HANDOUT FOR MAS MASTERY CLASS

iCARE Accountancy Review

MANAGEMENT CONSULTANCY
1. Which of the following characterizes MAS?
I. Broad and diversity in scope. III. Management is the main beneficiary of the service
II. Limited to CPAs.
A. I and II D. I, II and III
B. II and III E. Answer not given
C. I and III

MANAGEMENT ACCOUNTING
2. Which of the following management function is related in performance evaluation?
A. Planning C. Controlling
B. Organizing D. All of the above

3. The following characteristics refer to Financial Accounting except

A. Provides information to external users
B. Emphasizes on objective data
C. Has no externally imposed standards
D. Generates general purpose financial statements

4. ______________ is an example of a line position.

A. Controller for a merchandising company
B. Chief financial officer of a merchandising company
C. Store manager for Best Buy
D. Human resources manager for a community college

5. Controllership has attained special recognition in corporate management as business expands in

complexity and reach, and as the controller exerts influence for management to take organization’s
goals. Controllership and treasurership constitute corporate finance. These are among the
controller’s traditional functions:
1. Tax management. 5. Reporting to government regulatory agencies.
2. Financial reporting and interpretation. 6. Risk management.
3. Credit management. 7. Economic appraisal.
4. Sourcing and investing of funds. 8. Planning for control.
A. All eight items. C. Items 1, 2, 3, 4, 5, 7, and 8 only.
B. Items 1, 2, 5, 7, and 8 only. D. 2, 3, 5, and 7, and 8 only.

6. Which ethical standard has been violated if an accountant fails to disclose relevant information
pertaining to a financial statement?
A. Competence C. Integrity
B. Confidentiality D. Credibility

COST BEHAVIOR AND COST CLASSIFICATION

7. Which of the following is a period cost?
A. Direct material.
B. Advertising expense.
C. Depreciation on cars driven by a firm's president and treasurer.
D. Miscellaneous supplies used in production activities.
E. Both "B" and "C."
8. Which of the following is not an example of a committed fixed cost?
A. Property taxes. D. Outlays for advertising programs.
B. Depreciation on buildings. E. Equipment rental costs.
C. Salaries of management personnel.

9. Determine the true statement below:

I. A variable cost is constant if expressed on a per unit basis but the total dollar amount changes as the
number of units increases or decreases.
II. Within the relevant range, a change in activity results in a change in total variable cost and the per
unit fixed cost.
III. The cost formula used in estimating the cost of a company is applicable to all level of activities once
determined.
A. All statements are false C. None except III.
B. Only statement II and III. D. Only I and II.

Financial Accounting & Reporting by Karim G. Abitago, CPA Page 1

10. Statement 1: High-low method, as a means of segregating mixed cost, is known to give a precise estimate
of cost.
Statement 2: In applying high-low method, the two points needed to be known is the high and low of both
the cost to be segregated and its cost driver, separately.
A. Only the first statement is true. C. Both statements are true
B. Only the second statement is true. D. Both statements are false.

11. Determine whether the following statements are true or false:

I. The major variable cost in a manufacturing company is factory overhead.
II. A multiple regression equation uses more than one driver to predict costs.
III. As volume increases, the per-unit amount of a mixed cost increases.
A. Only I is true. C. Only III is false.
B. Both I and III are false. D. Only II is false.

12. Which of the following correlations shows the strongest relationship?

A. 0.85 C. -0.90
B. 1.01 D. -2.1

13. The following costs were presented by FURION INC. in relation to its production process:
Direct Material Cost P450,000
Gas and Lubricants for Production Equipment 120,000
Gas and Lubricants for Delivery Truck 150,000
Salary of Assembly Line Workers 500,000
Salary of Maintenance Team of Factory Equipment 150,000
Fringe Benefits of Assembly Line Workers 45,000
Outgoing Inspection Cost 60,000
Utilities Expense (2/3 incurred by factory) 120,000
Property Taxes (1/4 for factory building) 100,000
Depreciation (2/5 for production process) 300,000
Other Factory Overhead 150,000
Freight Out 220,000
Abnormal Factory Losses 110,000
Wastage and Rework Cost (normal) 210,000
The company produced 300,000 units in relation to above costs and sold 90,000 units.
REQUIREMENTS: Determine the total amount expensed in the income statement for the current year.

