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TitleRelevant Costing (2)
TagsCost Labour Economics Sales Inventory Outsourcing
File Size126.1 KB
Total Pages6
Document Text Contents
Page 3

P483,800. Assume that 70% of construction overhead is fixed.

A. Suppose that business is presently very slow, and the client countered with an offer

on this home of P390,000. Should Robinson accept the client's offer? Why?
B. If Robinson has more business than he can handle, how much should he be willing to

accept for the home? Why?

Special Order, Outsourcing

Cornell Corporation manufactures faucets. Several weeks ago, the firm received a special-order
inquiry from Yale, Inc. Yale desires to market a faucet similar to Cornell's model no. 55 and has
offered to purchase 3,000 units. The following data are available:
 Cost data for Cornell's model no. 55 faucet: direct materials, P45; direct labor, P30 (2

hours at P15 per hour); and manufacturing overhead, P70 (2 hours at P35 per hour).
 The normal selling price of model no. 55 is P180; however, Yale has offered Cornell only

P115 because of the large quantity it is willing to purchase.
 Yale requires a design modification that will allow a P4 reduction in direct-material cost.
 Cornell's production supervisor notes that the company will incur P8,700 in additional

set-up costs and will have to purchase a P3,300 special device to manufacture these units.
The device will be discarded once the special order is completed.

 Total manufacturing overhead costs are applied to production at the rate of P35 per labor
hour. This figure is based, in part, on budgeted yearly fixed overhead of P624,000 and
planned production activity of 24,000 labor hours.

 Cornell will allocate P5,000 of existing fixed administrative costs to the order as "…part
of the cost of doing business."

A. One of Cornell's staff accountants wants to reject the special order because "financially, it's a

loser." Do you agree with this conclusion if Cornell currently has excess capacity? Show
calculations to support your answer.

B. If Cornell currently has no excess capacity, should the order be rejected from a financial
perspective? Briefly explain.

C. Assume that Cornell currently has no excess capacity. Would outsourcing be an option that
Cornell could consider if management truly wanted to do business with Yale? Briefly
discuss, citing several key considerations for Cornell in your answer.


St. Joseph Hospital has been hit with a number of complaints about its food service from patients,
employees, and cafeteria customers. These complaints, coupled with a very tight local labor
market, have prompted the organization to contact Nationwide Institutional Food Service (NIFS)
about the possibility of an outsourcing arrangement.

The hospital's business office has provided the following information for food service for the year
just ended: food costs, P890,000; labor, P85,000; variable overhead, P35,000; allocated fixed
overhead, P60,000; and cafeteria food sales, P80,000.

Conversations with NIFS personnel revealed the following information:
 NIFS will charge St. Joseph Hospital P14 per day for each patient served. Note: This

figure has been "marked up" by NIFS to reflect the firm's cost of operating the hospital

 St. Joseph's 250-bed facility operates throughout the year and typically has an average
occupancy rate of 70%.

 Labor is the primary driver for variable overhead. If an outsourcing agreement is
reached, hospital labor costs will drop by 90%. NIFS plans to use St. Joseph facilities for
meal preparation.

 Cafeteria food sales are expected to increase by 15% because NIFS will offer an
improved menu selection.


Page 5

Manufacturing overhead:
Variable* 3.00 2.50
Fixed** 4 .00 5 .00

Total P14 .50 P15 .50

*Applied on the basis of direct labor hours
**Applied on the basis of machine hours

The company requires 8,000 units of C15 and 11,000 units of C19. Recently, management
decided to devote additional machine time to other product lines, resulting in only 31,000
machine hours per year that can be dedicated to production of the bearings. An outside company
has offered to sell Fowler the bearings at prices of P13.50 for C15 and P13.50 for C19.

A. Assume that Fowler decided to produce all C15s and purchase C19s only as needed.

Determine the number of C19s to be purchased.
B. Compute the net benefit to the firm of manufacturing (rather than purchasing) a unit of C15.

Repeat the calculation for a unit of C19.
C. Fowler lacks sufficient machine time to produce all of the C15s and C19s needed. Which

component (C15 or C19) should Fowler manufacture first with the limited machine hours
available? Why? Be sure to show all supporting computations.

Use of Excess Production Capacity

Lee Company has met all production requirements for the current month and has an opportunity
to manufacture additional units with its excess capacity. Unit selling prices and unit costs for
three product lines follow.

Plain Regular Super
Selling price P40 P55 P65
Direct material 12 16 22
Direct labor (at P20 per hour) 10 15 20
Variable overhead 8 12 16
Fixed overhead 6 7 8

Variable overhead is applied on the basis of direct labor dollars, whereas fixed overhead is
applied on the basis of machine hours. There is sufficient demand for the additional manufacture
of all products.

A. If Lee Company has excess machine capacity and can add more labor as needed (i.e., neither

machine capacity nor labor is a constraint), which product is the most attractive to produce?
B. If Lee Company has excess machine capacity but a limited amount of labor time available,

which product or products should be manufactured in the excess capacity?

Joint Costs: Allocation and Decision Making

Riverside Company manufactures G and H in a joint process. The joint costs amount to P80,000
per batch of finished goods. Each batch yields 20,000 liters, of which 40% are G and 60% are H.
The selling price of G is P8.75 per liter, and the selling price of H is P15.00 per liter.

A. If the joint costs are allocated on the basis of the products' sales value at the split-off point,

what amount of joint cost will be charged to each product?
B. Riverside has discovered a new process by which G can be refined into Product GG, which

has a sales price of P12 per liter. This additional processing would increase costs by P2.10
per liter. Assuming there are no other changes in costs, should the company use the new
process? Show calculations.


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