LONG PROBLEMS FOR PRELIM’S PRODUCT

Case 1. C Industries received an order for a piece of special machinery from T Company. Just as C completed the
machine, T declared bankruptcy, defaulted on the order, and forfeited the 10 percent deposit paid on the selling price of
P72,500.

C’s manufacturing manager identified the costs already incurred in the production of the special machinery for T as
follows:
Direct material P16,600
Direct labor 21,400
Manufacturing overhead:
Variable P10,700
Fixed 5,350 16,050
Fixed selling and administrative costs 5,405
Total P59,455

Another company, K Corporation, will buy the special machinery if it is reworked to K’s specifications. C offered to sell
the reworked machinery to K as a special order for P68,400. K agreed to pay the price when it takes delivery in two
months. The additional identifiable costs to rework the machinery to K’s specifications are as follows:
Direct materials P 6,200
Direct labor 4,200
Total P10,400

A second alternative available to C is to convert the special machinery to the standard model, which sells for P62,500.
The additional identifiable costs for this conversion are as follows:
Direct materials P2,850
Direct labor 3,300
Total P6,150
A third alternative for C is to sell the machine as is for a price of P52,000. However, the potential buyer of the
unmodified machine does not want it for 60 days. This buyer has offered a P7,000 down payment, with the remainder
due upon delivery.
The following additional information is available regarding C’s operations:
1. The sales commission rate on sales of standard models is 2 percent, while the rate on special orders
is 3 percent.
2. Normal credit terms for sales of standard models are 2/10, net/30. This means that a customer
receives a 2 percent discount if payment is made within 10 days, and payment is due no later than 30 days after
billing. Most customers take the 2 percent discount. Credit terms for a special order are negotiated with the
customer.
3. The allocation rates for manufacturing overhead and fixed selling and administrative costs are as
follows:

Manufacturing costs:
Variable 50% of direct-labor costs
Fixed 25% of direct-labor costs
Fixed selling and adm costs 10% of the total manufacturing costs

Normal time required for rework is one month.

1. How much peso contribution would the sale to K Corporation add to C’ before-tax profit?
a. P53,848 c. P55,900
b. P55,948 d. P 9,300

2. How much peso contribution would the alternative of converting the special machinery to standard model add
to C’s before-tax profit?
a. P52,200 c. P52,825
b. P54,475 d. P 7,650

3. If K makes C a counteroffer, what is the lowest price C should accept for the reworked machinery from K?
a. P10,400 c. P10,722
b. P12,500 d. P12,887

4. How much would the alternative of selling unmodified machinery to the potential buyer contribute to C’s
before-tax profit?
a. P50,440 b. P 1,740 c. P49,920 d. P49,400

Case 2. Metal Industries, Inc. operates its production department only when orders are received for one or both of its
two products, two sizes of metal discs. The manufacturing process begins with the cutting of doughnut-shaped rings
from rectangular strips of sheet metal; these rings are then pressed into discs. The sheets of metal, each 4 feet long and
weighing 32 ounces, are purchased P13.60 per running foot. The department has been operating at a loss for the past
year as shown below.
Sales for the year P1,720,000
Less: expenses 1,772,000
Net loss for the department P 52,000

The following information is available.

a. Ten thousand 4-foot pieces of metal yielded 40,000 large discs, each weighing 4 ounces and selling for P29, and
40,000 small discs, each weighing 2.4 ounces and selling for P14.
b. The corporation has been producing at less than “normal capacity” and has had no spoilage in the cutting step
of the process. The skeletons remaining after the rings have been cut are sold for scrap at P8.00 per pound.
c. The variable conversion cost of each large disc is 80% of the disc’s direct material cost, and variable conversion
cost of each small disc is 75% of the disc’s direct material cost. Variable conversion costs are the sum of direct
labor and variable overhead.
d. Fixed costs were P860,000.

1. The material net cost per ounce is

a. P2.00 b. P1.60 c. P1.70 d. P1.80
2. The total variable costs per unit for the large and small discs, respectively, are
a. P10.20 and P8.60. c. P9.10 and P5.30.
b. P14.40 and P8.40. d. P11.80 and P6.60.

3. If the material cost for large and small discs is P8.50 and P5.10, respectively, and the normal production capacity is
100,000 units, what is the breakeven point?
a. 91,611. c. 79,816.
b. 87,216. d. 82,412.