14. The MAGINA INC. reported the following

Month 1 Month 2
Units sold 6,000 8,000
Cost A P35,000 P36,000
Cost B 16,000 16,000
Cost C 1,500 2,000
Cost D 12,000 16,000

15. A controller is interested in analyzing the fixed and variable costs of indirect labor as related to direct labor
hours. The following data have been accumulated:
Month Indirect Labor Cost Direct Labor Hours
March P2,880 425
April 3,256 545
May 2,820 440
June 3,225 560
July 3,200 540
August 3,200 495
REQUIREMENT: Determine the amount of the fixed portion of indirect labor expense and the variable rate
for indirect labor expense, using the high and low points method.

16. A company owns two automobiles that are used by employees on company business, usually for short
trips. Mileage and expenses, excluding depreciation, by quarters were as follows during a typical year
(quarters instead of months are used to simplify the arithmetic):
Quarter Mileage Expenses
First 3,000 P 550
Second 3,500 560
Third 2,000 450
Fourth 3,500 600
12,000 P2,160
REQUIREMENT: Determine the variable cost per mile (nearest tenth of a cent) and the fixed costs per
quarter, using the method of lease squares.)

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17. For the month of May, the total production cost of P120,000 the number of units produced is 60,000 units
and the company used 15,000 direct labor hours. For the month of June, the company incurred a total
production cost of P150,000 for the production of 90,000 units. The company used a total of 30,000 direct
labor hours for the month of June.
Using correlation analysis, it was determined that the coefficient of correlation of the dependent variable in
relation to the units of production and direct labor hours is 0.85 and -0.91, respectively.
REQUIREMENT: How much is the quarterly fixed production cost of the Company?

COST-VOLUME-PROFIT (CVP) ANALYSIS

18. Cost-volume-profit analysis is a technique available to management to understand better the
interrelationships of several factors that affect a firm's profit. As with many such techniques, the
accountant oversimplifies the real world by making assumptions. Which of the following is not a major
assumption underlying CVP analysis?
A. All costs incurred by a firm can be separated into their fixed and variable components.
B. The product selling price per unit is constant at all volume levels.
C. Operating efficiency and employee productivity are constant at all volume levels.
D. For multi-product situations, the sales mix can vary at all volume levels.

19. Which of the following will result in raising the breakeven point? (E*)
A. A decrease in the variable cost per unit.
B. An increase in the semi-variable cost per unit
C. An increase in the contribution margin per unit.
D. A decrease in income tax rates.

20. A very high degree of operating leverage indicates a firm

A. has high fixed costs
B. has a high net income
C. has high variable costs
D. is operating close to its breakeven point

21. The indifference point is the level of volume at which a company earns (E)
A. no profit.
B. its target profit.
C. the same profit under different operating schemes.
D. Any of the above.

22. After reviewing its cost structure (variable costs of P7.50 per unit and monthly fixed costs of P60,000)
and potential market, FRANCE INC. established what it considered to be a reasonable selling price.
The company expected to sell 50,000 units per month and planned its monthly results as follows.
Sales P500,000
Variable costs 375,000
Contribution margin P125,000
Fixed costs 60,000
Income before taxes P 65,000
Income taxes (at 40%) 26,000
Net income P 39,000
REQUIREMENTS: Using the preceding information, answer the following questions independently.
A. What selling price did the company establish?
B. What is the contribution margin per unit?
C. What is the break-even point in units?
D. If the company determined that a particular advertising campaign had a high profitability of
increasing sales by 3,000 units, how much could it pay for such a campaign without reducing its
planned profits
E. If the company wants a P60,000 before-tax profit, how many units must it sell?
F. If the company wants a 10% before-tax return on sales, what level of sales, in dollars, does it need?
G. If the company wants a P45,000 after-tax profit, how many units must it sell?
H. If the company wants an after-tax return on sales of 9%, how many units must it sell?
I. If the company wants an after-tax profit of P45,000 on its expected sales volume of 50,000 units,
what price must it charge?
J. If the company wants a before-tax return on sales of 16% on its expected sales volume of 50,000
units, what price must it charge?
K. The company is considering offering its salespeople a 5% commission on sales. What would the total
sales, in dollars, have to be in order to implement the commission plan and still earn the planned
pre-tax income of P65,000?

