Solution manual managerial accounting by cabrera v2 chapter 19 answer

MANAGEMENT ACCOUNTING (VOLUME II) - Solutions Manual

CHAPTER 19
RELEVANT COSTS FOR DECISION MAKING
I.

Questions
1. Quantitative factors are those which may more easily be reduced in
terms of pesos such as projected costs of materials, labor and overhead.
Qualitative factors are those whose measurement in pesos is difficult
and imprecise; yet a qualitative factor may be easily given more weight
than the measurable cost savings. It can be seen that the accountant’s
role in making decisions deals with the quantitative factors.
2. Relevant costs are expected future costs that will differ between
alternatives. In view of the definition of relevant costs, historical costs
are always irrelevant because they are not future costs. They may be
helpful in predicting relevant costs but they are always irrelevant costs
per se.
3. The differential costs in any given situation is commonly defined as the
change in total cost under each alternative. It is not relevant cost, but it
is the algebraic difference between the relevant costs for the
alternatives under consideration.
4. Analysis:
Future costs:
New Truck
Less: Proceeds from
disposal, net

Replace
P10,200

Rebuild

1,000
P 9,200

Advantage of rebuilding

P8,500
P700

The original cost of the old truck is irrelevant but its disposal value is
relevant. It is recommended that the truck should be rebuilt because it
will involve lesser cash outlay.

II. Exercises
19-1


Chapter 19 Relevant Costs for Decision Making

Exercise 1 (Identifying Relevant Costs)
Case 1
a.
b.
c.
d.
e.
f.
g.
h.

i.
j.
k.
l.

Item
Relevant
Sales revenue................................. X
Direct materials............................. X
Direct labor.................................... X
Variable manufacturing
overhead........................................ X
Book value – Model E7000
machine..........................................
Disposal value – Model
E7000 machine...............................
Depreciation – Model E7000
machine..........................................
Market value – Model F5000
machine (cost)................................ X
Fixed manufacturing
overhead........................................
Variable selling expense................. X
Fixed selling expense..................... X
General administrative
overhead........................................ X

Case 2

Not

Relevant

Relevant
X

Not
Relevant
X
X
X

X
X

X
X

X

X
X

X

X
X
X
X

Exercise 2 (Identification of Relevant Costs)

Requirement 1
Fixed cost per mile (P3,500* ÷ 10,000 miles)..........................................................
P0.35
Variable operating cost per mile................................................................................
0.08
Average cost per mile................................................................................................
P0.43
* Depreciation...............................................................................................................
P2,000
Insurance....................................................................................................................
960
Garage rent.................................................................................................................
480
Automobile tax and license.......................................................................................
60
Total............................................................................................................................
P3,500
Requirement 2
The variable operating costs would be relevant in this situation. The
depreciation would not be relevant since it relates to a sunk cost. However,
any decrease in the resale value of the car due to its use would be relevant.
The automobile tax and license costs would be incurred whether Ingrid
19-2


Relevant Costs for Decision Making Chapter 19

decides to drive her own car or rent a car for the trip during summer break
and are therefore irrelevant. It is unlikely that her insurance costs would
increase as a result of the trip, so they are irrelevant as well. The garage

rent is relevant only if she could avoid paying part of it if she drives her
own car.
Requirement 3
When figuring the incremental cost of the more expensive car, the relevant
costs would be the purchase price of the new car (net of the resale value of
the old car) and the increases in the fixed costs of insurance and automobile
tax and license. The original purchase price of the old car is a sunk cost
and is therefore irrelevant. The variable operating costs would be the same
and therefore are irrelevant. (Students are inclined to think that variable
costs are always relevant and fixed costs are always irrelevant in decisions.
This requirement helps to dispel that notion.)
Exercise 3 (Make or Buy a Component)
Requirement 1

Cost of purchasing
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead, traceable 1
Fixed manufacturing overhead, common

Per Unit
Differential
Costs
15,000 units
Make
Buy
Make
Buy
P200

P3,000,000
P 60
P 900,000
80
1,200,000
10
150,000
20
0
P170

Total costs

300,000
0
0
0
P200 P2,550,000 P3,000,000

Difference in favor of continuing to make
the parts
P30
P450,000
1
Only the supervisory salaries can be avoided if the parts are purchased. The
remaining book value of the special equipment is a sunk cost; hence, the P3 per
unit depreciation expense is not relevant to this decision. Based on these data, the
company should reject the offer and should continue to produce the parts
internally.

