardson’s monthly
costs for T305 would

A. Increase P46,000
B. Decrease P64,000
C. Increase P96,000
D. Decrease P34,000
 18.A

Effect on the monthly cost if the parts are purchased and the idle capacity is rented
for
P50,000 per month.
Analysis the relevant cost of making and buying 10 units of T305 would result as
follows:

Cost to make Cost to buy

Relevant costs before rental income
(P26,400 X 10 units) P264,000
(P36,000 x 10 units) P360,000
Rental income (50,000)
Net relevant costs P264,000 P310,000
Savings P 46,000

The company has decided to purchase the parts and shall therefore pay more by
P46,000.

19. Assume the rental opportunity does not exist and Richardson Motors could use the
idle capacity to manufacture another product that would contribute P104,000 per month.
If Richardson chooses to manufacture the ten T305 units in order to maintain quality
control, Richardson’s opportunity cost is

A. P68,000
B. P88,000
C. P 8,000
D. P(96,000)

19.C
The opportunity cost if the company manufactures the parts.
Again, the best way is to compare the costs of making and buying as follows:

Cost of making Cost of buying

Relevant costs before other items P264,000 P360.000
Contribution margin from another
Product if the parts are purchased (104,000)
Net relevant costs P264,000 P256,000
Savings P8,000

It would be advisable for the company to buy the parts. However, since the company
decided to make the parts, it has to be spent more. The savings of P8,000 that could have
been derived had the company buys the part is the opportunity cost of the decision to
make.

20. Pixie Company produces Components 6417 for use in one of its electronic gadgets.
Normal annual production for the its is 100,00 units. The cost per 100 unit lot of the part
are as follows:

Direct materials P520

Direct labor 200
Manufacturing overhead:
Variable 240
Fixed 320
Total manufacturing costs per 100 units P1,280

Bobbie Inc, has offered to sell Pixie ll 100,000 units it will need during the coming
year for P1,200 per 200 per 100 units. If Pixie accepts the offer from Bobbie, the
facilities used to manufacture Component 6417 could be used in the production of
Components 8275. This change would save Pixie P180,000 in relevant costs. In
addition a P200,000 cost item included in fixed overhead is specifically related to
part 6417 and would be eliminated. Pixie should.

A. Buy components 6417 because of P300,000 savings

B. Buy components 6417 because of P140,000 savings
C. Continue producing component 6417 because of P40,000 savings
D. Continue producing component 6417 because of P60,000 saving

20.B

Make buy component 6417

In the short term analysis of deciding whether to make or buy a component part,
the
an alternative that gives a lower relevant cost should be chosen. The relevant cost
analysis for a make or buy decision is presented below:

Cost to make Cost to buy

Purchase price (1,000 x P1,200) P1,200,000
Direct materials (1,000 x P520) P520,000
Direct labor (1,000 x P200) 200,000
Variable overhead (100,000 x P240) 240,000
Savings from buying (180,000)
Avoidable fixed overhead 200,000
 Total relevant costs 1,160,000 P1,020,000
Less: Cost of buying 1,020,000
Net advantage of buying P140,000

Component 6417 should be purchased to earn a savings of P140,000 per annum.

The
unavoidable (allocated) fixed costs is not considered in the analysis because it is
not a
relevant costs.

21. Excellent writer produces and sells boxes of signing pens for 1,000 per box. Direct
materials are P400 per box and direct manufacturing labor averages P75 per box variable
overhead is P25 per box and fixed overhead is P25 per box and fixed overhead is
P12,500.00 per year. Administrative expenses, all fixed, run P4,500,000 per year, with
sales commissions of P100 per box. Production is expected to be 100,000 boxes, which
is met every year. For the year just ended, 75,000 boxes were sold. What is the
inventoriable cost per box using variable costing?

a. P770 c. P475
b. P500 d. P625

21. B
The inventoriable cost per box using the variable costing.
The unit inventoriable cost (or unit product cost) under the variable costing includes the
costs of direct materials, direct labor, and variable overhead.
The unit product cost using the variable costing method is P500(i.e., direct materials of
P400+direct labor of P75+variable overhead of P25

22. For P1,000 per box, the Majestic Producers, Inc. produces and sell delicacies. Direct
materials are P400 per box and direct manufacturing labor averages P75 per box.
Variable overhead is P25 per box and fixed overhead is P12,500,000 per year.
Administrative expenses, all fixed run P4,500,000 per year, with sales commissions of
P100 per box. Production is expected to be 100,000 boxes, which is the inventoriable
cpst per box using absorption costing.

