INCREMENTAL ANALYSIS

EXERCISES:
PROBLEM I
1. Relevant Cost for Theolite 14,500

2. Cost of 1,000 kg at least price (1,000 x 8.70) 8,700

Add: Excess price included on the remaining 4,000kg
[4,000 kg x (8.70- 8.30)] 1,600
Relevant Cost of Genetope 10,300

PROBLEM 2
1. Cost to make
Direct Materials (10,000 x 6) 60,000
Direct Labor (10,000 x 24) 240,000
Variable Overhead (10,000 x 12) 120,000
Avoidable Fixed Overhead (10,000 x 6*) 60,000
Total Relevant Cost 480,000

Cost to Buy 530,000

*₱15.00 x 40%= ₱6.00

2. Make = 50, 000 advantage

PROBLEM 3- ERROR

PROBLEM 4
PRODUCT INCREMENTAL INCREMENTAL INCREMENTAL
SALES COST PROFIT
X [(3.2-1) x 10,000)] - 10, 000 = 12, 000

Y [(3.5-2) x 10,000] - 10, 000 = (5, 000)

Z [(4.80-3) x 10,000] - 10, 000 = 3, 000

• X and Z- process further

• Y- sold as is

PROBLEM 5- ERROR

1|Page
PROBLEM 6

Department A loss (600,000)

Department B loss (10% x 2,100,000) (210,000)
Total Lost Contribution Margin (810,000)

Fixed Cost avoided if:

Department B is eliminated (800,000 - 340,000) 460,000
Net Disadvantage of Dropping Dept. B (350,000)

PROBLEM 7
1. Selling Price of the Sweater 20
Selling Price of the Wool Yarn (10)
Increase in SP 10
Further processing Cost
(2 + 5.80) (7.80)
Incremental Profit PROCESS FURTHER 2.20

2. SP of Wool Yarn 20.00

Add: Further Processing Cost 7.80
Minimum Price for Sweater 27.80

PROBLEM 8
Discontinue Department 8
Sales (80,000)
Less: COGS 44,000
Gross Profit (36,000)
Less: Avoidable FC 8,000
(28,000)
Rent- Opportunity Cost 12,000
Net Income would decline by (16,000)

PROBLEM 9

Sales (4,140,000/ 230,000) 18.00

VOGS [(2,760,000 - 690,000)/ 230,000] 9.00
Licensing Fee 1.50
Total VC per Shirt 10.50

1. Incremental Sales (15,000 x 15) 225,000

VC (15,000 x 10.50) (157,500)
Contribution Margin 67,500

• The company should accept the offer

2|Page
 2. Sales (40,000 x 15) 600,000
VC (40,000 x 10.50) (420,000)
CM 180,000
Loss on Regular Sales (114,000)*
Net Incremental Sales 66,000

230,000
(250,000- 40,000) 210,000
20,000

*Sales (20,000 x 18) 360,000

Sales Commission (36,000)
VC (210,000)
Loss on Regular Sales (114,000)

3. Selling Price= The Variable Cost 10.50

4. Contribution Margin (based on #2) 180,000

Regular Sales 18.00
10% SC 1.80
Variable Cost 10.50 ÷ 5.70
31,759 units

PROBLEM 10

1. YES.

Selling Price 32.00

Variable Expenses:
Materials 10.00
Direct Labor 4.50
Variable OH 2.30
Variable SC 1.20 (18.00)
14.00

2. Direct Material 10.00

Direct Labor 4.50
Variable OH 2.30
Variable Selling Cost 3.20
Import Duties 1.70
Permit and Licenses (9,000/ 20,000) 0.45
Minimum Selling Price 22.15

3. Variable Selling Expenses 1.20

Additional Contribution (60,000 x 0.25 x 14) 210,000

Additional Fixed Selling Costs (80,000)
Additional Profit 130,000

4. Avoidable FC:
Manufacturing (0.40 x 50,000) 20,000
Selling (35,000 x 0.20) 7,000
Total 27,000
CM if the company operates (42,000)
Disadvantage (15,000)

3|Page
 5. Direct Material 10.00
Direct Labor 4.50
Variable OH 2.30
Avoidable Fixed OH (0.75 x 5) 3.75
Avoidable Variable Expenses (1.20 x 1 / 3) 0.40
Relevant Cost- MAKE 20.95

PROBLEM 11

1.
COST TO MAKE COST TO BUY

15,000
Purchase Price
1,000
Direct Material
200 3,000**
Material Handling
8,000*
Variable OH
13,200 18,000
Net Relevant Cost
4,800
Savings

*1/3 x 12,000= 8,000

**20% x 15,000= 3,000

2.