Financial Accounting & Reporting by Karim G. Abitago, CPA Page 3

23. One of the products produced by ICELAND CORP is citrus Delight. The selling price per half-gallon is
P4.50, and variable cost of production is P2.70. total fixed costs per year are P316,600. The
company is currently selling 200,000 half –gallons per year.
Sales (200,000 units x 4.50) 900,000
Variable Cost (200,000 units x 2.70) 540,000
Contribution Margin 360,000
Fixed Cost 316,600
Operating Income 43,400
A. What is the margin of safety in units?
B. What is the degree of operating leverage?
C. If the company can increase sales in units by 30 percent, what percentage increase will it
experience in income? Prove your answer using the income statement approach.
D. If the company increases advertising by P41,200, sales in units will increase by 15 percent.
What will be the new break-even point? The new degree of operating leverage?

24. SPAIN INC. produces and sells two products: A and B in the ratio of 3A to 5B. Selling prices for A and
B are, respectively, P1,200 and P240; respective variable costs are P480 and P160. The company's
fixed costs are P1,800,000 per year.
REQUIREMENT: Compute the volume of sales in units of each product needed to:
A B
SP 1,200 240
VC 480 160
CM 720 80
Sales Mix 37.50% 62.50%
WEIGHTED AVE. UCM 320
WEIGHTED AVE. SP
WEIGHTED AVE. CMR 53.33%
(a) break even.
(b) earn P800,000 of income before income taxes.
(c) earn P800,000 of income after income taxes, assuming a 30 percent tax rate.
(d) earn 12 percent on sales revenue in before-tax income.
(e) earn 12 percent on sales revenue in after-tax income, assuming a 30 percent tax rate.

STANDARD COSTING AND VARIANCE ANALYSIS

25. Standard costs
A. are estimates of costs attainable only under the most ideal conditions.
B. are difficult to use with a process costing system.
C. can, if properly used, help motivate employees.
D. require that significant unfavorable variances be investigated, but do not require that significant
favorable variances be investigated.
26. Which kinds of variances should be investigated?
A. Those that are large and unfavorable.
B. Those that are large and either favorable or unfavorable.
C. All variances, despite their size.
D. Only use variances.

27. Which of the following choices correctly notes a characteristic associated with perfection standards
and one associated with practical standards?
Perfection Standards Practical Standards
A. Attainable in an ideal environment Incorporate abnormal occurrences when setting
quantity and efficiency targets
B. Result in many unfavorable variances Are often attainable by workers
C. Tend to boost worker morale Generally preferred by behavioral scientists
D. Generally, are easily achieved by workers Result in both favorable and unfavorable
variances
E. Generally preferred by behavioral scientists Are easier to achieve than perfection standards
28. The material price variance is calculated
A. the same as the labor rate variance.
B. on the quantity of materials bought, not the quantity used.
C. on the quantity of materials used, not the quantity bought.
D. by multiplying the difference between the actual and standard price of materials times the
quantity of materials used.
29. If the labor quantity variance is unfavorable and the cause is inefficient use of direct labor, the
responsibility rests with the
A. sales department. C. budget office.
B. production department. D. controller's department.

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30. A company would most likely have an unfavorable labor rate variance and a favorable labor efficiency
variance if
A. the mix of workers used in the production process was more experienced than the normal mix.
B. the mix of workers used in the production process was less experienced than the normal mix.
C. workers from another part of the plant were used due to an extra heavy production schedule.
D. the purchasing agent acquired very high quality material that resulted in less spoilage.

31. TEXAS INC. has the following information available for the current year:
Standard:
Material 3.5 feet per unit @ P2.60 per foot
Labor 5 direct labor hours @ P8.50 per unit
Actual:
Material 95,625 feet used (100,000 feet purchased @ P2.50 per foot)
Labor 122,400 direct labor hours incurred per unit @ P8.35 per hour
25,500 units were produced
REQUIREMENT: Compute for the direct material and direct labor variances
32. Each of the following independent situations relates to direct labor. Fill in the blanks.
A B C D
Units produced 4,000 _____ 3,000 _____
Actual hours worked 1,900 8,400 _____ _____
Standard hours for
production achieved 2,000 _____ _____ 6,000
Standard hours per unit _____ 0.5 2 3
Standard rate per hour P12 P10 P12 _____
Actual labor cost _____ P83,600 _____ P24,500
Rate variance P310U _____ P900U P300F
Efficiency variance _____ P2,000U P1,800F P800 U