a. P625 c.P770
b. P500 d.P670

22.A
The inventoriable cost per box using absorption costing.
Under the absorption costing method, the product (or inventoriable) costs include direct
materials, direct labor, variable overhead and fixed overhead. Therefore, the unit cost is
P625, computed as follows:

Direct materials P400

Direct labor 75
Variable overhead 25
Fixed overhead (P12,500,000/100,000) 125
Unit product cost P625

23. compute for the inventory value under the direct costing method using the data given
units unsold a the end of the period 45,000; raw materials used, P6.00 per unit; raw
materials inventory, beginning, P5.90 per unit; direct labor, P3.00 per unit; variable
overhead per unit, P2.00 per unit; indirect labor for the month, P33,750. Total fixed costs,
P67,500.

a. P16.90 c.P17.45
b. P11.00 d.P19.15

23.B
The cost of the ending inventory under the direct costing method
The cost of the ending inventory comprises that of the variable production costs, such as:

Direct materials P6.00

Direct labor 3.00
Variable factory overhead 2.00
Unit cost-direct costing P11.00
Indirect labor is not included because it is a fixes cost and is not a product cost under the
direct costing method. The total fixed costs are not also included because fixed costs are
period costs under the direct costing method. The material of P6.00 is included in the cost
of ending inventory because it is assumed that the company uses the FIFO method in
accounting its material flows.

24. With a production of P200,000 units of product A during the month of June, Bucayao
Corporation has incurred costs as follows:

Direct materials P200,000

Direct labor used 135,000
Manufacturing overhead:
Variable 75,000
Fixed 90,000
Selling and administrative expenses:
 Variable 30,000
Fixed 85,000
Total: 615,000

Under absorption costing, the unit cost of product A was:

a. P2.20 c.P 3.25

b.P2.50 d.P2.05

24. B
The unit cost under absorption costing
The inventoriable costs under absorption costing include direct materials, direct labor,
variable overhead, and fixed overhead, as follows:

Direct materials(200,000/200,000 units) P1,000

Direct labor(P135,000/200,000 units) 0.675
Variable overhead(P75,000/200,000 units) 0.375
Fixed overhead(P90,000/200,000 units) 0.450
Total Unit cost P2500

Alternatively, the unit costs may be determined as follows:

Total production costs
(200,000+P135,000+P75,000P90,000) P500,000
/production in units P200,000
Unit cost P 2.50

Question 24 and 25 are based on the following data: Lina Company produced 100,000
units of product Zee during the month of June. Costs incurred during June were as
follows:

Direct materials P100,000

Direct labor 80,000
Variable manufacturing overhead 40,000
Fixed manufacturing overhead 50,000
Variable selling and general expenses 12,000
Fixed selling and general expenses 46,000
Total P327,000

25. What was product Zee’s unit cost under absorption costing?
a. P3.27 c.P2.32
b. P2.70 d.P1.80
25.B
The unit cost under absorption costing.
The unit product cost using absorption costing method includes all variable production
costs (i.e., direct materials, direct labor, and variable overhead) and fixed manufacturing
overhead. Selling and general expenses, both variable and fixed, are period costs. The
unit product cost under absorption costing is P2.70 determined as follows:

Direct materials (P100,000/100,000 units) P1.00

Direct labor (P80,000/100,000 units) 0.80
Variable overhead (P40,000/100,000 units) 0.40
Fixed overhead (P50,000/100,000 units) 0.50
Unit product cost-absorption costing (P270,000/100,000 units) 2.70

26. What was product Zee’s unit cost under variable (direct) costing?
a.P2.82 c.P2.32
b.P2.70 d.P2.20

26. D
The unit cost under direct costing.
The unit product cost using variable costing includes only the variable production costs
of direct materials, direct labor, and variable overhead. Fixed overhead, variable
expenses, and fixed expenses are treated as period costs. The unit cost under variable
costing is P2.20 computed as follows.

Direct materials P1.00

Direct labor 0.80
Variable overhead 0.40
Unit product cost-variable costing P2.20

27. LY & Company completed its first year of operations during which time the following
information were generated:

Total units produced 100,000

Total units sold 80,000 @P100/unit
WIP ending inventory none
Cost:
Fixed cost: P1.2 million
Selling and administrative P0.7 million
Per unit variable cost
Raw materials P20.00
Direct labor 12.20
Factory overhead 7.50
Selling and administrative 10.00