COST TO MAKE COST TO BUY

Relevant Cost before Rental

Income
132,000
(₱13,200 x 10 units)
180,000
(₱18,000 x 10 units)
(25,000)
Rental Income
132,000 155,000
Net Relevant Cost
23,000
Savings

4|Page
 3.
COST TO MAKE COST TO BUY

Relevant Cost before other 132,000 180,000

items
CM from another product if (52,000)
the parts are purchased
Net Relevant Cost 132,000 128,000

Savings 4,000

PROBLEM 12

1. Unit Sold 5,000

x Selling Price 42
Sales 210,000
(5,000 x 27) 135,000
75,000
Cost of Machine (10,000)
Profit 65,000

2. 5,000 units x 1.80= 9,000

3. Unit Sold 5,000

Selling Price 50
250,000
Variable Cost 150,000
Contribution Margin 100,000

9,000 – 100,000= (91,000)

PROBLEM 13

1.

MAKE BUY

Purchase Price (60,000 x 18) 1,080,000

Depreciation (810,000/6) – (6,000 x 39,000

1.60)
Direct Materials (60,000 x 10.35) 621,000

Direct Labor (60,000 x 6 x 70%) 252,000

Variable OH (60,000 x 1.50 x 70%) 63,000

Total Cost 975,000 1,080,000

5|Page
 2. YES
a. MAKE BUY
Purchase Price (75,000 x 18.00) 1,350,000
Depreciation 39,000
Direct Material (75,000 x 10.35) 776,250
Direct Labor (75,000 x 6 x 70%)
315,000
Variable OH (75,000 x 1.50 x
78,750
70%)
Total Cost
1,209,000 1,350,000

b. MAKE BUY
Purchase Price (90,000 x 18.00)
1,620,000
Depreciation 39,000
Direct Material (90,000 x 10.35) 931,500
Direct Labor (90,000 x 6 x 70%)
378,000
Variable OH (90,000 x 1.50 x
94,500
70%)
Total Cost
1,443,000 1,620,000

MULTIPLE CHOICE

1. Excess Inventory [(60,000-5,000)x 6 x ½] 165,000

x rate 12%
Average Inventory 19,800

2. Food 400,000
Labor 300,000
Variable OH (440,000 x 60%) 264,000
Total Incremental Cost 964,000

The highest price that the company is willing to pay should not exceed its own
Incremental Cost of operating the cafeteria which is ₱ 964,000.

3. Unit Variable Production Cost

(2 + 2.40 + 1.60) 6.00
Avoidable Var. Marketing Expense
(2.50 x 30%) 0.75
Net Relevant Cost of Making 6.75

6|Page
4.

MAKE BUY

DM (10,000 x 20) 200,000 400,000

= (10,000 x 40)
DL (10,000 x 15) 150,000 75,000
= (150,000 x 50%)
VOH (10,000 x 20) 200,000 100,000
= (200,000 x 50%)
Relevant 550,000 575,000
Cost
Savings Advantage 25,000

5. Fixed Cost= 150,000 x 40%= 60,000

Make y= 150,000 + 11x

Buy y= 60,000 + 12.875x

150,000 + 11x= 60,000 + 12.875x

1.875x= 90,000
x= 48,000

6. 0.80 400 x 0.40 160

(0.40) 1 - 0.40 = 0.60 = 267 units
0.40

7.
CAFETERIA VENDING

Sales 1,200,000

(1,200,000 x 140%) 1,680,000

Variable Cost 40% of Sales

Fixed Cost 470,000

Commission Income 16% of Sales

Income of Vending (1,680,000 x 16%) 268,800

Income from Cafeteria
(1,200,000 x 60%) 720,000
Fixed Cost (470,000) 250,000
Increase in Operating Income 18,800

7|Page
8. Direct Materials 1.50
Direct Labor 2.50
Variable OH 0.80
Variable Selling Cost 1.00
Differential Cost 5.80 x 5,000= 29,000