33. CALIFORNIA CORP. manufactures candles in various shapes, sizes, colors, and scents. Depending on
the orders received, not all candles require the same amount of color, dye, or scent materials. Yields
also vary, depending upon the usage of beeswax or synthetic wax. Standard ingredients for 1,000
lbs. of candles are:
Input: Standard Mix Standard Cost per Pound
Beeswax 200 lbs. P1.00
Synthetic wax 840 .20
Colors 7 2.00
Scents 3 6.00
Totals 1,050 lbs.
Standard output 1,000 lbs.
Price variances are charged off at the time of purchase. During January, the company was busy
manufacturing red candles for Valentine's Day. Actual production then was:
Input:
Beeswax 4,100
Synthetic wax 13,800
Colors 2,200
Scents 60
Totals 20,160 lbs.
Actual output 18,500 lbs.
REQUIREMENT: Compute the materials mix variance and the materials yield variance. (Indicate
whether each variance is favorable or unfavorable and round to three decimal places.)
34. The manager of the AUTOMOBILE REGISTRATION DIVISION of the state of NEBRASKA has
determined that it typically takes 30 minutes for the department's employees to register a new car.
The following predetermined overhead costs are applicable to LANCASTER COUNTY. Fixed overhead,
computed on an estimated 4,000 direct labor hours, is P8 per DLH. Variable overhead is estimated at
P3 per DLH.
During July 2001, 7,600 cars were registered in LANCASTER COUNTY, taking 3,700 direct labor hours.
For the month, variable overhead was P10,730 and fixed overhead was P29,950.
REQUIREMENTS:
A. Compute overhead variances using a four-variance approach.
B. Compute overhead variances using a three-variance approach.
C. Compute overhead variances using a two-variance approach.

Financial Accounting & Reporting by Karim G. Abitago, CPA Page 5

VARIABLE AND ABSORPTION COSTING
35. Variable costing considers which of the following to be product costs?
A. B. C. D.
Fixed Mftg. Cost Yes Yes No No
Fixed Selling & Admin. No No No No
Variable Mftg. Cost Yes Yes Yes Yes
Variable Selling & Admin. No Yes Yes No

36. Consider the following statements about absorption costing and variable costing:
I. Variable costing is consistent with contribution reporting and cost-volume-profit analysis.
II. Absorption costing must be used for external financial reporting.
III. A number of companies use both absorption costing and variable costing.
Which of the above statements is (are) true?
A. I only. D. I and II.
B. II only. E. I, II, and III.
C. III only.

37. If a firm produces more units than it sells, absorption costing, relative to variable costing, will result
in
A. higher income and assets. C. lower income but higher assets.
B. higher income but lower assets. D. lower income and assets.

38. Profit under absorption costing may differ from profit determined under variable costing. How is this
difference calculated?
A. Change in the quantity of all units in inventory times the relevant fixed costs per unit.
B. Change in the quantity of all units produced times the relevant fixed costs per unit.
C. Change in the quantity of all units in inventory times the relevant variable cost per unit.
D. Change in the quantity of all units produced times the relevant variable cost per unit.

39. CABADBARAN CORP., produces non-fat yogurt which it sells to restaurants and ice cream shops. The
product is sold in 10-gallon containers, which have the following price and variable costs.
Sales price P30
Direct materials 10
Direct labor 4
Variable overhead 6
Budgeted fixed overhead in 2019, the company’s first year of operations, was P600,000. Actual
production was 150,000 10-gallon containers, of which 125,000 were sold. CABADBARAN incurred the
following selling and administrative expenses.
Fixed P100,000 for the year
Variable P2 per container sold
REQUIREMENTS:
(a) Compute the unit product cost per container of frozen yogurt under variable costing and
absorption costing, respectively.
(b) Prepare the operating income statements for 2019 using absorption costing and variable
costing.
(c) Reconcile the operating income reported under the two methods.
(d) Compute the throughput margin and income under throughput costing.