If the company used the variable (direct) costing method, the operating income would be

a.P2,100,000 c.P2,480,000
b.P4,000,000 d.P3,040,000

27.A
The operating income using the variable (direct) costing method
The total od unit variable costs and expenses is P50 (i.e., P20+P12.50+P7.50+P10). The
analysis in computing operating income is shown below:
Sales (80,000 units x P100) P8,000,000
Variable costs and expenses (80,000 units x P50) (4,000,000)
Fixed costs and expenses (1,900,000)
Operating income – variable costing P2,100,000

28. Gordon company began its operations on January 1, 2013, and produces a single
product that sells for P10 per unit. Gordon uses and actual (historical) cost system. In
2013, 100,000 unit were produced and 80,000 units were sold. There was no work-in-
process inventory at December 31, 2013. Manufacturing costs and selling and
administrative expenses for 2013 were as follows:
Fixed costs Variable costs
Raw materials P2.00/unit produced
Direct labor P1.25/unit produced
Factory overhead P120,000 P0.75/ unit produced
Selling and administrative P 70,000 P1.00/ unit produced

What would be Gordon’s operating income for 2013 under the variable (direct) costing
method?

a.P114,000 c.P234,000
b.P210,000 d.330,000

28.B
The operating income under variable costing.
Under the variable costing system, the operating income is contribution margin less fixed
costs and expenses. The total unit variable costs and expenses is P
(i.e.,P2+P1.25+P.75+P1) and the unit contribution margin is P5.00 (i.e., P10.00-P5.00)
total fixed costs and expenses amount to P190,000. The operating income is P210,000,
as shown in the following computation:

Contribution margin (80,000 units x P5) P400,000

Fixed costs and expenses 190,000
Operating income P210,000

29. What is the estimated income from manufacturing using the absorption costing
method?
a. P3,750.000
b. P3,450,000
c. P3,550,000
d. P3,750,000

29.D
The amount of income from manufacturing under the absorption costing method.
Manufacturing income is the difference between sales and variable costs and fixed
overhead. The unit production cost under absorption costing method is P20 (i.e.,
P500,000/25,000 units). The manufacturing income under the absorption costing method
is:

Sales (250,000 x P35) P8,750,000

Cost of goods sold (250,000xP20) (5,000,000)
Manufacturing income (Gross profit) P3,750,000

30. What is the estimated income from manufacturing using the variable costing method?
a. P3,150,000 c.P3,450,000
b. P3,550,000 d.P3,750,000

30.C
The estimated income from manufacturing using the variable costing method.
Using variable costing model, manufacturing income is sales less variable cost and fixed
overhead. The variable cost component of the finished goods inventory on December 31,
2012 is P200,000 (i.e., P500,000 – P300,000). Therefore, the unit variable cost is P8.00
(i.e., P200,000/25,000 units) and the unit fixed costs is P12.00 (i.e., P300,000/25,000
units) the manufacturing income shall then be determined as follows:

Sales (250,000 x P35) P8,750,000

Variable CGS (250,000xP20) (2,000,000)
Fixed factory overhead(275,000xP23 (3,300,000)
Manufacturing income P3,450,000

The budgeted fixed factory overhead shall be determined based on normal capacity,
275,000 units. Fixed factory overhead is treated as a period cost, an expense, under the
variable costing method. Hence, all the fixed overhead is automatically treated as a
deduction from sales.

31. Quality is achieved more economically if the company focuses on

a. Appraisal costs. c. Internal failure costs.
b. Prevention costs. d. External failure costs.

31.B
The focus pf a company in economically achieving quality
Quality is best achieved by instituting quality systems from the very start of the process
to avoid errors and increased customer satisfaction. The most logical focus of quality
should be in the prevention costs, choice-letter ‘b’ is correct. It avoids the most damaging,
uneconomically, and unfavorable consequences of errors and other failure costs.
Choice-letter ‘a’ is incorrect because appraisal costs do not support error prevention
system but is more attuned to detecting the effectiveness of a system. Choice-letters ‘c’
and ‘d’ are incorrect because failure costs are the more expensive and damaging costs
of quality.
Questions 28 and 29 are based on the following information. Yahoo corporation is a highly
automated manufacturing firm. The vice president of finance, Ferdinand, has decided that
traditional standards are inappropriate for performance measures in an automated
environment. Labor is insignificant in terms of the total cost of production and tends to be
fixed. Materials quality are considered more important than minimizing material cost, and
customer satisfaction is the number one priority. As a result, delivery performance
measures have been chosen to evaluate performance. The following information is
considered typical of the time involved to complete orders:

Wait time
From order being placed to start of production 10.0 days
From start of production to completion 5.0 days
Inspection time 1.5 days
Process time 3.0 days
Move time 2.5 days

