Special Order

1. Aldous Corp. Manufacure batons. Aldous can manufacture 300,000 batons a year
at a variable cost of P750,000 and a fixed cost of P450,000. Based in Aldous's
predictions, 240,000 batons will be sold at a regular price of P6 each. In addition a
special order was placed for 60,000 batons to be sold at a 40% discount off the
regular price . By what amount would income before taxes be increased or decreased
as a result of the special order?
a. P60,000 decrease
b. P30,000 increase
c. P36,000 increase
d. P180,000 increase
2. Bon Company manufactures part no.1700 for use in its production cycle.
The cost per unit for 5,000 units if part No. 1700 is as follows
Direct materials
Direct Labor
Variable overhead
Fixed overhead applied

2.00
12.00
5.00
7.00
26.00

Hans Co. Has offered to sell Bon 5000 units of part No. 1700 for P27 per unit. If Bon
accepts the offer, some of the facilities presently used to manufacture par No. 1700
could be used to help with the manufacture of Part No. 1211 and thus save P40,000
in relevant cost in the manufacure of Part No 1211, and P3 per unit of fixed overhead
applied to part No. 1700 would be totally eliminated. By what amount would net
relevant costs be increased or decreased if Bon accepts Hans offer?
a. P35,000 decrease
b. P20,000 decrease
c. P15,000 decrease
d. P5000 increase

Quiz - P 5
Prelim P 6

Sales
Variable cost
Contribution margin
Fixed Cost
Net income

Before Special Order

With Special Order
Amount
Production
Per Unit
Amount
1,440,000.00
240,000.00
6.00
216,000.00
750,000.00
300,000.00
2.50
150,000.00
690,000.00
66,000.00
450,000.00
240,000.00
No. 28

Purchase costs
Avoidable costs:
Direct materials
Direct Labor
Variable overhead
Fixed overhead applied
Total avoidable costs
Savings

Volume
5,000.00

U.Cost
27.00

Amount
135,000.00

5,000.00
5,000.00
5,000.00

2.00
12.00
5.00
19.00
3.00

10,000.00
60,000.00
25,000.00
95,000.00
15,000.00
110,000.00
40,000.00
150,000.00
15,000.00

5,000.00

Total
Net advantage of buying from Hans

Quiz - P 5
Prelim P 6

0,000 batons a year

ed in Aldous's
each. In addition a
discount off the
creased or decreased
Key-80
Sales
Variable cost
Contribution margin
Fixed Cost
Net income

ction cycle.

P27 per unit. If Bon

acture par No. 1700

Purchase costs
Avoidable costs:
Direct materials
Direct Labor
Variable overhead

thus save P40,000

nit of fixed overhead
mount would net

Fixed overhead applied

Total avoidable costs
Savings

With Special Order

Total
Production
Per Unit
Amount
Production
Per Unit
60,000.00
3.60
1,656,000.00
300,000.00
5.00
60,000.00
2.50
900,000.00
360,000.00
2.50
756,000.00
###
306,000.00
Price at P 6
No 27
66,000.00

No. 29

Quiz - P 5
Prelim P 6

Amount

Before Special Order

With Special Order
Production
Per Unit
Amount
Production
Per Unit
6.00
3.60
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
-

No. 2

Price at P 6

Volume

U.Cost

urchase costs
voidable costs:
irect materials
irect Labor
ariable overhead

xed overhead applied

otal avoidable costs
Total
Net advantage of buying from Hans

Amount
-

No. 3

No 1

Total
Production

Amount
#VALUE!
#VALUE!
#VALUE!

Per Unit
5.00
#VALUE!

Eliminate or Drop a product line

A multi-product company after preparing its annual income statement showing for each
the sales, costs, and expenses and net income, gave you the following statements:

Sales
Variable costs
Contribution margin
Fixed costs traceable to product
Common cost allocated
Net income (loss)

1
240,000.00
140,000.00
100,000.00
35,000.00
45,000.00
20,000.00

Products
2
360,000.00
220,000.00
140,000.00
40,000.00
65,000.00
35,000.00

You were informed that an official proposed to drop product 3 in order to increase
the over-all net income by P5,000 when the loss sustained in the production is eliminate
Another official disagreed arguing that it must be the P50,000 contribution margin
derived from the product that must be considered not the loss of P5,000.

