1.

Nagbabalik si Caris Ambashort Company which usually produces high heel sneakers however the
company recently received an order for regular sneakers, a product that it does not normally
produce. Since the company has excess production capacity, Caris is considering accepting the
order. In analyzing the decision, the assistant controller is compiling the relevant costs of
producing the order.

The special order requires 1,000 kilograms of powdered Silver Dust, a solid chemical regularly
used in the company’s high heel sneakers. The current stock of Silver Dust is 8,000 kilograms at a
book value of P8.10 per kilogram. If the special order is accepted, the company will be forced to
restock the powdered Silver Dust earlier than expected, at a predicted cost of P8.50 per kilogram.
Without the special order, the purchasing manager predicts that the price will be P8.30 per
kilogram, when normal restocking takes place. Any order of Silver Dust must be in 5,000
kilograms.

What is the relevant cost of powdered Silver Dust to be included in the special order?

A. P42,500
B. P9,300
C. P8,900
D. P8,500

Solution:
Cost of 1,000kg at latest price (1,000 x 8.5) 8,500
Add: excess price included on the remaining 4,000kg. (4,000 x (8.5 - 8.3)) 800
Relevant Cost 9,300

2. Juan Pablo Hola Company currently sells 1,000 units of Wonder Beer. “Wonder Beer” is a
special formulation drink in which the more you drink the slimmer and flatter your tummy gets.
The product is sold at P500 each with a variable cost of P300 per product. A certain company
offers to buy 300 units of wonder beer at P400 each.

The managers of the company believes that if they accept the special order, they will lose some
sales at a regular price. How many units that the company could lose before the order becomes
unprofitable.

A. 150 units
B. 200 units
C. 350 units
D. 400 units
 Solution:

The maximum decrease in regular sales = CM of special sales / CMu regular sales

300u × (P 400 − P 300)

P 500 − P 300 ​→ 150 units

3. A strong independent woman named Diana Tobasco is planning to dispose of her two-bedroom
condo unit to buy a studio type unit since her current space is too big for her to live alone. She
can sell the unit through a broker for P2,500,000 less 5% commission.

However, Jannic, a woman with a husband and a kid, has offered to lease the unit for P36,000 a
month for 5 years. Diana will have to incur P20,000 for repairs and repainting the unit.

The net differential income for the lease alternative is:

A. P270,000
B. P250,000
C. P230,000
D. No difference

Solution:

Lease arrangement :
Rental Income ( 6 yrs) 2,520,000
Cost of repairs and repainting (20,000)
NI P2,500,000

Sales arrangement:
Net proceeds ( 2,500,000 x .9) P​2,250,000

Differential income : P250,000

Choose to Lease

Question Nos. 4 and 5 are based on the following:

 The Southern Company produced portable elevators for students who are too lazy and do not
want to use the stairs. The costs of manufacturing and marketing these portable elevators at the
company’s normal volume of 3,000 units per month are shown below:

Unit Manufacturing costs:

Direct Materials P550
Direct Labor P825
Variable Overhead P420
Fixed Overhead P660 P2,455

Unit Marketing Costs:

Variable P275
Fixed P​770 P1,045
Total Unit Costs P3,500

Unless otherwise stated, each question is to be treated independently; assume there is no

connection between the situations described in the questions. Unless otherwise stated, a regular
selling price of P4,350 per unit should be assumed. Ignore income taxes and other costs that are
not mentioned in the cost schedule or in the question itself.

4. According to the company’s market research estimates, the volume could be increased to 3,500
units, which is well within the portable elevator production capacity limitations, provided that the
price were cut from P4,350 to P3,850 per unit. Assuming the cost behavior patterns as implied by
the data in the cost schedule is correct, would you recommend this action be taken?
A. Yes, because the profit will increase by P1,500,000.
B. Yes, because the profit will increase by P200,000.
C. No, because the profit will decrease by P610,000.
D. No, because the profit will decrease by P2,400,000.

Solution:
In as much that there would be no change in the amount of the fixed costs, the
recommended solution was made by just comparing the amounts of contribution margin
based on the revised data and the original information:

CM based on estimates (3,500 x (3,850 - 2,070)) P6,230,000

CM based on current Estimates decrease (3,000 x 2,280) P6,840,000
Decrease in Profit P(610,000)

5. Upon strolling through the premises of the company, the COO (Child Of the Owner) discovered
an inventory of 230 units of an obsolete model of the portable elevator remaining in the
stockroom. As a responsible accountant you suggested that these must be sold through regular
 channels at reduced prices, or the inventory will soon be valueless. What is the minimum price
that would be acceptable in selling these units?
A. P1,795
B. P2,070
C. P1,045
D. P275

Solution:
All the production costs, both variable and fixed, are no longer relevant because they are
sunk costs. To be relevant to a decision, the cost must be both a differential and a future
costs. Therefore, the only relevant cost is the variable marketing cost, because if the units
will be sold through regular channels, ​P275​ will be incurred.