32. What is the delivery cycle time for this order?

a. 7 days
b. 12 days
c. 15 days
d. 22 days
32. D
The delivery cycle time.
Delivery cycle time (DCT) measured the total length of time waited by the customer from
the date he placed an order to the date he received his order. Delivery cycle time includes
the leas time form supplier and the manufacturing cycle time, as follows:

DCT = Lead time + Manufacturing cycle time

= 10 days+12 days=22 days

33. Quality costs indices are often used to measure and analyze the cost of maintaining
a given level quality. One example of quality cost index, which uses a direct labor base is
computed as

Quality cost index = (total quality costs/Direct labor costs)x 100

The following quality costs data were collected for May and June:

May June
Prevention costs P4,000 P5,000
Appraisal costs 6,000 5,000
Internal failure costs 12,000 15,000
External failure costs 14,000 11,000
Direct labor costs 90,000 100,000

Based upon these cost data, the quality cost index.

a. Decrease 4 points for May to June.
b. Was unchanged from May to June.
c. Increased 10 points from May to June.

33.A
The quality cost index based on direct cost.
The quality cost index (QCI) based on DL costs is total quality costs divided by DL costs.
total quality costs DL costs. total quality costs, appraisal costs, internal failure costs, and
external failure costs. by comparison, we may derive the following information for the
months of May and June, as follows:

May June
Total quality costs P36,000 P36,000
DL costs 90,000 100,000
QC index (P36,000/P90,000) 40%
(P36,000/P100,000) 36%
Decrease in QC index (40%-36%) 4%
34. In 2013, a manufacturing company instituted a total quality management (TQM)
program producing the following report:
2012 2013 %change
Prevention costs 200 300 +50
Appraisal costs 210 315 +50
Internal failure costs 190 114 -40
External failure costs 1200 621 -48
Total quality costs 1800 1350 -25

On the basis of this report, which one of the following statements is most likely correct?
a. an increase in conformance costs resulted in a higher-quality product and a decrease
in nonconformance costs.
b. an increase in inspection costs was solely responsible for the decrease in quality costs
c. quality costs such as scrap and rework decreased by 48%
d. quality costs such as returns and repairs under warranty decreased by 40%

34. A
The most likely true statement that could be derived from the cost of quality report as
presented.
Conformance costs include prevention costs and appraisal costs. Nonconformance costs
include internal failure costs and external failure costs. by interpreting the data contained
in the cost of quality report, as conformance costs increased by 50% nonconformance
costs decreased from 40% to 48%.

35. The following information is available for Rocky Company for its 2 fiscal years;

Year 1 Year 2
Statistical process control 70,000 100,000
Quality audits 35,000 50,000
Training 40,000 80,000
Inspection and testing 100,000 150,000
Rework 90,000 50,000
Spoilage 80,000 55,000
Warranties 180,000 80,000
Estimated customer losses 800,000 450,000
Net sales 3,000,000 3,200,000

In its cost of quality report for the year 2, Rocky will disclose that the ratio of
a. Conformance costs to total quality costs increased from 17.56% in year 1 to 37.44 in
year 2.
b. Nonconformance costs to total quality costs increased from 62.56% in year 1 to 82.44%
in year 2.
c. Nonconformance costs to net sales equaled 19.84% in year 1.
d. Conformance cost to net sales equaled 8.17% in year 2.

35.A
The ratio that is disclosed on the given information.
Conformance costs include prevention costs and appraisal costs. specially, statistical
process control, quality audits, training, and inspection and testing are conformance
costs. Total quality costs include the conformance costs and rework, spoilage, warranties,
and estimated customer losses.
The ratio od conformance costs to total quality costs are computed as follows:

Year 1 Year 2
Conformance costs
(70,000+35,000+40,000+100,000) 245,000
(100,000+50,000+80,000+150,000)
Total quality costs
(245,000+90,000+80,000+180,000+800,000) 1,395,000
(300,000+50,000+55,000+80,000+450,000) 1,015,000
Ratio of conformance costs over total quality costs 17.56% 37.44%

36. The underlying philosophy of “just in time” inventory system is

A. That the status of quantities on hand must be periodically reviewed where high value
or critical items are examined more frequently that low cost or non-critical items.
B. It is a quest toward toward continous improvement in the environment conditions that
necessitate inventories
C. That quantities of most stock are subject to definable limits
D. That it is impractical to give equal attention to all stock items, hence the need to classify
and rank according to their cost significance

36. B
A true statement that pertains to the underlying philosophy of the “just in time” inventory
system.
Just in time (JIT) inventory system was developed to speed up accurate operating
processes through the use of breakthroughs in electronics and other technology. It aims
to eliminate inventory levels. Reduce supplier to a number of reliable sources and
increase efficiencies and savings. Hence, choice better “b” is correct.
Choice letter “a” refers to ABC inventory system where goods are classified according to
their movement and cost. Choice letter “c” relates to mini max inventory system where
inventory levels are subject to defined limits. Choice letter “d” is a description of the
traditional inventory costing.