Give your own opinion supported by necessary computations that will enlighten the offic

Solution:
Contribution margin that will be lost if Product 3 is dropped
Reduction in fixed cost of Product 3
Net disadvangabe of dropping product 3

ement showing for each individual product

llowing statements:

oducts
3
180,000.00
130,000.00
50,000.00
30,000.00
25,000.00
(5,000.00)

n order to increase
e production is eliminated.
ontribution margin
of P5,000.

hat will enlighten the officials on the matter.

No 4

Retain or Eliminate a Department

A summary statement of profits by operating departments has been prepared for the A
Company showing results for a typical year. Included in the costs are costsof the home
office that have been allocated to the departments in proportion to sales revenue. All
costs with the exception of home office costs -------in total amount of
can be eliminated by elimination of a department.

Sales
Costs

Total
3,000,000
2,830,000

1
450,000
260,000

Department
2
1,200,000
950,000

Required:
Based on infromation given which department or departments should be eliminated?
Give reasons for your answer.
Solution:
Aldous Company
Statement of Income
Key 80
Department
Total
Sales
Costs
Allocated costs*
Contrubution Margin

#DIV/0!
#DIV/0!

#DIV/0!
#DIV/0!

0
0
#VALUE!

*Allocated costs = (Division sales/Total sales) (P 700,000.00)

Conclusion:
Department 3 should be eliminated because it has negative contribution margin

een prepared for the Aldous

are costsof the home
to sales revenue. All
700,000.00

Department
3
450,000
580,000

4
900,000
1,040,000

hould be eliminated?

Department
3

#DIV/0!
#DIV/0!
No. 5

ribution margin

#DIV/0!
#DIV/0!

Sell As Is or Process Further

The TJ Meat Company produces a meat product which can be sold after slaughtering
without additional processing, or it can be processed and then sold. For the next month,
the company has scheduled production of 20,000 units of the product which if sold
unprocessed would bring a selling price of P7 per unit. The variable costs associated wi
producing the unprocessed product is P3 per unit and the fixed costs of the facilities use
for producing the unpocessed product is P50,000 for the month. If 20,000 units of the
unprocessed product are produced, the entire capacity of that part of the plant will be u
However, there will be unused capacity in the part of the plant used for the additional
processing - the smoking. If the 20,000 units are smoked, this capacity which would oth
will be entirely used.

The additional variable costs, mainly for heating and smoking ingredients, is estimated
be P2 per unit; and the selling price of the processed product is P10 per unit. The month
fixed cost depreciation on the portion of the facility used for additional processing
amounts to P15,000. This cost is fixed regardless of whether or not the product is
processed further.
Do an analysis to help the manager decide whether the 20,000 units should be sold
processed or unprocessed.

d after slaughtering
d. For the next month,
duct which if sold
le costs associated with
osts of the facilities used
f 20,000 units of the
rt of the plant will be used.
ed for the additional
pacity which would otherwise

redients, is estimated to
10 per unit. The monthly
ional processing
ot the product is

nits should be sold

Solution:
Key 80
Volume
Sales
Varialble Costs:

Contribution Margin
Fixed Costs
Net income

Conclusion : Process Further since the C

Sell as is
U.Costs/S. Price
7.00
10.00

Process Further
-

3.00
5.00

50,000.00
(50,000.00)

ocess Further since the CM is favorable

50,000.00
(50,000.00)

1) Net Initial Investment or Project Cost

The Management of Ingrid Company plans to replace a sorting machine that was acquired years ag
machine has its residual value of P 10 thousand.

A new sorter can be purchased for P 100 thousand. The dealer will grant a trade in allowance of P 1
new machine is not purchased, the Company will spend P 5 thousand to repair the old machine. Ga
transactions are not subject to income taxes. The cost to repair the old machine can be deducted i
estimated at 30% fo the income tax. additional working capital required is P 40 thousand.

What is the net investment in the new machine?