40. The following information is available for SAN JOSE CORP.’s new product line:
Sale price per unit P 30
Variable manufacturing cost per unit of production 8
Total annual fixed manufacturing cost 25,000
Variable administrative cost per unit 3
Total annual fixed administrative expenses 15,000
There was no inventory at the beginning of the year. Normal capacity is 12,500 units. During the
year, 12,000 units were produced and 10,000 units were sold.
REQUIREMENTS:
(1) What is the cost of ending inventory under direct costing and absorption costing, respectively?
(2) What is the net income under direct costing and absorption costing, respectively?

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COMPREHENSIVE BUDGETING
41. Which of the following choices correctly denotes managerial functions that are commonly associated
with budgeting?
Performance Coordination
Planning Evaluation of Activities
A. Yes Yes No
B. Yes Yes Yes
C. Yes No No
D. Yes No Yes
E. No Yes No
42. If a manager builds slack into a budget, how would that manager handle estimates of revenues and
expenses?
Revenues Expenses
A. Underestimate Underestimate
B. Underestimate Overestimate
C. Overestimate Underestimate
D. Overestimate Overestimate
E. Estimate correctly Estimate correctly

43. Wilson Corporation is budgeting its equipment needs on an on-going basis, with a new quarter being
added to the budget as the current quarter is completed. This type of budget is most commonly
known as a:
A. capital budget. D. pro-forma budget.
B. rolling budget. E. financial budget.
C. revised budget.
44. A static budget report
A. shows costs at only 2 or 3 different levels of activity.
B. is appropriate in evaluating a manager's effectiveness in controlling variable costs.
C. should be used when the actual level of activity is materially different from the master budget
activity level.
D. may be appropriate in evaluating a manager's effectiveness in controlling costs when the
behavior of the costs in response to changes in activity is fixed.

45. Evaluate the following statements:

I. The cash budget is known as the anchor budget since cash is the fuel of the company’s
operations.
II. A flexible budget is adjusted to reflect expected costs at the actual level of activity.
III. A budget serves as a control tool for a company since budget reports are prepared to analyze
any difference from the budget. The company does not need to modify future plans since the
operations had already started.
A. B. C. D.
Statement I True True False True
Statement II False True True True
Statement III True False False True

46. MEWTWO INC. has the following budgeted sales for the next six month period:
June 90,000 August 210,000 October 180,000
July 120,000 September 150,000 November 120,000
There were 30,000 units of finished goods in inventory at the beginning of June. Plans are to have an
inventory of finished products that equal 20% of the unit sales for the next month.
Five pounds of materials are required for each unit produced. Each pound of material costs P8.
Inventory levels for materials are equal to 30% of the needs for the next month. Materials inventory
on June 1 was 15,000 pounds.
Each unit requires 0.50 direct labor hours at a rate of P5 per hour. Overhead is applied on the basis of
P2 per direct labor hour.
REQUIREMENTS:
(a) Prepare production budgets in units for July, August, and September.
(b) Prepare a purchases budget in pounds for July, August, and September, and give total
purchases in both pounds and dollars for each month.
(c) Compute for the total labor hours and total labor cost for July, August and September.
(d) Prepare the overhead budget.

47. CELEBI CORP. has the following sales forecast for the first four months of 20X9.
January P70,000
February 70,000
March 90,000
April 80,000

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 CELEBI’s cost of sales is 60% of sales. Fixed costs are P12,000 per month. CELEBI maintains
inventory at 150% of the coming month’s budgeted sales requirements and has P55,000 inventory at
January 1.
CELEBI pays for its purchases 40% in the month of purchase, 60% in the following month. CELEBI
collects 60% of its sales in the month of sale, 40% in the following month. All fix costs require cash
disbursements. CELEBI’s balance sheet at December 31, 20X8 appears below.
Assets Equities
Cash P 20,000 Accounts payable P 18,000
Receivables 30,000
Inventory 55,000 Stockholders’ equity 87,000
Total P105,000 Total P105,000
REQUIREMENTS:
(a) Prepare a budgeted income statement for the first three months of 20X9, in total, not by month.
(b) Prepare a purchase budget for the first three months of 20X9 b month.
(c) Prepare a cash receipts budget for each of the first three months of 20X9 and for the quarter as
a whole.
(d) Prepare a cash disbursement budget for each of the first three months of 20X9 and for the
quarter as a whole.
(e) Prepare a cash budget for each of the first three months of 20X9 and for the quarter as a whole.
(f) Prepare a pro forma balance sheet as of March 31, 20X9.