37. Companies that adopt just in time purchasing system often experience
A. An increase in carrying costs.
B. A reduction in the number of supplier
C. A greater need for inspection of goods supplier
D. Less used for linkage with a vendor’s computerize order entry system.
37. B
An experience of companies adopting JIT purchasing system.
Just in time (JIT) purchasing system aims to receive delivery of materials just in time they
are needed and complete finished goods just in time for their delivery to customer. This
system requires precise timing of activities from vendor’s perspective to the company’s
shipping department. To do this, system must be streamlined where non valued added
activities are eliminated, manufacturing cycle time is shortened, supplier’s lead time is
avoid, and goods are completed in conformity with customer’s specifications. This system
operates in an environment of trust where vendors are allowed to have access over the
company’s database of production schedules, and in an extended fashion, the company
is allowed to have access on the sales order schedule of customers, this system uses
electronic technology (i.e., electronic data interchange) to have access on timely
information allows deliveries to be made on time, and reduces inventory balance to zero
or at the lowest possible balance. Consequently, vendors tend to be reduced as only the
reliable and dependable ones are retained. Hence, choice letter “b” is correct. Choice
letter “a” is incorrect because under the JIT system inventory level is greatly reduced
thereby reducing also carrying costs. Choice letter “c” is incorrect because inspection of
goods as they arrive is minimized on the basis of integrity, reliability, and dependability of
suppliers. Choice letter “d” is incorrect because under JIT system there is a need for
closer and great linkages to be maintained between the supplier and the customer
especially in terms of access over the production needs and schedules of the customer.
38. The benefits of a just in time system for raw materials usually include.
A. Elimination of nonvalue-adding operations.
B. Increase in the number of supplier, thereby ensuring competitive bidding.
C. Maximization of the standard delivery quantity, thereby lessening the paperwork for
each delivery.
D. Decrease in the number of deliveries required to maintain production.

38. A
A benefit derived from JIT system,
One of the benefits that could be derived from JIT system is the streamlining of
manufacturing operation where non value added activities are eliminated to shorten the
manufacturing cycle and yield greater customer satisfaction.
Choice letter “b” is incorrect because JIT results to reduced number of suppliers who
could survive the rigid requirements of timely delivery, error free materials conformity to
design specification, and other features of best services. Choice letter “c” and “d” are
incorrect because JIT result to frequent deliveries as the need arises with the
consequence of increasing the volume of coordination and paperwork to be done.
39. Companies that adopt just in time purchasing system often experience
A. A reduction in the number of supplier
B. Fewer deliveries from suppliers
C. A greater need for inspection of goods as the goods arrive.
D. Less need for linkage with a vendor’s computerized order entry system.
39. A
An experience of companies adopting JIT purchasing system.
Under the JIT system, operational schedules are integrated from the vendor’s
perspectives to the customer perspectives. Ideally, to prevent errors from the very starts,
supplier must also be managed in terms of their adherence to JIT environment (or quality
environment). The consequence of this is a significant reduction in the number of
suppliers that do not meet the rigid dependability, and quality criteria that are important in
working a JIT system
Choice letter “b” is incorrect because deliveries from suppliers are expected to be more
frequent due to substantial reduction in inventory level. Choice letter “c” is incorrect
because regular inspection may now be eliminated, as suppliers are highly trusted to
deliver those that the business specifically wants, otherwise they will be excluded in
participating in the JIT environment. Choice letter “d” is incorrect because linkages with
vendors and customers should be more pronounced, permanent and trusting than before,
with the aid of the computerized order entry system.
40. Bell Company changed from a traditional manufacturer philosophy to just in time
philosophy. What are the expected effects of this change on Bell’s inventory turnover and
inventory as a percentage of total assets reported on Bell’s balance sheet?
Inventory turnover Inventory percentage
A. Decrease Decrease
B. Decrease Increase
C. Increase Decrease
D. Increase Increase

41. Which of the following statement about a balanced scorecard is incorrect?

a. A primary purpose of a balanced scorecard is to give managers a way o
forecasts future performance.
b. In a balanced scorecard, measurements should be directly linked to
organizational strategy and values.
c. A balanced scorecard can be used at multiple organizational level by
redefining the categories and measurements.
d. Using the balanced scorecard approach, an organization evaluates
managerial performance based on a single ultimate measure of
operating results, such as residual income.