2) Computation of Weighted Average Cost of Capital

The following information on Judith Corporation's capital structure is availabe from the latest statem
Source
Bank loan
Preference Shares
Ordinary Shares
Retained earnings
Total

Rate
6%
5%
-

Amount
300,000
100,000
200,000
400,000
1,000,000

Additional data:
Current market price per share
Preference shares
Ordinary shares
Dividend per share
Preference shares
Ordinary shares
Dividend growth rate
Corporate tax rate
Given rate
a) Cost of
1) Bank loan
= Interest rate (1- Corporate Tax Rate)
2) Preferred shares = Dividends per share/ MV/share of Preferred shares
(Expected cash dividends per share/current price p
3) Ordinary shares =
share of ordinary shares )+ Dividend Growth Rate
4) Retained earnings (same as ordinary shares)
b) Weighted Average Cost of Capital
Source
Rate
Amount

Proportion

3) Net Present Value Application, Uniform Cash Inflows

J&T wants to invest in a machine costing P 80K with a useful life of 6 years and no salvage value. T
the straight line method and is expected to produce annual cash inflow from operations, net of inco
of an ordinary annuity of P 1 for 6 periods at 10% is 4.355. The present value of P 1 for 6 periods a
wants a minimum rate of return of 10%, what is the net present value of this proposed investment?

J&T wants to invest in a machine costing P 80K with a useful life of 6 years and no salvage value. T
the straight line method and is expected to produce annual cash inflow from operations, net of inco
of an ordinary annuity of P 1 for 6 periods at 10% is 4.355. The present value of P 1 for 6 periods a
wants a minimum rate of return of 10%, what is the net present value of this proposed investment?

4) Net Present Value Application: Not Uniform Cash Inflows

Judith Corporation plans to invest in a four year project that will cost P 750K. Judith cost of capital i
project is as follows:
Year

Cash Flow from

Present
Operations net of taxes Value of P
1 at 8%

1
200,000
0.926
2
220,000
0.857
3
240,000
0.794
4
260,000
0.735
Required: Using the net present value method, determine whether the project is acceptable or not.

5) Discounted Payback Period

A project requiring an investment of P 170,000.00 is expected to generate the following cash inflo
Present Value factor at Discounted Cash Flow
15%
Year
Cash Flow
Balance
170,000.00
0
170,000.00
1
60000
0.870
2
60000
0.756
3
60000
0.658
4
60000
0.572
5
60000
Required:
1. If the cost of capital is 15%, what is its discounted payback period
2. Should the profit be accepted if the maximum allowable DPB is 3 years?

was acquired years ago at a cost of P 50 thousand. The

ade in allowance of P 10 thousand on the old machine. If

ir the old machine. Gains and losses on trade-in
ine can be deducted in computing taxes. Income taxes are
40 thousand.

from the latest statement

Proportion
30%
10%
20%
40%
100%

62.50
40.00
5.00
2.00
4%
32%
100%

of Preferred shares
r share/current price per
Dividend Growth Rate

Cost

Weighted Cost

nd no salvage value. The machine will be depreciated using

operations, net of income taxes, of P 22K. The presen value
e of P 1 for 6 periods at 10% is 0.564. Assuming that T & J
proposed investment? Is the proposal acceptable?

Judith cost of capital is 8%. Additional information on the

ct is acceptable or not.

e following cash inflows.

Compounded interest

n
=
tm
where n = total number of conversion period
m= the frequency of conversion (m), is the number of times that the interest is computed for th
t= time
To describe, please see below table
Description
Annually
Semi-annually
Quarterly
Monthly

Conversion
Period

Time (t) in year

Frequency of
Conversion (m)

I year
6 months
3 months
1 month

1
3
2
5

1
2
4
12

The nominal rate j, is the rate charged which may be converted several times per year. To ge the inter
the frequency of conversion per year.
t = j/m
Description
Annually
Semi-annually
Quarterly
Monthly

Conversion
Period

Frequency of
Conversion (m)

Nominal Rate (j)

I year
6 months
3 months
1 month

1
2
4
12

10%
12%
14%
16%

he interest is computed for the span of 1 year

Total Number of
Conversion (n=tm)
1
6
8
60

mes per year. To ge the interest rate per period I, divide rate by

Interest Rate per

Period (i=j/m)
10%
6%
4%
1.33%

Amount of investment at the end of n period

Period (n)

Principal (P)

Interest (I)

0
1
2

P
P
P

0
P(i)
P (1+i)(i)

With this, if the number of conversion periods is n, the accumulation factor (1+i
exponent n. The formula for compound amount at the end of n period is:
n

F= P (1+i)

of n period
Amount (F)
F=P+0
F=P+P(i) or F = P (1+i)
F= P(1+i) + P(1+i)i or F =
2
P(1+i) (1+i) or F = P (1+i)

umulation factor (1+i) will have an

of n period is:

Good exercise for compound interest

If P 12,900 is invested for 4 years in a bank that pay 3% compounded s

investor receive after 4 years?
Given:
Value=
P=
t in years=
m (frequency)=
j(nominal rate)=
Formula
where i= J/m
and n = tm
FV = Principal + Interest

Computation:
1
12,900.00
4
2
3.00%
1.50%
8

F= P (1+i)
F = 12,900 ( 1 + .015)
F=
I=
Interest

t pay 3% compounded semi-annually, what sum will the

r receive after 4 years? How much interest was earned?