6. EASIEST QUESTION Company is preparing its cash budget for the month ending November 30.
The following information pertains to EASIEST QUESTION’s past collection experience from
its credit sales:

Current month’s sales 12%

Prior month’s sales 75%
Sales two months prior to current month 6%
Sales three months prior to current month 4%
Cash Discounts (2/30, net/90) 2%
Doubtful Accounts 1%
Credit Sales:
November - Estimated P2,500,000
October P1,800,000
September P1,600,000
August P1,900,000

How much is the estimated credit to Accounts Receivable as a result of collections expected
during November?
A. P294,000
B. P1,816,000
C. P1,822,000
D. P1,872,000

Solution:
Gross receivable collected month’s sales
November 2,500,000 x 12% P300,000
October 1,800,000 x 75% P1,350,000
September 1,600,000 x 6% P96,000
August 1,900,000 x 4% P76,000
Total Credit P1,822,000
7. Scared To Fail company presented the following information:

Each unit of product requires 2 lbs of direct materials. The company begins each quarter with
inventory of direct materials equal to 20% of the total quarter’s material requirement.

Quarter Production

First 40,000 units

Second 55,000 units

Third 50.000 units

Fourth 45,000 units

What is the budgeted purchases of materials for the second quarter?

A. 94,000 kg
B. 114,000 kg
C. 108,000 kg
D. 101,000 kg

Solution:
Materials required by 2nd Q (55,000 x 2 ) 110,000
Add: Materials, Ending ( 50,000 x 2 x 20% ) 20,000
Total materials required 130,000
Less: Materials, Beginning ( 110,000 x .2 ) (22,000)
Total budget purchases in KG 108,000 kg

Questions Nos. 8 through 10 are based on PAG STUDY Corporation, a retailer whose sales are
all made on credit. Sales are billed twice monthly, on the 10th of the month for the last half of the
prior month’s sales, and on the 20th of the month for the first half of the current month’s sales.
The terms of all sales are 2/10, net 30. Based upon past experience, the collection of accounts
receivable is as follows:
Within discount period 83%
On the 30th day 15%
Uncollectible 2%
 PAG STUDY’s average mark up on its products is 25% of the sales price. All sales and purchases
occur uniformly throughout the month. The sales value if shipments for May and the forecast for
the next four months is as follows:
May (Actual) P500,000
June P600,000
July P700,000
August P700,000
September P400,000

PAG STUDY purchases merchandise for resale to meet the current month’s sales demand and to
maintain a desired monthly ending inventory of 25% of the next month’s sales. All purchases are
on credit with terms of net/30. PAG STUDY pays for 50% of a month’s purchases in the month
of purchase and 50% in the month following the purchase.

8. How much cash can PAG STUDY plan to collect in September from sales made in August?
A. P337,190
B. P332,500
C. P290,500
D. P284,690

Solution:
August Sales:
Billed 8/20 P350,000 x 15% P52,500
Billed 9/10 P350,000 x 83% x 98% P284,690
Collections in Sept from Aug Sales P337,190

9. The budgeted peso value of PAG STUDY’s Inventory on August 31 will be:
A. P75,000
B. P100,000
C. P125,000
D. P150,000

Solution:
PAG STUDY provides 25% of next month’s quantity sales
25% x P400,000 x 75% = ​P75,000

10. How much cash can PAG STUDY plan to collect from accounts receivable during July?
A. P574,710
B. P617,020
C. P528,710
D. P611,210

Solution:
May sales billed in June 10 P250,000 x 15% P37,500
June Sales:
Billed June 20 P300,000 x 15% P45,000
Billed July 10 P300,000 x 83% x 98% P244,020
July Sales:
Billed July 20 P350,000 x 83% x 98% P284,690
July Collections P611,210

BREAKDOWN:
June 10 --- May Sales P250,000 83% (Within Discount Period) - to be Collected in June
15% (on the 30th Day) - to be Collected in ​July
June 20 --- June Sales P300,000 83% (Within Discount Period) - to be collected in June
15% (on the 30th Day) - to be collected in ​July
July 10 --- June Sales P300,000 83% (Within Discount Period) - to be collected in​ July
15% (on the 30th Day) - to be collected in Aug
July 10 --- July Sales P350,000 83% (Within Discount Period) - to be collected in ​July
15% (on the 30th Day) - to be collected in Aug