9. Direct Materials (100,000/ 10,000) 10.00

Direct Labor (120,000/ 10,000) 12.00
Variable OH [(60,000/10,000) + 14.00] 20.00
Incremental Cost 42.00 x 2,000= 84,000

10. Variable Cost 33,000

External Design Cost 7,750
Incremental Cost 40,750

11. Direct Material 4.50

Direct Labor 10.00
Variable OH 3.00
Variable Selling Exp. 1.00
Additional Profit [(15,000 + 10,000)/5,000] 5.00
Incremental Cost 23.50

12. Incremental Sales 1,500

Incremental Cost (40 baskets x ₱ 30) (1,200)
Incremental Profit 300

13.
RETAIN REPLACE
Purchase Price 900,000
Book Value 500,000
Useful life remaining 5 years 5 years
Terminal Salvage Value 0 0
Salvage Value- now 50,000
Variable Operating Costs 1,250,000 1,000,000
Annual Savings in Operating
250,000
Cost

Therefore:
Savings in 5 years (₱250,000 x 5 years) 1,250,000
Salvage Value of Old equipment 50,000
Total Cash Inflows 1,300,000
Purchase Price 900,000
Net Advantage of Replacing the Old Equipment 400,000

8|Page
14.

JI JII
Incremental Sales (15,000 x ₱ 6.00) 90,000
(30,000 x ₱ 4.00) 120,000
Incremental Costs of
Further Processing (100,000) (90,000)
Incremental
(Decremental) Profit (10,000) 30,000

The focus in deciding whether to drop or continue a segment is in the segment

margin. Normally, if the direct margin is positive, the segment has to be continued because
discontinuance of the segment would mean elimination of its positive segment margin and
a decrease in the overall profit of the business.
Segment Margin- is the difference between the contribution margin and direct fixed costs
and expenses.

PRODUCT W PRODUCT Z
Unit Sales Price 30.00 14.00
Unit Variable Cost (8.50) (15.00)
Unit Contribution Margin 21.50 (1.00)

Elimination of the negative CM

Product Z (1,800 units x ₱1.00) 1,800
Lost CM- Product W (4,000 units x ₱21.50) (8,600)
Net Decrease in Profit (6,800)

15. --
16. Profit- Bulacan 270,000
Profit- Laguna 205,000
Royalty (30,000 x 2.00) 60,000
(50,000)
Estimated Net Profit 485,000

17. Profit- Bulacan 270,000

Profit- Laguna 205,000
Allocated Home Office- Naga (50,000)
Estimated Net Profit 425,000

18. Problem Incomplete

19.

Product JII should be processed further because it will contribute ₱ 30,000 to the overall
short term profit of the business. Its cost of further processing is ₱ 90,000, hence the choice-
letter B is correct.

9|Page
 20. # of defective units (old materials) = 36,000
# of defective units (new materials) = (6,000)
30,000

Incremental Sales (30,000 x 50) 1,500,000

Incremental Costs (300,000 x 2.50) (750,000)
Incremental Profit- net benefit 750,000

21.

C J P
Sales
200,000 150,000 125,000
Variable Cost
95,000 75,000 50,000
Separate (Direct)
60,000 35,000 40,000
FC
Segment Margin
45,000 40,000 35,000
Product P gives the lowest profit and shall be eliminated.

Segment Margin- C&J (45,000 + 40,000) 85,000

Allocated FC [(35,000 + 40,000 + 25,000) x 60%] (60,000)
Operating Profit 25,000

22. 21,000,000/14 years= 1,500,000

21,000,000/ 20 years= (1,050,000)
450,000

1,800,000 x 20%= 360,000/ 60%= 600,000 VC @ 100% capacity

90%-60%= 30% x 600,000= 180,000 + 450,000= 630,000

23. 1,200,000- maximum amount

24. 7.50 x 2/3= 5.00

6.50 x 1/3= 2.17
7.17

Multiple Choice Answers

1. C 11. A 21. D
2. D 12. C 22. B
3. B 13. A 23. C
4. B 14. B 24. C
5. D 15. D
6. A 16. B
7. D 17. 425,000
8. D 18. ERROR
9. A 19. B
10. B 20. C

10 | P a g e
11 | P a g e