Case 3. Surigao Ski Company recently expanded its manufacturing capacity to allow it to produce up to 15,000
pairs of cross-country skis of either the mountaineering model or the touring model. The sales department assures
management that it can sell between 9,000 and 13,000 pairs (units) of either product this year. Because the models are
very similar, Surigao Ski will produce only one of the two models. The information below was compiled by the
accounting department.
Mountaineering Touring
Selling price per unit P88.00 P80.00
Variable cost per unit 52.80 52.80
Fixed costs will total P369,600 if the mountaineering model is produced but will be only P316,800 if the touring model is
produced. Surigao Ski Company is subject to a 40% income tax rate.

1. If Surigao Ski Company desires an after-tax net income of P24,000, how many pairs of touring model skis will the
company have to sell?
a. 13,118 c. 13,853
b. 12,529 d. 4,460

2. The total sales revenue at which Surigao Ski Company would make the same profit or loss regardless of the ski model
it decided to produce is
a. P880,000 c. P924,000
b. P422,400 d. P686,400

3. How much would the variable cost per unit of the touring model have to change before it had the same breakeven
point in units as the mountaineering model?
a. P2.68/unit increase c. P5.03/unit decrease
b. P4.53/unit increase d. P2.97/unit decrease

4. If the variable cost per unit of touring skis decreases by 10%, and the total fixed cost of touring skis increases by 10%,
the new breakeven point will be
a. 10,730 pairs
b. 13,007 pairs
c. 12,812 pairs
d. Unchanged from 11,648 pairs because the cost changes are equal and offsetting

5. If the Surigao Ski Company sales department could guarantee the annual sale of 12,000 skis of either model,
Surigao would
a. Produce touring skis because they have a lower fixed cost.
b. Produce only mountaineering skis because they a lower breakeven point.
c. Produce mountaineering skis because they are more profitable.
d. Be indifferent as to which model is sold because each model has the same variable cost per unit.
Case 4. Pullman Company is a small but growing manufacturer of telecommunications equipment. The company
has no sales force of its own; rather, it relies completely on independent sales agents to market its products. These
agents are paid a commission of 15% of selling price for all items sold. Maui Soliman, Pullman’s controller, has just
prepared the company’s budgeted income statement for next year. The statement follows:
Pullman Company
Budgeted Income Statement
For the Year Ended December 31
Sales P16,000,000
Manufacturing costs:
Variable P7,200,000
Fixed overhead 2,340,000 9,540,000
Gross margin 6,460,000

Selling and administrative costs:

Commissions to agents 2,400,000
Fixed marketing costs *120,000
Fixed administrative costs 1,800,000 4,320,000
Net operating income 2,140,000
Less fixed interest cost 540,000
Income before income taxes 1,600,000
Less income tax (30%) 480,000
Net income P1,120,000
*Primarily depreciation on storage facilities
As Maui handed the statement to Kim Viceroy, Pullman’s president, she commented, “I went ahead and used the agents’
15% commission rate in completing these statements, but we’ve just learned that they refuse to handle our products
next year unless we increase the commission rate to 20%.”
“That’s the last straw,” Kim replied angrily. “Those agents have been demanding more and more, and this time they’ve
gone too far. How can they possibly defend a 20% commission rate?”

“They claim that after paying for advertising, travel, and the other costs of promotion, there’s nothing left over for
profit,” replied Maui.
“I say it’s just plain robbery,” retorted Kim. “And I also say it’s time we dumped those guys and got our own sales force.
Can you get your people to work up some cost figures for us to look at?”
“We’ve already worked them up,” said Maui. “Several companies we know about pay a 7.5% commission to their own
salespeople, along with a small salary. Of course, we would have to handle all promotion costs, too. We figure our fixed
costs would increase by P2,400,000 per year, but that would be more than offset by the P3,200,000 (20% x P16,000,000)
that we would avoid on agents’ commissions.”
The breakdown of the P2,400,000 cost figure follows:
Salaries:
Sales manager P 100,000
Salespersons 600,000
Travel and entertainment 400,000
Advertising 1,300,000
Total P2,400,000
“Super,” replied Kim. “And I note that the P2,400,000 is just what we’re paying the agents under the old 15%
commission rate.”
“It’s even better than that,” explained Maui. “We can actually save P75,000 a year because that’s what we’re having to
pay the auditing firm now to check out the agents’ reports. So our overall administrative costs would be less.”
“Pull all of these number together and we’ll show them to the executive committee tomorrow,” said Kim. “With the
approval of the committee, we can move on the matter immediately.”
1. What is the breakeven point in pesos for next year assuming that the agents’ commission rate remains unchanged at
15%?
a. P10,650,000 c. P9,000,000
b. P12,000,000 d. P10,750,000
2. What is the breakeven point in pesos for next year assuming that the agents’ commission rate is increased to 20%?
a. P13,171,000 c. P13,714,286
b. P15,000,000 d. P12,750,000
3. What is the breakeven point in pesos for next if the company employs its own sales force?
a. P15,000,000 c. P13,090,909
b. P12,954,545 d. P15,157,895
4. Assume that Pullman Company decides to continue selling through agents and pays the 20% commission rate. The
volume of sales that would be required to generate the same net income as contained in the budgeted income
statement for next year would be:
a. P18,285,714 c. P19,225,000
b. P18,368,421 d. P20,414,714
5. The volume of sales at which net income would be equal regardless of whether Pullman Company sells through agents
(at a 20% commission rate) or employs its own sales force:
a. P11,625,000 c. P19,200,000
b. P12,000,000 d. P18,600,000