Computation:
n

= P (1+i)
8
= 12,900 ( 1 + .015)
14,531.75 Formula
1,631.75 Formula
1.5% calculated thru = rate-formula

Good exercise for Present value at compound interest

What is the present value of P 35,000.00 due in 7 years and 6 months if mon

Given:
Value=
F=
t in years=
m (frequency)=
j(nominal rate)=
Formula
where i= J/m
and n = tm

Computation:
1
35,000.00
7.50
4
12.00%
3.00%
30

F= P (1+i)
P=F/(1+i)
Present Value

Note - The present value of P

FV = Principal + Interest

If money is invested at 6% compounded semi-annually, find the present valu

Given:
Value=
F=
t in years=
m (frequency)=
j(nominal rate)=
Formula
where i= J/m
and n = tm
FV = Principal + Interest

Computation:
1
94,500.00
3.00
2
6.00%
3.00%
6

F= P (1+i)
P=F/(1+i)
Present Value

Note - The present value of P

ompound interest

ars and 6 months if money is worth 12% compounded quarterly

Computation:
n

= P (1+i)
=F/(1+i) 30
resent Value

14,419.54

Formula

Note - The present value of P 35K that is due at the end of 7 years

ly, find the present value of P94,000.00 which is due in 3 years

Computation:
n

= P (1+i)
-6
=F/(1+i)
resent Value

79,142.26

Formula

Note - The present value of P 94.5K that is due at the end of 3 years

Ilustrative Problem 20.1 Preparation of Segmental Income Statemen

From the following data, prepare a segmental income

results
Sales
Fixed Costs:
Controllable by division manager
Controllable by others
Variable Costs:
Manufacturing
Selling and Administrative
Unallocated fixed costs:
Manufacturing
Selling and Administrative
T & J Company
Income Statement by Segment
`
Sales
Variable Costs:
Manufacturing
Selling and Administrative
Total Variable Costs
Contribution Margin
Fixed CostControllable by division manager
Contribution Margin - Controllable by Divisi
Fixed CostControllable by others
Division Segment Margin
Unallocated fixed costs:
Manufacturing
Selling and Administrative
Total

Net Income

Both divisions showed positive results as far as the Co

However, the Agricultural Division showed a much sm
fixed costs allocated to it. The Manager of this division
adjusting the selling price of his products or controllin
have profits.

ental Income Statement

a segmental income statement for the T & J Company for year 201

Total
1,000,000.00
250,000.00
120,000.00
420,000.00
140,000.00

Divisions
Pharmaceutical
Agricultural
600,000.00
400,000.00
130,000.00
120,000.00
70,000.00
50,000.00
220,000.00
70,000.00

200,000.00
###

40,000.00
20,000.00

Total
1,000,000.00
(420,000.00)
(140,000.00)
(560,000.00)
440,000.00
(250,000.00)
190,000.00
(120,000.00)
70,000.00
(40,000.00)
(20,000.00)
(60,000.00)

Divisions
Pharmaceutical
Agricultural
600,000.00
400,000.00
(220,000.00)
(70,000.00)
(290,000.00)
310,000.00
(130,000.00)
180,000.00
(70,000.00)
110,000.00

(200,000.00)
###
(270,000.00)
130,000.00
(120,000.00)
10,000.00
(50,000.00)
(40,000.00)

10,000.00

sults as far as the Contribution Controllable by Division Managers a

n showed a much smaller contribution so that it was not able to full
nager of this division should strive to have a bigger contribution m
roducts or controlling the varialbe costs to enable it to absorb fixed

pany for year 2014 and evaluate the

vision Managers are concerned.

was not able to fully absorb the other
ger contribution margin either by
e it to absorb fixed costs and still