Quiz – Part 2 – Tactical Decisions/Relevant Analysis

Problem 1 ( 20 pts.)
Arnold Syjuco operates a small machine shop. He manufactures one standard product available
from many other similar businesses and he also manufactures products to customer order. His
accountant prepared the following annual income statement shown below:

Custom Standard
Sales Sales Total
Sales 1,000,000.00 500,000.00 1,500,000.00
Materials 200,000.00 160,000.00 360,000.00
Labor 400,000.00 180,000.00 580,000.00
Depreciation 126,000.00 72,000.00 198,000.00
Power 14,000.00 8,000.00 22,000.00
Rent 120,000.00 20,000.00 140,000.00
Heat and light 12,000.00 2,000.00 14,000.00
Others 8,000.00 18,000.00 26,000.00
Total 880,000.00 460,000.00 1,340,000.00
Income 120,000.00 40,000.00 160,000.00
The depreciation charges are for machines used in the respective product lines. The power charge
is apportioned based on the estimate of power consumed. The rent is for the building space which
has been leased for 10 years at P140,000 per year. The rent and heat and light are apportioned to
the product lines baesd on amount of floor space occupied. All other costs are current expenses
identified with the product line incurring them. A valued custom parts customer has asked Mr.
Syjuco to manufacture 5,000 special units for him. Mr. Syjuco is working at capacity and would
have to give up some other business to take this business. He cannot renege on custom orders
already agreed to but he could reduce the output of his standard product by about one-half for one
year while producing the specially requested custom part. The customer is willing to pay P140 for
each part. The material cost will be about P40 per unit and the labor will be P72 per unit. Mr.
Syjuco will have to spend P40,000 for a special device which will be discarded when the job is
done.
a. What is the incremental cost of the special order of 5,000 units?
b. What is the full cost of the special order?
c. How much is the opportunity cost of taking the special order?
d. What is the effect on the overall profit if the special order is accepted?

Problem 2 (5 pts.)
The operations of Knickers Corporation are divided into the Pacers Division and the Bulls Division.
Projections for the next year are as follows:
Pacers Bulls
Division Division Total
Sales revenue P420,000 P252,000 P672,000
Variable expenses 147,000 115,500 262,500
Contribution margin P273,000 P136,500 P409,500
Direct fixed expenses 126,000 105,000 231,000
Segment margin P147,000 P 31,500 P178,500
Allocated common costs 63,000 47,250 110,250
Total relevant benefit (loss) P 84,000 P(15,750) P 68,250
Compute for the operating income of Knickers Corporation if Bulls Division is dropped.

Problem 3 (5 pts.)
Bergamit Company manufactures veterinary products. One joint process involves refining a
chemical (dactylyte) into two chemicals − dac and tyl. One batch of 10,000 gallons of dactylyte
can be converted to 4,000 gallons of dac and 6,000 gallons of tyl at a total joint processing cost of
P15,000. At the split-off point, dac can be sold for P5 per gallon and tyl can be sold for P7 per
gallon. Bergamit has just learned of a new process to convert dac into prodac. The new process
costs P5,000 and yields 2,500 gallons of prodac for every 3,000 gallons of dac. Prodac sells for P6
per gallon.

What is Bergamit's profit from refining one batch of dactylyte if both dac and tyl are sold at the
split-off point?

Problem 4 (10 pts.)

Autry Company manufactures veterinary products. One joint process involves refining a chemical
(dactylyte) into two chemicals − dac and tyl. One batch of 5,000 gallons of dactylyte can be
converted to 2,000 gallons of dac and 3,000 gallons of tyl at a total joint processing cost of
P600,000. At the split-off point, dac can be sold for P150 per gallon and tyl can be sold for P200
per gallon. Autry has just learned of a new process to convert dac into prodac. The new process
costs P4,000 and yields 1,700 gallons of prodac for every 2,000 gallons of dac. Prodac sells for
P250 per gallon. Should Autry process dac further? Justify your answer.