42. The balanced scorecard translates an organization’s mission and strategy into
operational objectives and performance measures for four different perspectives.
Which of the following is not among those perspectives?
a. Financial perspective
b. Customer perspective
c. Environmental perspective
d. Learning and growth perspective
43. On a balanced scorecard, which of the following would be most appropriate to
measure customer service?
a. Corporate financial profits
b. On-time delivery
c. On-time production
d. Decrease in re-work cost of defective units

44. On a balanced scorecard, which of the following is not an appropriate measure of

internal business process performance?
a. Delivery cycle time
b. Number of customer complaints
c. Quality costs
d. Manufacturing cycle efficiency

45. On a balanced scorecard, which of the following would be most appropriate to

measure financial performance?
a. Return on investment
b. Ratings from customer surveys
c. Number of new customers
d. Percentage of repeating customers

46. It is the difference between realization and sacrifice, where realization is what the
customer receives and sacrifice is what is given up in return.
a. Revenue growth c. Customer profitability
b. Strategy d. Customer Value

47. A primary characteristic of a performance management system is

a. Efficiency of application to all the employees of the firm.
b. Consistency at all levels in the organization.
c. Adaptability to differing situations in the organization.
d. Flexibility to delay rewards even if performance objectives have already
been met.
(Management Advisory Services, Rodelio S. Roque, Performance
Measurements)
 48. Claveria Company’s current production process produces 10,000 units of output
with 2,500 labor hours per day. Thus, productivity is 4, considering that productivity
is defined as the ration of outputs to the inputs used.
Accordingly, the present production process can be redesigned to produce 12,600
units of output requiring 3,000 labor hours per day.
Redesigning the process would
a. Cause no change in productivity.
b. Decrease productivity by 5%.
c. Increase productivity by 5%.
d. Increase productivity to 0.20.

ITEMS 49-50 ARE BASED ON THE FOLLOWING INFORMATION:

Total factor productivity is computed by dividing the units of output by the cost of
all inputs. It varies with input prices, quantities, input mix, and output levels. It is
computed for purposes of control and performance evaluation.
Assume that Rosales Company produced 1,152 units of its product Y last month.
The inputs to the production process of product Y were:
Material A 360kgs @ P1.20 per kg P 432
Material B 240kgs @ P2.20 per unit 528
Direct labor 240 hours @P12 per hour 2,880

Total cost of inputs P3,840

49. The total factor productivity for Rosales Company’s product Y is

a. 3.20 per kilo. c. 4.80 per hour.
b. 4.80 per unit. d. 0.30 per peso input.

50. If a supervisor’s primary responsibility in the production of product Y is employee

supervision, and his/her productivity is measured based on output per labor hour,
such supervisor’s productivity measure is
a. 3.20 units per kilo. c. 4.80 per hour.
b. 4.80 units per piece. d. 0.30 per peso input.
 51. Diliman Republic Publishers, Inc. is considering replacing an old press that cost
P80,000 six years ago with a new one that would cost P2,250,000 Shipping and
installation would cost an additional P200,000 the old press has a book value of
P150,000 and could be sold currently for P50,000 The increased production of the
new press would increase inventories by P40,000, accounts receivable by P160,000
and accounts payable by P140,000, Diliman Republic’s net initial investment for
analyzing the acquisition of the press assuming a 35% income tax would be.
A. P2,450,000
B. P2,425,000
C. P2,600,000
D. P2,250,000

51. B
The net cost of investment.
The net cost of investment includes the purchase price (net of discount) together with
all incidental costs of acquisition and operations plus or minus opportunity costs
assuming a decision on whether to replace or retain an old asset, the costs analysis
will be:
Added to the cost of investment Deducted from the cost of
investment
1. Net purchase price 1. Proceeds from disposal of old
asset
2. Incidental acquisition, installation 2. Tax savings from loss on sale of
old

Asset.
3. Additional working capital 3. Tax savings from avoided
repairs.
4. Additional tax paid to gain on disposal
of the old asset.
5. Additional tax paid on savings from
avoided repairs.
Given the data on the problem, the net cost of investment is:

52. Regal industries us replacing a grinder purchased 5 years ago for P15,000 with a new
one costing P25,000 cash. The original grinder is being depreciated on a straight-line
basis over 15 years to a zero salvage value. Regal will sell this old equipment to a third
party over P6,000 cash. The new equipment will be depreciated on a straight-line basis
over 10 years to a zero salvage value. Assuming a 40% marginal tax rate, regal’s net
cash investment at the time of purchase if the old grinder is sold and the one purchased
is
A. P19,000 C. P17,400
B. P15,000 D. P25,000
52. C
The net cash investment at the time of purchase of a new grinder
The net cost of investment, for capital budgeting purposes, includes the following items:
Net purchase price P25,000
Net proceeds from sales of old grinder (
6,000)
Tax savings from loss on sale of old grinder (P4,000 x 40%) (
1,600)
Net cost of investment
P17,400
Purchase price should always be ref

lected at net of discount, whether taken or not taken. The proceeds from sale of old
grinder is a cash inflow, so deducted from cost of investment which is naturally an outflow.
A loss of P4,000 resulted from the sale of the old grinder. That is, net sales price of P6,000
less the carrying value of P10,000 (i.e., P15,000 10/15). The gain or loss on disposal of
an old asset, by itself, has nothing to do with the computation of net cost of investment.
The tax effects of gain or loss on sale, however, affects in the computation of the cost of
investment. The tax savings of P1,600 (i.e., P40,000 x 40%) generated from the loss on
sale of old equipment is an inflow, hence, a deduction from the net cost of investment. In
case, there is a gain on sale of asset, this will result to additional tax payment, which shall
be added to the cost of new investment.
53. Lawson Inc. is expanding its manufacturing plant, which requires an investment of P4
million in new equipment and plant modifications. Lawson’s sales are expected to
increase by P3 million per year as are a result of the expansion. Cash investments in
current assets average 30% of sales; accounts payable and other current liabilities are
10% of sales. What is the estimated total investments for this expansions?
A. P3.4 million C. P4.6 million
B. P4.3 million D. P5.2 million

53. D
The expected annual cash flow to the company resulting from the project.
Net cash inflows are net income add back depreciation expense. As fallows:
Contribution margin (P050,000 x 60%) P30,000
- Fixed costs 10,000
- Depreciation expense 5,000

Income before income taxes 15,000

- Income tax (40%) 6,000

Net income 9,000

Add back: Depreciation expense 5,000
Net cash inflows P14,000
The depreciation expense is assumed to the not been include in the fixed cost.
Alternatively, net cash inflows is equal to:
Cash flows before tax (P30,000- P10,000) P20,000
- Tax [(P20,000 – P5,000) X 40] 6,000
- Cash flows after tax P14,000

54. Nakane Company is planning to purchase a new machine for P500,000. The new
machine is expected to produce cash flows from operations, before income taxes, of
P135,000 a year in each of the next five years. Depreciation of P100,000 a year will be
charge to income for each of the next five years. Assume that the income tax rate is 40%.
The payback period would be approximately

A. 2.2 years C. 3.7 years

B. 3.4 years D. 4.1 years

54. D

The payback period

When cash flows are uniform, payback period is computed by dividing cost of investment
over net cash inflows. The given cash flows are before taxes. The net cash inflows are
still to be calculated as follows:
 Cash flows before taxes P135,000

- Depreciation expense 100,000

Income before income tax 35,000

- Income tax (40%) 14,000

Net income 21,000

+ Depreciation expense 100,000

Net cash inflows P121,000

The payback period is 4.1 years (i.e., P500,000/P121,000)

55. The sweets, Etc., Inc. plans to undertake a capital expenditure requiring P2 million
cash outlay. Below are the projected after-tax cash inflows for the five-year period
covering the useful life. The company’s tax rate is 35%

Year P000

1 600
2 700
3 480
4 400
5 400

The founder and president of the company believes that the best gauge for capital
expenditures is cash payback period and that the recovery period should not be more
than 75% of the useful life of the project or the asset. Should the company undertake the
project?

A. No, since the payback period is 4 years or 80% of the useful life of the project.
B. Yes, since the payback period is 3.55 years or 71% of the useful life of the project.
C. No, since the payback period extends beyond the life of the project.
 D. Yes, since the payback period is 4 years and still shorter than the useful life of the
project.

55. B

The decisions as to whether undertake the project or not using the payback period as
criterion.

Payback period (also called as “breakeven time”) indicates the length of time before an
investment cost is fully recovered. The problem gives an unequal (irregular) cash inflows
after tax. Payback period is then determined by getting the cumulative cash inflows until
such time that it equals the net cost of investment (P2 million)

Annual net cash Cumulative Payback

Year Inflow, after tax Cash flows Period

1 P 600,000 P 600,000 1.0

2 700,000 1,300,000 1.0

3 480,000 1,780,000 1.0

4 400,000 2,000,000 0.55

Payback period

*[(P2,000,000 – P1,780,000) / 400,000)]

The remaining P220,000 cash (P2 million – P1,780,000) is expected to come from the
cash flows in the 4th year. That is why the fraction of a year after the 3 rd year but before
the 4th year is P220,000 divided by P400,000 or 0.55. Hence, the payback period is 3.55
years.