Requirement 2
19-3


Chapter 19 Relevant Costs for Decision Making

Make
Buy
Cost of purchasing (part 1)..............................................................................................
P3,000,000
Cost of making (part 1)....................................................................................................
P2,550,000
Opportunity cost—segment margin forgone on a
potential new product line...........................................................................................
650,000
Total cost..........................................................................................................................
P3,200,000 P3,000,000
Difference in favor of purchasing from the outside
supplier.........................................................................................................................
P200,000
Thus, the company should accept the offer and purchase the parts from the outside
supplier.

Exercise 4 (Evaluating Special Order)
Only the incremental costs and benefits are relevant. In particular, only the
variable manufacturing overhead and the cost of the special tool are
relevant overhead costs in this situation. The other manufacturing overhead
costs are fixed and are not affected by the decision.
Per
Unit

P3,499.50

Total
10 bracelets
P34,995.00

Incremental revenue
Incremental costs:
Variable costs:
Direct materials
1,430.00
14,300.00
Direct labor
860.00
8,600.00
Variable manufacturing overhead
70.00
700.00
Special filigree
60.00
600.00
Total variable cost
P2,420.00
24,200.00
Fixed costs:
Purchase of special tool
4,650.00
Total incremental cost
28.850.00
Incremental net operating income

P 6.145.00
Even though the price for the special order is below the company’s regular
price for such an item, the special order would add to the company’s net
operating income and should be accepted. This conclusion would not
necessarily follow if the special order affected the regular selling price of
bracelets or if it required the use of a constrained resource.
Exercise 5 (Utilization of a Constrained Resource)

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Relevant Costs for Decision Making Chapter 19

Requirement 1
(1)
(2)
(3)
(4)

X
Y
Z
Contribution margin per unit............................................................................................
P18 P36 P20
Direct labor cost per unit..................................................................................................
P12 P32 P16
Direct labor rate per hour..................................................................................................
8
8
8

Direct labor-hours required per unit (2) ÷ (3)...................................................................
1.5
4.0
2.0
Contribution margin per direct labor-hour (1) ÷ (4).........................................................
P12 P 9 P10

Requirement 2
The company should concentrate its labor time on producing product X:
Contribution margin per direct labor-hour

X
P12
× 3,000
P36,000

Direct labor-hours available
Total contribution margin

Y
P9
× 3,000
P27,000

Z
P10
× 3,000
P30,000

Although product X has the lowest contribution margin per unit and the

second lowest contribution margin ratio, it has the highest contribution
margin per direct labor-hour. Since labor time seems to be the company’s
constraint, this measure should guide management in its production
decisions.
Requirement 3
The amount Jaycee Company should be willing to pay in overtime wages
for additional direct labor time depends on how the time would be used. If
there are unfilled orders for all of the products, Jaycee would presumably
use the additional time to make more of product X. Each hour of direct
labor time generates P12 of contribution margin over and above the usual
direct labor cost. Therefore, Jaycee should be willing to pay up to P20 per
hour (the P8 usual wage plus the contribution margin per hour of P12) for
additional labor time, but would of course prefer to pay far less. The upper
limit of P20 per direct labor hour signals to managers how valuable
additional labor hours are to the company.
If all the demand for product X has been satisfied, Jaycee Company would
then use any additional direct labor-hours to manufacture product Z. In that
case, the company should be willing to pay up to P18 per hour (the P8 usual
wage plus the P10 contribution margin per hour for product Z) to
manufacture more product Z.
19-5


Chapter 19 Relevant Costs for Decision Making

Likewise, if all the demand for both products X and Z has been satisfied,
additional labor hours would be used to make product Y. In that case, the
company should be willing to pay up to P17 per hour to manufacture more
product Y.
Exercise 6 (Sell or Process Further)

