Differential Cost Analysis

Make or Buy

Jam Foods Corp is known for selling a great tasting yet very affordable siomai in Manila.
Information on selling price and related costs of one complete order is shown below. Fixed cost is
computed using the normal operations of 3,000 orders (4pcs per order).

Selling price per order P 25.00

Variable cost per order
Direct materials P 4.00
Direct Labor 4.00
Variable Overhead 2.00
Fixed cost allocated to products per order
Supervisory salaries P 3.00
Other fixed cost 3.00

1. If Erwin has offered to supply siomai for P3 per piece, on normal operations, should Jam make or
buy siomai?

Suppose that Erwin has offered to supply siomai for P3 per piece and that P2.50 of the total fixed
costs could be eliminated.

2. Should Jam make or buy siomai?

3. Determine the indifference point.
4. If Jam plans to sell 1,800 orders, should the company make or buy siomai?

Accept or Reject:

Jam Foods Corp is known for producing and selling a great tasting yet very affordable siomai.
Information on selling price and cost per unit at a normal capacity of 20,000 pieces is as follows:

Selling Price P 6.25

Less, Variable Cost 2.50
Contribution Margin P 3.75
Less, Fixed Cost 1.50
Net Profit P 2.25

Ruby House of Dumplings offers to buy 5,000 pieces at P3.65. Also, an extra shipping cost of
P0.15 per unit will be incurred if the company will accept the special order.

5. If the business is presently very slow, should Jam accept or reject the order?
6. If Jam has more businesses than it can handle, should the special order be accepted?
7. If present production is 16,500 pieces, should the Jam accept or reject the special order?

Drop/Eliminate, Retain or Add:

Jam Foods Corp has three product lines. Results of the 4 th quarter are presented below:

Shrimp Pork Beef Total

Units sold 800 4,000 4,200 9,000
Revenue P20,000.00 P100,000.00 P105,000.00 P225,000.00
Variable departmental costs 12,000.00 40,000.00 42,000.00 94,000.00
Direct fixed costs 5,000.00 15,000.00 15,000.00 35,000.00
Allocated fixed costs 8,000.00 12,000.00 12,000.00 32,000.00
Net Income (Loss) (P5,000.00) P33,000.00 P36,000.00 P64,000.00
 Demands of individual products are not affected by changes in other product lines.

8. Will Jam retain or drop Shrimp Siomai?

9. What will be the net income or loss of Jam if Shrimp is dropped?

Shut down or Continue operations:

ABC Company is contemplating to temporarily stop operating for the next four months since
demand declines below the breakeven point. The company has a normal operating fixed cost of P50,000
per month and if they shut down, they could eliminate P20,000 fixed cost per month. However, they
would incur additional costs for insurance and security guards for the entire shut down period of
P25,000. They estimated that the restarting cost will be P20,000. At present, they have a selling price of
P50 per unit and a variable cost of P30. For the next four months, they will be forced to reduce their
selling price to 80%. Based on these facts, determine the following:

1. Shut down costs ____________________________

2. Shut down savings ____________________________
3. Shut down point ____________________________

Sell as is or Process Further:

Vicky manufactures A and B from a joint process (cost = P80,000). Five thousand pounds of A
can be sold at split-off for P20 per pound or processed further at an additional cost of P20,000 and then
sold for P25. Ten thousand pounds of B can be sold at split-off for P15 per pound or processed further at
an additional cost of P20,000 and later sold for P16.

If Vicky decides to process B beyond the split-off point, the change in operating income will be

Profit maximization – by utilizing limited or scarce resources:

Smith Manufacturing has 6,000 labor hours available for producing X and Y. Consider the
following information:
Product X Product Y
Selling price per unit P10.00 P20.00
Variable cost per unit 5.00 14.00
Contribution margin per unit P5.00 P6.00

Required labor time per unit (hours) 2 3

Replace or retain Equipment:

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/rcroque