Solution manual managerial accounting by cabrera 2010 chapter 19 answer

In view of the definition of relevant costs, historical costs arealways irrelevant because they are not future costs.. Requirement 3When figuring the incremental cost of the more expensi

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of materials, labor and overhead Qualitative factors are those whose

measurement in pesos is difficult and imprecise; yet a qualitative factor may beeasily 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 arealways irrelevant because they are not future costs They may be helpful in predicting relevant costs but they are always irrelevant costs per se.3 Thedifferential 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:#Replace #Rebuild## New Truck#P10,200###

Less: Proceeds from #### disposal, net # 1,000####P 9,200#P8,500##Advantage of rebuilding#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

2##Item#Relevant#Not Relevant#Relevant#Not Relevant##a Sales revenue

#X###X##b Direct materials #X##X###c Direct labor #X###X##d.Variable manufacturing overhead #X###X##e Book value � Model E7000 machine ##X##X##f Disposal value � Model E7000 machine ##X#X###g

Depreciation � Model E7000 machine ##X##X##h Market value � Model F5000

#X##X###i Fixed manufacturing overhead ##X##X##j.Variable selling expense #X###X##k Fixed selling expense

#X###X##l General administrative overhead #X###X##Exercise 2

#P0.35##Variable operating cost per mile #� 0.08##Average costper 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 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 3When figuring the incremental cost of the more expensive car, the relevant costs would be the purchase price of the new 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

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�����������0##Total costs #P170#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.##

#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

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#Total####Unit#10 bracelets###Incremental revenue

#P3,499.50#P34,995.00###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 specialorder affected the regular selling price of bracelets or if it required the use

labor rate per hour

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###P#3#6#,#0#0#0###P#2#7#,#0#0#0#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 guidemanagement 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 contributionmargin 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 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

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 C##Sales value after further processing #P80,000�#P150,000#P75,000##Sales value at split-off point # �50,000�#���90,000#�60,000##Incremental

revenue #30,000�#60,000#15,000##Cost of further processing #�

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

costs/unit:#### Materials#0.50#0.70## Labor#0.20#0.24## Factory overhead

Contribution margin/unit#P0.40#P0.32##Multiplied by number of units to be sold#21,000 units#30,000 units##

Total contribution margin#P8,400 #P9,600## Product B should be

accepted because its total contribution margin is higher than that of Product A.sale of the round trampolines should not be discontinued Computations to support this answer follow:Contribution margin lost if the round trampolines

are discontinued

avoided: Advertising � traceable P41,000 Line supervisors� salaries

6,000 47,000Decrease in net operating income for the

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:

##Trampoline###Total#Round#Rectangular#Octagonal##Sales

#P1,000,000#P140,000#P500,000#P360,000##Less variable expenses # 410,000# 60,000# 200,000# 150,000##Contribution margin # 590,000# 80,000# 300,000# 210,000##Less fixed expenses:######Advertising � traceable

#216,000#41,000#110,000#65,000##Depreciation of special equipment #95,000#20,000#40,000#35,000##Line supervisors� salaries # 19,000# 6,000# 7,000# 6,000##Total traceable fixed expenses # 330,000# 67,000# 157,000# 106,000##Product-line segment margin #260,000#P 13,000#P143,000#P104,000##Less common fixed expenses # 200,000#####Net operating Line ###A#B#C#D##Selling price per unit#P30#P25#P10#P8##Variable cost per unit# 25# 10# 5# 4##Contribution margin / unit#P5 #P15#P 5#P4##Divided by no

of hours required for each unit#5 hrs.#10 hrs.#4 hrs.#1 hr.##Contribution per hour#P1#P1.5#P1.25#P4## Product ranking: 1 D 2 B

3 C 4 ABased on the above analysis, first priority should be given to Product D The company should use 4,000 out of the available96,000 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 2If 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 iscomputed as follows:

P 16,000 138,000 Total contribution margin of D and B P154,000 Less

P230,000Problem 4 special order of 4,000 @ P10 each because this selling price is still higher than the additional variable cost to be incurred Whether or not variable marketing expenses will be incurred, the decision is still to accept the order.