Sales value after further processing
Sales value at split-off point
Incremental revenue
Cost of further processing
Incremental profit (loss)

Product A
P80,000
50,000
30,000
35,000
P(5,000)

Product B
P150,000
90,000
60,000
40,000
20,000

Product C
P75,000
60,000
15,000
12,000
3,000

Products B and C should be processed further, but not Product A.
III. Problems
Problem 1 (Accept or Reject an Order)

Selling price per unit
Less Variable costs/unit:
Materials
Labor
Factory overhead (25%)
Contribution margin/unit
Multiplied by number of units to be sold
Total contribution margin

Product A
P1.20

Product B
P1.40

0.50
0.20
0.10
0.80
P0.40
21,000 units
P8,400

0.70
0.24
0.14
1.08
P0.32
30,000 units
P9,600

Product B should be accepted because its total contribution margin is
higher than that of Product A.
Problem 2 (Eliminate or Retain a Product Line)
Requirement 1
No, production and sale of the round trampolines should not be
discontinued. Computations to support this answer follow:
Contribution margin lost if the round trampolines
are discontinued.............................................
Less fixed costs that can be avoided:
19-6

P(80,000)


Relevant Costs for Decision Making Chapter 19

Advertising – traceable..................................
Line supervisors’ salaries..............................
Decrease in net operating income for the
company as a whole.......................................

P41,000
6,000

47,000
P(33,000)

The depreciation of the special equipment represents a sunk cost, and
therefore it is not relevant to the decision. The general factory overhead is

allocated and will presumably continue regardless of whether or not the
round trampolines are discontinued; thus, it is not relevant.
Requirement 2
If management wants a clear picture of the profitability of the segments,
the general factory overhead should not be allocated. It is a common cost
and therefore should be deducted from the total product-line segment
margin. A more useful income statement format would be as follows:
Total
Sales.................................... P1,000,000
Less variable expenses........
410,000
Contribution margin............
590,000
Less fixed expenses:
Advertising – traceable....
216,000
Depreciation of special
equipment.....................
95,000
Line supervisors’
salaries..........................
19,000
Total traceable fixed
expenses...........................
330,000
Product-line segment
margin..............................
260,000
Less common fixed
expenses...........................

200,000
Net operating income
(loss)................................ P 60,000

Trampoline
Round
Rectangular
P140,000
P500,000
60,000
200,000
80,000
300,000

Octagonal
P360,000
150,000
210,000

41,000

110,000

65,000

20,000

40,000

35,000

6,000

7,000

6,000

67,000

157,000

106,000

P 13,000

P143,000

P104,000

Problem 3 (Product Mix)
Requirement 1
Selling price per unit
Variable cost per unit

A
P30
25
19-7

Product Line

B
C
P25
P10
10
5

D
P8
4


Chapter 19 Relevant Costs for Decision Making

Contribution margin / unit
Divided by no. of hours required
for each unit
Contribution per hour
Product ranking:
1. D
2. B

P5

P15

P 5

5 hrs.
P1

10 hrs.
P1.5

4 hrs.
P1.25

3. C

P4
1 hr.
P4

4. A

Based on the above analysis, first priority should be given to Product D.
The company should use 4,000 out of the available 96,000 hrs. to produce
4,000 units of product D. The remaining 92,000 hrs. should be used to
produce 9,200 units of Product B. Hence, the best product combination is
4,000 units of Product D and 9,200 units of Product B.
Requirement 2
If there were no market limitations on any of the products, the company
should use all the available 96,000 hours in producing 96,000 units of
product D only.

The difference in profit between the two alternatives is computed as
follows:
Contribution margin of combination (1)
Product D (4,000 x P 4.00)
Product B (9,200 x P15.00)

Total contribution margin of D and B
Less contribution margin of D only
(96,000 x P4)
Difference, excess over profit in combination (1)

P 16,000
138,000
P154,000
384,000
P230,000

Problem 4 (Accept or Reject a Special Order)
Requirement 1
The company should accept the special order of 4,000 @ P10 each because
this selling price is still higher than the additional variable cost to be
19-8