RELEVANT COSTING
1. Which of the following best defines the concept of a relevant cost?
A. A past cost that is the same among alternatives.
B. A past cost that differs among alternatives.
C. A future cost that is the same among alternatives.
D. A future cost that differs among alternatives.
E. A cost that is based on past experience.

2. Which of the following statements is true regarding opportunity cost? (E)

A. Opportunity cost is recorded in the accounts of an organization that has a full costing system.
B. The potential benefit is not sacrificed when selecting an alternative.
C. Idle space that has no alternative use has an opportunity cost of zero.
D. Opportunity cost is representative of actual dollar outlay.

Use the following information in answering the next two questions:

I. Unavoidable Fixed Factory Overhead
II. Avoidable Fixed Factory Overhead
III. Variable Factory Overhead
IV. Variable Selling Cost
48. In a make or buy decision, which of the above cost is considered to be relevant?
A. I and III D. III and IV
B. II and III E. I, II, III and IV
C. II, III and IV
49. In a decision to accept or reject a special order, determine which of the above cost is relevant.
A. I and III D. III and IV
B. II and III E. I, II, III and IV
C. II, III and IV
50. Indicate which of the following would be avoided if a segment is eliminated. (M1**)
1. variable manufacturing costs 4. variable selling costs
2. direct fixed costs 5. direct fixed selling costs
3. common fixed costs 6. common fixed selling costs
A. 2, 3, 5, and 6 D. 1, 4, 5, and 6
B 1, 2, 4, and 5 E. 2, 3, 4, and 5.
C 2, 3, 4, and 5
51. If a firm is at full capacity, the minimum special order price must cover (M1)
A. variable costs associated with the special order
B variable and fixed manufacturing costs associated with the special order
C variable and incremental fixed costs associated with the special order
D variable costs and incremental fixed costs associated with the special order plus foregone
contribution margin on regular units not produced
E both c and d.
52. Which of the following is NOT relevant in deciding whether to process a joint product beyond its split-
off point?
A. The split-off value. C. The cost of further processing.
B. The price after additional processing. D. The cost of operating the joint process.

Financial Accounting & Reporting by Karim G. Abitago, CPA Page 8

53. The Mark X Corp. contemplates the temporary shutdown of its plant facilities in a provincial area
which is economically depressed due to natural disasters. Below are certain manufacturing and
selling expenses.
1. Depreciation 5. Sales commissions
2. Property tax 6. Delivery expenses
3. Interest expense 7. Security of premises
4. Insurance of facilities
Which of the following expenses will continue during the shutdown period?
A. All expenses in the list. C. Items 1, 2 and 3 only.
B. All except 5 and 6. D. Items 1, 2, 3, 4, 6, and 7 only
54. Assume a company produces three products: A, B, and C. It can only sell up to 3,000 units of each
product. Production capacity is unlimited. The company should produce the product (or products) that
has (have) the highest
A. contribution margin per hour of machine time.
B. gross margin per unit.
C. contribution margin per unit.
D. sales price per unit.

55. From the previous years, DARK MAGICIAN INC. has been manufacturing its own wheels for its
skateboards. DARK MAGICIAN’s skateboards have the highest demand on the market since it can be
used also for water activities. Due to a convention attended by the company’s CFO in London, he met
an outside supplier who has offered to produce and sell the same type of wheels DARK MAGICIAN is
using for its skateboards. DARK MAGICIAN’s present cost to manufacture one wheel is given below
(based on 60,000 wheels per year):
Direct material P10.00
Materials handling (10% of direct material cost) 1.00
Direct labor 6.00
Variable overhead 2.20
Fixed overhead (P2.80 general company overhead,
P2.45 depreciation and, P0.75 supervision) 6.00
Total cost per drum P25.20
Material handling represents the direct variable costs of the Receiving Department that are applied to
direct materials and purchased components on the basis of their cost. A decision about whether to
make or buy the wheels is especially important at this time since the equipment being used to make
the drums is completely worn out and must be replaced. Thus if the company will chose to continue
making the wheels, it should buy a new equipment costing P600,000 to be depreciated over its 5 year
useful life using straight-line method. The old equipment has no resale value.
A supervisor would have to be hired to oversee production of the wheels and the company’s total
general company overhead would be unaffected by this decision.
If the wheels were to be purchased at P22 DARK MAGICIAN could use the freed capacity to launch a
new product generating a segment margin of P200,000.
REQUIREMENTS:
(a) Prepare computations helping DARK MAGICIAN if it will accept the outside supplier’s offer?
(b) Would your recommendation in (a) above be the same if the company’s needs were: (1) 73,000
wheels per year; (2) 86,000 wheels per year