56. The payback reciprocal is an estimate of the internal rate of return. The bravo Inc. is
considering the acquisition of a merchandise picking system to improve customer service.
Annual cash returns on investment cost of P1.2 million is P220,000. Useful life is
estimated at 8 years. The company’s cost of capital is 14% and income tax rate is 35%.
Calculated bravo, Inc.’s payback reciprocal for this investment:

A. 20.5% C. 11.9%

B.18.3% D. 22.2%

56. B

The payback reciprocal

Payback reciprocal (PR) is a capital budgeting technique that measures the rate of return
on investment cash-wise. It does not consider the time value of money and is computed
as follows:

Payback Reciprocal = 1/Payback period.

The PR rate indicates the percentage of annual cash return of the investment
made. The higher the PB rate, the better it would be.

First, let us compute the payback period then, the payback reciprocal payback
period in then, the payback reciprocal, payback period is net cost of investment divided
by annual cash inflows. The payback period in this problem is 5:45 years (i.e.,
P1,200,000/220,000) The payback reciprocal is 18.3% (i.e., 1/5.45)

57. Mark company purchased a new machine on January 1 of this year for an amount of
P90,000 with an estimated useful life of 5 years and a salvage value of P10,000. The
machine will be depreciated using the straight line method. The machine is expected to
produce cash flows from operations. Net of income taxes, of P36,000 a year in each of
the next 5 years. The new machine’s salvage value is P20,000 in years 1 and 2 and
P15,000 in years 3 and 4. What will be the bailout period for this new machine.
A 1.4 years
B. 2.2 years
C. 1.9 years
D. 3.4 years
57. C
The bailout period.
The payback bailout period is computed as follows:
Net cash inflows Cash to date Salvage value Total cash Payback
bailout
years
Period
01 P36,000 P36,000 P20,000 P56,000 1
02 36,000 72,000 20,000 90,000
0.9
1.9 yrs.
The fraction of the payback period in the second year of operations is computed a
[P90,000 – P36,000 – P20,000)/P36,000]. This indicates that the needed cash in the
second year amounting to P54,000 is recovered from the cash generated in the second
year.

58. The Hablot Inc. is planning to spend P600,000 for a machine that it will depreciate on
a straight line basis over a ten year period with no terminal disposal piece. The taxes what
is the accounting rate of return on the net initial investment?
A. 5%
B. 12%
C. 10%
D. 15%
58. C
The accounting rate of return (ARR) on the net initial investment.
ARR is equal to net income over original investment. The net income is not readily

Give but the annual cash flows from operations of P120.000 is given. Income tax is
ignored. The ARR on original investment is:
59. Rod Santos has agreed to the immediate down payment of P1,000 but would like the
note for P4,000 to be payable in full at the terms of this note. Would be an 8% discount
rate. The present value of this note would be.
A. P2,940
B. P3,313
C. P3,940
D. P2,557

59. A
The present value of the note
The note, with a face value of P4,000 will be receive in sum at the end of the fourth year.
Therefore, the present value of the note is P2,940 (i.e., 4,000 x 0.7350). The 0.7350 is
the present value of single payment at 8%, at the end of fourth year. This value maybe
computed using your calculator or by deriving it from the preset value factor of annuity
table at 8% as given on the problem (i.e., 3.312-2.577)

60. Garfield company purchased a machine, which will be depreciated on the straight line
basis over an estimated useful life of seven years and no salvage value. This machine is
expected to generate cash flow from operations, net of income taxes, of 80,000 in each
of the seven years. Garfield’s expected rate of income taxes, of information on present
value factors is as follows:

Present value of P1 at 12% for seven periods 0.452

Present value of an ordinary annuity of P1 at 12% for 7 periods 4.564

Assuming a positive net present value of P12,720 what was the cost of the machine?

a. 240,000
b. 253,000
c. 352,400
d. 377,840
60. C

The cost of the machine given a positive net present value.

Using the net present value method (NPV), the cost of machine is the difference between
the present value of cash inflows and positive net present value, as follow:

Present value of cash inflows (80,000 x 4,564) P365,120

Net value – positive (12,720)

Cost of investment 352,400

A positive NPV indicates that the present value of cash inflows is greater than the cost of
investment. As such, the positive NPV is deducted from present value of cash inflows to
get the cost of investment.