Relevant Costs for Decision Making Chapter 19

incurred. Whether or not variable marketing expenses will be incurred, the
decision is still to accept the order.
Supporting computations:
(a) Assume no additional variable marketing cost will be incurred.
Selling price per unit
Less variable manufacturing costs:
Direct materials
Direct labor
Variable overhead
Contribution margin/unit

Multiplied by number of units of order
Total increase in profit

P10.00
P5.00
3.00
0.75

8.75
P 1.25
4,000 units
P5,000

(b) Assume additional variable marketing cost will be incurred.
Selling price per unit
Less variable costs (P8.75 + P0.25)
Contribution margin / unit
Multiplied by number of units of order
Total increase in contribution margin

P10.00
9.00
P 1.00
4,000 units
P4,000

Requirement 2
P8.75, the total variable manufacturing cost.
Requirement 3
Direct materials

Direct labor
Variable factory overhead
Total cost of inventory under direct costing

P5.00
3.00
0.75
P8.75

Requirement 4
Present contribution margin
[10,000 units x (P15 - P9)]
Less proposed contribution margin
[(P14 - P9) x 11,000 units]
Decrease in contribution margin

P60,000
55,000
P 5,000

The company should not reduce the selling price from P15 to P14 even if
volume will go up because total contribution margin will decrease.

19-9


Chapter 19 Relevant Costs for Decision Making

Problem 5 (CVP Analysis used for Decision Making)
Requirement (a)

Units sold per month
4,000
5,000
6,000

No. of months
6
15
9
30

Probability
20%
50%
30%
100%

Requirement (b)
4,000 units
P160,000

Production
5,000 units
P160,000

6,000 units
P160,000

100,000
-

125,000
-

150,000
-

Total
Contribution margin

P100,000
P 60,000

P125,000
P 35,000

P150,000
P 10,000

Sales (5,000 x P40)
Less variable costs
Production cost @ P25
Purchase cost @ P45

P200,000

P200,000

P200,000

100,000
45,000

125,000
-

150,000
-

Total
Contribution margin

P145,000
P 55,000

P125,000
P 75,000

P150,000
P 50,000

Sales (6,000 x P40)
Less variable costs
Production cost @ P25
Purchase cost @ P45
Total
Contribution margin

P240,000

P240,000

P240,000

100,000
90,000
P190,000
P 50,000

125,000
45,000
P170,000
P 70,000

150,000
0
P150,000
P 90,000

Sales (4,000 x P40)
Less variable costs
Production cost @ P25
Purchase cost @ P45

Requirement (c)
Sales Order
4,000

Contribution Margin
P35,000

19-10

Probability
0.20

Expected Value
P 7,000


Relevant Costs for Decision Making Chapter 19

5,000
75,000
6,000
70,000
Average Contribution Margin

0.50
0.30

37,500
21,000
P65,500

Problem 6 (Pricing)
Requirement A:

Sales
Less Variable cost
Contribution margin

Less Fixed cost
Net income (loss)

2005
P 100,000
130,000
(P 30,000)
40,000
(P 70,000)

2006
P 400,000
520,000
(P120,000)
40,000
(P160,000)

Operating
Result at Full
Capacity
P 480,000
624,000
(P144,000)
40,000
(P184,000)

The company had been operating at a loss because the product had been
selling with a negative contribution margin. Hence, the more units are
sold, the higher the loss will be.
Requirement B: P60.14

Requirement C: P74.29
Requirement D: P56.58
Problem 7 (Make or Buy)
Cost of Making
Outside purchase
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead*
Total cost

P15,000
30,000
10,000
15,000
P70,000

Cost of Buying
P90,000

P90,000

* 1/3 x P45,000 = P15,000

Therefore, the annual advantage to make the parts is P20,000.
IV. Multiple Choice Questions
1. C

11.

D

21.
19-11

D

31.

A


Chapter 19 Relevant Costs for Decision Making

2.
3.
4.
5.
6.
7.
8.
9.
10.

C
B
B
A
B
C

B
A
B

12.
13.
14.
15.
16.
17.
18.
19.
20.

A
D
A
D
C
A
C
B
C

22.
23.
24.
25.
26.
27.

28.
29.
30.

A
D
E
B
D
D
C
A
A

32.
33.
34.
35.