56. BLUE EYES INC. makes outdoor shirts. Data relating to the coming year’s planned operations are as
follows.
Sales (230,000 shirts) P4,140,000
Cost of goods sold 2,760,000
Gross profit P1,380,000
Selling and administrative expenses 805,000
Income P575,000
The factory has capacity to make 250,000 shirts per year. Fixed costs included in cost of goods sold
are P690,000. The only variable selling, general and administrative expenses are a 10% sales
commission and a P1.50 per shirt licensing fee paid to the designer.
A chain store manager has approached the sales manager of BLUE EYES INC. offering to buy 15,000
shirts at P15 per shirt. These shirts would be sold in areas where BLUE EYES’ shirts are not now sold.
The sales manager believes that accepting the offer would result in a loss because the average total
cost of the shirt is P15.50 ([2,760,000 + P805,000]/230,000). He feels that even though sales
commissions would not be paid on the order, a loss would still result.
REQUIREMENTS:
1. Determine whether the company should accept the offer.
2. Suppose that the order was for 40,000 shirts instead of 15,000. What would the company’s
income be if it accepted the order?

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 3. Assuming the same facts as in requirement 1, what is the lowest price that the company could
accept and still earn P575,000?
4. How many units of sales at the regular price could the company loss before it become
unprofitable to accept the order in requirement 2?
57. BABY DRAGON MERCHANDISING COMPANY has products, A and B. A recent monthly income
statement for the company follows:
TOTAL PRODUCT A PRODUCT B
No. of units sold 250,000 150,000 100,000
Sales P4,000,000 P3,000,000 P1,000,000
Less: Variable expenses 1,300,000 900,000 400,000
Contribution Margin 2,700,000 2,100,000 600,000
Less: Fixed expenses 2,200,000 1,400,000 800,000
Net operating income (loss) P 500,000 P 700,000 P(200,000)
A study indicates that P340,000 of the fixed expenses being charged to PRODDUCT B are sunk costs
or allocated costs that will continue even if B is dropped.
REQUIREMENTS: Answer each of the following questions independently, unless otherwise instructed.
(a) Management is considering dropping PRODUCT B but will result in a 10% decrease in the sales
of PRODUCT A. If the company will push through the proposed action, what would be its effect
on the company’s net income as a whole?
(b) The managers are considering increasing advertising for product A by P40,000. They expect to
achieve a 10% increase in volume for product A with no change in selling price, but some of
that increase will be the expense of product B. Sales of B are expected to decline by 5%. What
will total profit be if the managers approve the proposed action?
(c) What is the maximum percentage decline in volume of product B that would leave the action in
requirement (b) just barely desirable?
(d) The managers are considering dropping product B and replacing it with product C. Introducing
product C would increase total fixed costs by P175,000. C’s contribution margin percentage is
40% and is expecting sales of P1,500,000. What is the expected new profit of the company
after approving the proposal?
(e) The company is considering increasing the sales price of B is increased to P15 with a decrease in
the number of units sold to 90,000. What is the effect on income of the proposed action?
(f) Part of the plant in which A is produced can easily be adapted to the production of B, but
changes in quantities may make changes in sales prices advisable. If production of A is reduced
to 100,000 units (to be sold at P25 each) and production of B is increased by 50,000 units (to
be sold at P8.00 each), the total effect on income will be?
58. BLADE SKATER CORP. manufactures three products from a common input in a joint processing
operation. Joint processing cost up to the split-off point total P500,000 per quarter. The company
allocates these costs to the joint products on the basis of their total sales value at the split-off point.