Supporting computations: Assume no additional variable

marketing cost will be incurred Selling price per unit P10.00

Less variable manufacturing costs: Direct materials

0.75 8.75 Contribution margin/unit P 1.25

Multiplied by number of units of order 4,000 units

Total increase in profit P5,000 Assume additional variable marketing cost will be incurred Selling price per unit

Contribution margin / unit P 1.00 Multiplied by number of units of order 4,000 units Total increase in contribution margin P4,000 Requirement 2 P8.75, the total variable manufacturing cost Requirement 3 Direct materials P5.00 Direct labor 3.00 Variable factory overhead 0.75 Total cost of

inventory under direct costing P8.75 Requirement 4 Present contribution

in contribution margin 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.Problem 5 (CVP Analysis used for Decision months#Probability##4,000#6#20%##5,000#15#50%##6,000# 9# 30%###30#100%##

Production cost @ P25#100,000#125,000#150,000##Purchase cost @ P45#

Total#P100,000#P125,000#P150,000##Contribution margin#P 60,000#P

35,000#P 10,000###########################Sales (5,000 x

Production cost @ P25#100,000#125,000#150,000## Purchase cost @ P45# 45,000# - #

- ## Total#P145,000#P125,000#P150,000##Contribution margin#P 55,000#P 75,000#P 50,000#######Sales (6,000 x

Production cost @ P25#100,000#125,000#150,000## Purchase cost @ P45# 90,000# 45,000# 0## Total#P190,000#P170,000#P150,000##Contribution margin#P 50,000#P Margin#Probability#Expected Value##4,000#P35,000#0.20#P

7,000##5,000#75,000#0.50#37,500##6,000#70,000#0.30# 21,000## Average

Requirement A:#2005#

2006#Operating Result at Full Capacity##Sales#P 100,000#P 400,000#P

480,000##Less Variable cost# 130,000# 520,000# 624,000##Contribution

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: P60.14Requirement C: P74.29Requirement D: P56.58Problem materials#P15,000###Direct labor#30,000###Variable manufacturing

overhead#10,000###Fixed manufacturing overhead*# 15,000# ## Total cost#P70,000#P90,000## * 1/3 x P45,000 = P15,000Therefore, the annual advantage to make the parts is P20,000.IV Multiple Choice Questions

unit P1418 P240,000 Purchase cost P300,000 Less: Savings in manufacturing cost P45,000

Avoidable fixed overhead 50,000 95,000 Net purchase price P205,000 Difference in favor of �buy� alternative P 35,000

150,000 Net increase inincome P 30,00020.#R#S#T## Sales (10,000 x

Less: Variable costs##### R (P12 x

# # 40,000## Contribution margin#P 80,000#P120,000#P160,000## 21.#R#S#T## Sales (P16 x

Less: Variable costs##### R (P12 x

# # 60,000## Contribution margin#P 60,000#P120,000#P180,000## Less: Fixed costs# 40,000# 80,000#

120,000## Operating income#P 20,000#P 40,000#P 60,000##22 Old operating

20,000 Difference - decrease P20,00023 Sales

P1,200,000 Less: Variable costs Direct materials P300,000

Direct labor 400,000 Factory overhead 80,000

Marketing expenses 70,000 Administrative expenses 50,000 900,000 Contribution margin P 300,000 Less: Fixed costs

Factory overhead P 50,000 Marketing expenses 30,000Administrative expenses 20,000 Increase in fixed costs

40,000

P80,00026 Avoidable fixed overhead P 4 Direct

18 Total P42 Multiplied by: Number of units to be produced

20,000 Total relevant costs to make the part P840,000

to make 10,000 Savings of making the blade P 2,50028

Selling price per unit P17 Less: Variable costs of goods sold

Contribution margin per unit P 5 Multiplied by units to be sold under Special Order 2,000 Increase in operating income

P10,00029 Budgeted operating income: Contribution margin

P600,000 Less fixed costs 400,000Net operating income P200,000 Operating income under the proposal: Sales P2,000,000 Less Variable costs

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