OLDCASTLE DIVISION

An Individual Business Case

Presented to the
Accountancy Department
De La Salle University

In partial fulfillment
Of the course requirements
In ACTMANA

SUBMITTED TO:
Barredo, Brixen S.

SUBMITTED BY:
Yeo, Josua
December 20, 2014

The following are the Oldcastle Divisions unit costs of manufacturing and marketing
different products at output levels of 150,000 units for the first year, 160,000 units
for the second year and 180,000 units for the third year:
Manufacturing cost
Direct Materials P10.00
Direct Labor 12.00
Variable manufacturing overhead cost 8.00
Marketing Cost
Variable 5.00
The following situations refer only to the preceding data answers are as follows:

1. Compute for the unit cost of the new product that should be included in the
inventory account for the first year assuming the first strategy was used and that
production amounted to 200,000?
Variable Costs
Fixed Costs
Number of Units
Cost per Unit

7,000,000.0
0
22,000,000.
00
200,000.00
145.00

2. Assuming the company used the first strategy, provide the following:
a. Net loss on the first year
Gross Sales
Manufacturing Cost

25,500,000.0
0
1,500,000.00
1,800,000.00
1,200,000.00

Marketing Cost
Fixed Cost
Net Operating Loss

4,500,000.00
750,000.00
22,000,000.00
-

1,750,000.0
0

b. Net loss on the second year

27,200,000.
00

Gross Sales
Manufacturing Cost

1,600,000.0
0
1,920,000.0
0
1,280,000.0
0

4,800,000.0
0
800,000.00
22,000,000.
00
400,000.0
0

Marketing Cost
Fixed Cost
Net Operating Loss

c. Net income on the second year

30,600,000.
00

Gross Sales
Manufacturing Cost

1,800,000.0
0
2,160,000.0
0
1,440,000.0
0

5,400,000.00
900,000.00
22,000,000.0
0
2,300,000.
00

Marketing Cost
Fixed Cost
Net Operating
Income

3. Assuming the company used the second strategy, provide the following:
a. Break-even Point
Fixed Cost
Divide: Selling Price
Variable Cost
Break-even Point
(Units)

27,000,000.0
0
190.00
35.00
174,193.5
5

b. Degree of Operating Leverage

Sales
Less: Variable Costs
Sales
Less: Variable Costs
Fixed Costs
Degree of Operating Leverage
Y1

Sales
Less: Variable Costs
Sales
Less: Variable Costs
Fixed Costs
Degree of Operating Leverage
Y2

Sales
Less: Variable Costs
Sales
Less: Variable Costs
Fixed Costs
Degree of Operating Leverage
Y3

28,500,000.0
0
5,250,000.00
28,500,000.0
0
5,250,000.00
27,000,000.0
0

23,250,000.
00

(3,750,000.0
0)
(6.20)

30,400,000.0
0
5,600,000.00
30,400,000.0
0
5,600,000.00
27,000,000.0
0

24,800,000.
00

(2,200,000.0
0)
(11.27)

34,200,000.0
0
6,300,000.00
34,200,000.0
0
6,300,000.00
27,000,000.0
0

27,900,000.
00

900,000.00
31.00

c. Change in net income from first year to second year in % and in amount
Gross Sales
Manufacturing Cost

28,500,000.
00
1,500,000.00
3

1,800,000.00
1,200,000.00
Marketing Cost
Fixed Cost
Net Operating Loss Y1

Gross Sales
Manufacturing Cost

30,400,000.
00
1,600,000.00
1,920,000.00
1,280,000.00

Marketing Cost
Fixed Cost
Net Operating Loss Y2

Net Operating Loss Y2

Less: Net Operating Loss Y1

4,500,000.0
0
750,000.00
27,000,000.
00
3,750,000.0
0

(2,200,000.0
0)
(3,750,000.0
0)

Divide: Net Operating Loss Y1

Change in Net Operating Loss
%

4,800,000.0
0
800,000.00
27,000,000.
00
2,200,000.0
0

1,550,000.0
0
(3,750,000.0
0)
(0.41)

(2,200,000.0
0)
(3,750,000.0
0)
1,550,000.0
0

Net Operating Loss Y2

Less: Net Operating Loss Y1
Change in Net Operating Loss
(Amount)

4. Assuming production of the company for the first year resulted to 200,000 units
with the expected demand being the actual demand. Should management decide to

discontinue the new product on the second year, at what minimum price should the
company sell the remaining units?
Gross Sales
Manufacturing Cost

34,000,000.00
2,000,000.00
2,400,000.00
1,600,000.00

Marketing Cost
Fixed Cost
Net Operating Income

6,000,000.00
1,000,000.00
22,000,000.00
5,000,000.00

5. The material used to produce the new product is highly specialized. A

manufacturer of this material is offering to sell it at PHP8 per unit to the company.
Oldcastle is currently manufacturing the material with the following costs:

Material cost (per unit)

Direct Materials
Direct Labor
Variable Manufacturing
Overhead
Fixed Manufacturing
Overhead

5.0
0
2.0
0
2.0
0
1.0
0

Assuming that all fixed costs related to the material will be saved if the company
bought it from the manufacturer, should Oldcastle buy or continue to make the
material?

Total Relevant Cost @ 200,000

Make
Buy
1,000,000.00
400,000.00
-

Direct Materials
Direct Labor

Variable Manufacturing Overhead

Outside Purchase Price @ PHP 8
Total Cost

400,000.00
1,800,000.00

Cost savings if Oldcastle buys the

material

1,600,000.00
1,600,000.00
200,000.0
0

Oldcastle should outsource the material based on what is offered to them rather
than producing the material on their own because they will be saving Php 200,000
in costs.

6. During the first year of operations, the company Oldcastle determined that their
plant capacity is not enough to cater to the demand of the new product because
most of their capacity is used to manufacture an old product. Details of the old
product are as follows:

Manufacturing cost
Direct Materials
Direct Labor
Variable Manufacturing
Overhead
Marketing cost
Variable

20.00
9.00
12.00
8.00

The old product is being sold for PHP100 per unit. To produce the old product, the
company needs to allot 4 hours per unit while to produce the new product, the
company needs to allot 8 hours per unit. Assuming an unlimited demand for both
products, which product should the company produce first?

Product @ 150,000 Units

Selling price per unit

Variable cost per unit
Contribution margin per unit
Contribution margin (CM) ratio
Contribution margin per unit
Time allocation per unit
Contribution margin per unit of Old

Old
100.00
49.00
51.00
51%

New

49%

51.00
4.00
12.75

49.00
8.00
6.13

The company should focus on producing the old product first because it will give a
return of PHP12.75 more contribution margin per hour producing the old product
rather than having the new product at PHP6.13 per hour.