Case 5. Alex Company had the following inventories at the beginning and end of the month of January.
January 1. January 31.
Finished goods P125,000 P117,000
Work in process 235,000 251,000
Direct materials 134,000 124,000

The following additional manufacturing data were available for the month of January:
Direct materials purchased P189,000
Purchase returns and allowances 1,000
Transportation-in 3,000
Direct labor 300,000
Actual factory overhead 175,000

Alex Company applies factory overhead at a rate of 605 of direct labor cost, and any over applied or underapplied factory
overhead is deferred until the end of the year, December 31.
1. Alex Company’s prime cost for January was
A. P199,000
B. P501,000
C. P489,000
D. P201,000

2. Alex Company’s total manufacturing cost for January was

A. P681,000
B. P665,000
C. P489,000
D. P673,000
3. Alex Company’s cost of goods manufactured for January was\
A. P665,000
B. P681,000
C. P673,000
D. P657,000
4. Alex Company’s cost of goods for January was
A. P697,000
B. P681,000
 C. P673,000
D. P657,000
5. Alex Company’s balance in factory overhead control for January was
A. P5,000 debit-overapplied.
B. P5,000 crebit-underapplied.
C. P5,000 debit-underapplied.
D. P5,000 crebit-overapplied.

Case 6. A manufacturing company employs variable costing for internal reporting and analysis purposes.
However, it converts its records to absorption costing for external reporting. The Accounting Department always
reconciles the two operating income figures to assure that no errors have occurred in the conversion. Financial data
for the year are presented below. The fixed manufacturing overhead cost per unit was based on the planned level of
production of 480,000 units.
Budgeted and Actual Levels for Sales and Production
Budget Actual
Sales (in units) 495,000 510,000
Production (in units) 480,000 500,000

Standard Unit Manufacturing Costs

Variable Absorption
Costing Costing
Variable Costs P10.00 P10.00
Fixed manufacturing overhead 0 6.00
Total unit manufacturing costs P10.00 P16.00

The difference between the operating income calculated under the variable costing method and the operating
income calculated under the absorption costing method would be
A. P57,600
B. P60,000
C. P90,000
D. P120,000

Case 7
Xerbert Co
Budgeted and Actual Income Statements
For the year Ending December 31
(000s omitted)
Budgeted Actual
Xenox Xeon Total Xenox Xeon Total
Units sales 150 100 250 130 130 260
Net Peso sales P900 P1,000 P1,900 P780 P1,235 P2,015
Variable expenses 450 750 1,200 390 975 1,365
P450 P 250 P 700 P390 P 260 P 650
Fixed expenses P 200 P 190
Manufacturing 153 140
Marketing 95 90
Total fixed experience P 448 P 420
Income before taxes P 252 P 230
1. The percentage difference between the actual and budgeted breakeven point in units was that actual was
A. 5.00 % above budget.
 B. 6.67 % below budget.
C. 6.67 % above budget.
D. 5.00 % below budget.

2. The budgeted total volume of 250,000 units was based upon Xerbert’s achieving a market share of 10%. Actual
industry volume was 2,580,000 units. Xerbert increased volume owing to improved market share is
A. 100%
B. 80%
C. 20%
D. 4%

3. The variance of actual contribution margin from budgeted contribution margin attributed to sales price is
A. P155,000 unfavorable.
B. P155,000 favorable.
C. P65,000 favorable.
D. P65,000 unfavorable.
4. The variance of actual contribution margin from budgeted contribution margin attributed to unit variable cost changes
is
A. P165,000 unfavorable.
B. P137,000 favorable.
C. P165,000 unfavorable.
D. Zero because actual unit variable costs were the same as budgeted unit variable costs.