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Make or Buy: Cebu Corporation makes steel blades for lawn mowers that is heat treats, assembles and
sells.
The cost accounting system gives the following data:
Direct Materials P 50,000
Direct Labor 30,000
Variable Factory Overhead 60,000
Fixed Factory Overhead 90,000
Units Produced 100,000 units
Cebu has an opportunity to purchase its 100,000 blades from an outside supplier at a cost of P 2.20 per
blade. Inspection of the purchased blades will cost an additional of P 5,000 in the quality assurance
department. Certain leased equipment, which costs P 30,000 and is included in fixed overhead, can be
avoided if the blades are purchased.
Required:
a. Should Cebu buy the blades from the outside supplier? What is the maximum purchase price
acceptable?
b. Should Cebu buy the blades from the outside supplier if the released space should be used to make a
part that is not purchased, which would net Cebu a savings of P 46,000?
c. What is the maximum purchase price acceptable?
Accept or Reject: Batangas Corporation manufactures and sells a type of knife. The company has never been
able to sell all it can produce (which is 50,000 knives, meaning it has enough excess capacity). The cost sheet
for the knife appears below:
Direct Material P 6.00
Direct Labor 7.00
Overhead @ 100% of direct labor 7.00
TOTAL COST 20.00
Variable Overhead is P 1.00 and variable selling and administrative expense is P 1.50 per unit. The company
received a special order from a new customer for 5,000 knives at a special price of P 18.00 instead of the
regular priceof P 25.00.
Required:
a. Based on the foregoing information, how much is the net advantage (dissadvantage) if the company
accepts the special order?
b. Assuming that the special order requires a special tool worth P 10,000 the net advantage
(dissadvantage) of accepting the special order?
c. What if the company is currently able to sell 47,500 knives to its regular customers, should the
company accept the special order?
d. What is the minimum selling price acceptable?
Drop or Maintain: Condensed monthly operating income data for Bataan Corporation for May follow:
Urban Store Suburban Store Total

Sales Revenue P 80,000 P 120,000 P 200,000
Less: Variable Expense 32,000 84,000 116,000
Contribution Margin 48,000 36,000 84,000
Less: Direct Fixed Cost 20,000 40,000 60,000
Segment Margin 28,000 (4,000) 24,000
Less: Common Fixed Cost 4,000 6,000 10,000
Operating Income P 24,000 P (10,000) P 14,000
Additional information regarding Bataan’s operation follows:
 One-fourth of each store’s direct fixed cost would continue if either store is closed.
 Bataan allocates common fixed costs to each store on the basis of the sales revenues.
 The operating results for May are representative of all months.
Required:
a. A decision by Bataan to close Suburban store would result in monthly increase (decrease) in Bataan’s
operating income?
b. In closing Suburban store will require Bataan to incur shutdown cost of P 5,000, should Bataan close
Suburban Store?
c. What if Bataan’s decision to close Suburnban store would result to a 30% increase in sales of Urban
Store, should Bataan close Suburban Store?
d. What if closing Suburban Store would result to a 20% decrease in Urban Store’s sales, should Bataan
close Suburban store?
Shutdown Point: Bataan Corporation manufactures and sell a single product. At normal capicity of 100,000
units per annum, the unit cost of manufacturing the product is:
Direct Materials P 2.20
Direct Labor 2.80
Variable Manufacturing Overhead 1.20
Fixed Manufacturing Overhead 2.00
Total production cost per unit 8.20
Variable selling and administrative expenses amount of P 0.80 per unit. Fixed selling and administrative cost
are P 40,000 anually. Due to the increasing competition, the company expects to be able to sell only 40,000
units at a reduced selling price of P 10.00 each, next year. The company is re-organizing its operations to be
able to regain competitive position. In the meantime, management is faced with the problem of whether to
shutdown completely or continue limited operationsat a loss. In the event of shutdown, it is expected that all
fixed cost can be reduced by about 1/4. Additional cost of shutting down the plant for one year are estimated
at P 15,000.
Required:
a. What would be the net advantage (dissadvantage) to the company if management decides to
shutdown?
b. What if the company can only sell 14,000 units, should the company continue or shutdown?
c. Using the original data, compute for the shutdown point in units.
Sell or Process Further: Mcdonalds has been producing burgers for a number of years now. A regular burger
can already be sold at P 50.00 or it can be further processed into a cheese burger which sell for P 75.00, a
mushroom melt burger which sells for P 90.00, and a famous Big Mac which can be sold at P 120. A regular
burger can be produced at a total per unit cost of P40.00. Additional cost incurred for the other burgers are
as follow:
Cheese Burger 20.00
Mushroom Melt Burger 45.00
Big Mac 60.00
Required: Which of the following three products should be processed further?
Constrained Resources: Wringgly Company is a small family business that produces wooden plaques and
trophies:
Plaques Trophies
Selling price per unit 18.00 15.00
Variable Cost per unit 12.00 8.00
The company only has one machine, a sander, to sand the wood that is used for the plaques or the trophie.
Generally, the wood required for each plaque takes 0.25 hour to sand, while the wood required for each
trophy takes 0.50 hour to sand.
Required:
a. Based on the constraint related to the machine time, which product should be emphasized if only
limited machine time is available?
b. If the available machine time is 100 hours, disregarding any market requirements and limitations,
how many of each product will be produced?
c. If the available machine time is 100 hours, but Plaques has a market limit of 300 units, how many
units of each product will be produced?
d. If the available machine time is 150 hours and Plaques has a market limit of 300 units, but Wringgly
is required to produced atleast 100 units of each product every period. How many units of each
product will be produced?

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Make or Buy: Cebu Corporation makes steel blades for lawn mowers that is heat treats, assembles and

Direct Materials P 50,000

Direct Labor 30,000

Variable Factory Overhead 60,000

Fixed Factory Overhead 90,000

Units Produced 100,000 units

Urban Store Suburban Store Total

Direct Materials P 2.20

Direct Labor 2.80

Variable Manufacturing Overhead 1.20

Fixed Manufacturing Overhead 2.00

Total production cost per unit 8.20

Cheese Burger 20.00

Mushroom Melt Burger 45.00

Big Mac 60.00

Required: Which of the following three products should be processed further?

Selling price per unit 18.00 15.00

Variable Cost per unit 12.00 8.00

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