D
C
A
C

Supporting computations for nos. 16 - 29:
16. Sales [(100,000 x 90%) x (P5.00 x 120%)]
Less: Variable costs (P300,000 x 90%)
Contribution margin
Less: Fixed costs
Operating income

P540,000
270,000
P270,000
150,000
P120,000

17. Direct materials
Direct labor
Overhead
Selling cost
Minimum selling price per unit

P 4
5
2
3
P14

18. Relevant cost to make (10,000 x P24)
Purchase cost
Less: Savings in manufacturing cost
Avoidable fixed overhead
Net purchase price
Difference in favor of “buy” alternative

P240,000
P300,000
P45,000
50,000

19. Increase in sales (60,000 x P3)
Less: Increase in variable cost (60,000 x P2.50)
Net increase in income
20.
Sales (10,000 x P20)
Less: Variable costs
R (P12 x 10,000)
S (P 8 x 10,000)
T (P 4 x 10,000)

R
P200,000

95,000
P205,000
P 35,000
P180,000
150,000
P 30,000

S
P200,000

T
P200,000

120,000
80,000
40,000

19-12


Relevant Costs for Decision Making Chapter 19

Contribution margin
21.
Sales (P16 x 15,000)
Less: Variable costs
R (P12 x 15,000)
S (P 8 x 15,000)
T (P 4 x 15,000)
Contribution margin
Less: Fixed costs
Operating income

P 80,000

P120,000

P160,000

R
P240,000

S
P240,000

T
P240,000

180,000
120,000
60,000
P 60,000
40,000
P 20,000

P120,000
80,000
P 40,000

22. Old operating income:
Contribution margin
Less: Fixed cost

P180,000
120,000
P 60,000

P80,000
40,000
P40,000
20,000
P20,000

New operating income
Difference - decrease
23. Sales
Less: Variable costs

Direct materials
Direct labor
Factory overhead
Marketing expenses
Administrative expenses
Contribution margin
Less: Fixed costs
Factory overhead
Marketing expenses
Administrative expenses
Increase in fixed costs
Profit

19-13

P1,200,000
P300,000
400,000
80,000
70,000
50,000
P 50,000
30,000
20,000
10,000

900,000
P 300,000

110,000

P 190,000


Chapter 19 Relevant Costs for Decision Making

24. Sales
Less: Variable costs
Direct materials
Direct labor
Factory overhead
Marketing expenses
Administrative expenses
Contribution margin
Less: Fixed costs
Factory overhead
Marketing expenses
Administrative expenses
Decrease in fixed costs
(P25,000 ÷ 4)
Profit

P1,200,000
P275,000
375,000
80,000
70,000
50,000
P 50,000
30,000
20,000

(6,250)

25. Direct materials
(P2 x 5,000)
Direct labor
(P8 x 5,000)
Variable overhead
(P4 x 5,000)
Total variable costs
P70,000
Add: Avoidable fixed overhead
Total
26. Avoidable fixed overhead
Direct materials
Direct labor
Variable overhead
Total
Multiplied by: Number of units to be produced
Total relevant costs to make the part
27. Purchase cost (P1.25 x 10,000)
Variable costs to make
Savings of making the blade
28. Selling price per unit
Less: Variable costs of goods sold per unit
([P320,000 - P80,000] ÷ 20,000 units)
19-14

850,000
P 350,000

93,750
P 256,250

P10,000
40,000
20,000
10,000
P80,000
P 4
4
16
18
P42
20,000
P840,000
P12,500
10,000
P 2,500
P17
12


Relevant Costs for Decision Making Chapter 19

Contribution margin per unit
Multiplied by units to be sold under Special Order
Increase in operating income
29. Budgeted operating income:
Contribution margin (P2,000,000 x 30%)
Less fixed costs

Net operating income
Operating income under the proposal:
Sales
P2,000,000
Less Variable costs
([70% x P2,000,000] x 80%) 1,120,000
Contribution margin
P 880,000
Less fixed costs
520,000
Increase in budgeted operating profit

19-15

P 5
2,000
P10,000
P600,000
400,000
P200,000

360,000
P160,000