Unit selling prices and total output at the split-off point are as follows:
Product Selling Price Quarterly Output
Economy P16 per pound 15,000 pounds
Deluxe 8 per pound 20,000 pounds
Supreme 25 per gallon 4,000 gallons
Batch product can be processed further after the split-off point. Additional processing costs (per
quarter) and unit selling prices after further processing are given below:

Product Additional Processing Costs Selling Price

Economy P55,000 P19 per pound
Deluxe 115,000 14 per pound
Supreme 26,000 31 per gallon
REQUIREMENT: Which product(s) should BLADE SKATER sell at the split-off point and which
product(s) should it continue processing?

59. DANCING ELF INC. produces white glue (a wood glue) that is used by furniture manufacturers. The
company normally produces and sells 10,000 gallons of the glue each month. White Glue is sold for
P280 per gallon, variable costs is P168 per gallon, fixed factory overhead cost totals P460,000 per
month, and the fixed selling costs totals P620,000 per month.
Labor strikes in the furniture manufacturers that buy the bulk of White Glue have caused the monthly
sales of DANCING ELF to temporarily decrease to only 30% of its normal monthly volume. DANCING
ELF's management expects that the strikes will last for about 2 months, after which, sales of White
Glue should return to normal. However, due to the dramatic drop in the sales level, DANCING ELF’s
management is considering to close down its plant during the two-month period that the strikes are
on.
If DANCING ELF INC. will temporarily shut down its operations, it is expected that the fixed factory
overhead costs can be reduced to P340,000 per month and that the fixed selling costs can be reduced
by P62,000 per month. Start-up costs at the end of the shut-down period would total P56,000.
DANCING ELF uses the JIT system, so no inventories are on hand.

Financial Accounting & Reporting by Karim G. Abitago, CPA Page 10

 REQUIREMENTS:
(a) At the sales level of only 30% of the normal volume, should the company continue operating or
shutdown temporarily for two months?
(b) Compute for the shut-down point

60. ELEMENTAL HERO CORP. makes three products in a single facility. Data concerning these products
follow:
Product A Product B Product C
Selling price per unit P64.50 P64.80 P63.30
Direct materials P20.90 P14.50 P18.30
Direct labor P30.80 P33.40 P26.00
Variable manufacturing overhead P1.60 P1.90 P2.10
Variable selling cost per unit P1.00 P3.40 P1.50
Mixing minutes per unit 3.50 3.10 3.50
Monthly demand in units 4,000 2,000 4,000
The mixing machines are potentially the constraint in the production facility. A total of 32,400
minutes are available per month on these machines. Direct labor is a variable cost in this company.
REQUIREMENTS:
(a) How many minutes of mixing machine time would be required to satisfy demand for all
products?
(b) Which orders would you advise the company to accept first, second and third?
(c) How many units of each product should be produced to maximize net operating income? (Round
off to the nearest whole unit.)
(d) What is the expected total contribution margin of ELEMENTAL HERO if it will follow the proposed
action maximizing its net income?
(e) Up to how much should the company be willing to pay for one additional hour of mixing machine
time if the company has made the best use of the existing mixing machine capacity?

61. FAIRY DRAGON CORP. has been producing two bearings, components B12 and B18, for use in
production, data regarding these two components are:
B12 B18
Machine hours required per unit 2.5 3.0
Standard cost per unit
Direct Material P2.25 P3.75
Direct labor 4.00 4.50
Manufacturing overhead
Variable* 2.00 2.25
Fixed** 3.75 4.50
P12.00 P15.00
*Variable manufacturing overhead is applied on the basis of direct labor hours.
**Fixed manufacturing overhead is applied on the basis of machine hours.
FAIRY DRAGON’s annual requirement for these components is 8,000 units of B12 and 11,000 units of
B18. Recently, FAIRY DRAGON’s management decided to devote additional machine time to other
product lines resulting in only 41,000 machine hours per year that can be dedicated to the production
of the bearings. An outside company has offered to sell FAIRY DRAGON the annual supply of the
bearings at prices of P11.25 for B12 and P13.50 for B18. FAIRY DRAGON wants to schedule the
otherwise idle 41,000 machine hours to produce bearings so that the company can minimize its costs
(maximize its net benefits).
REQUIREMENTS:
(a) The net benefit (loss) per machine hour that would result if FAIRY DRAGON accepts the
supplier’s offer of P13.50 per unit for component B18 is
(b) How many units of B12 and B18 should the company purchased or produced to maximize its net
benefits?

- END OF HANDOUTS -

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