NOTRE DAME OF MIDSAYAP COLLEGE

MIDSAYAP, COLLEGE

COLLEGE OF BUSINESS AND ACCOUNTANCY

COURSE TITLE: COST ACCOUNTING AND CONTROL

CREDIT: 3 UNITS

ASSIGNMENT

PROBLEM 1
Bob Corporation operates its production department only when orders are received for one or both
of its two products, two sizes of metal discs. The manufacturing process begins with the cutting
of doughnut-shaped rings from rectangular strips of sheet metal; these rings are then pressed into
discs. The sheets of metal, each 4 feet long and weighing 32 ounces, are purchased P13.60 per
running foot. The department has been operating at a loss for the past year as shown below.
Sales for the year P1,720,000
Less: expenses 1,772,000
Net loss for the department P 52,000
The following information is available.
 Ten thousand 4-foot pieces of metal yielded 40,000 large discs, each weighing 4 ounces and
selling for P29, and 40,000 small discs, each weighing 2.4 ounces and selling for P14.
 The corporation has been producing at less than “normal capacity” and has had no spoilage in
the cutting step of the process. The skeletons remaining after the rings have been cut are sold
for scrap at P8.00 per pound.
 The variable conversion cost of each large disc is 80% of the disc’s direct material cost, and
variable conversion cost of each small disc is 75% of the disc’s direct material cost. Variable
conversion costs are the sum of direct labor and variable overhead.
 Fixed costs were P860,000.
Requirements: Compute the following:
1. The net cost per ounce of material
2. The total variable costs per unit for the large and small discs
3. If the material costs for large and small discs are P8.50 and P5.10, respectively, and the
normal production capacity is 100,000-unit level, what is the breakeven point?
PROBLEM 2
Based on the Income Statement of NDMC which represents the operating results for the current
fiscal year ending December 31. NDMC had sales of 1,800 tons of product during the current
year. The manufacturing capacity of NDMC’s facilities is 3,000 tons of product. Consider each
question’s situation separately.
Sales P900,000
Variable costs
Manufacturing P315,000
Selling costs 180,000
Total variable costs P495,000
Contribution margin P405,000
Fixed costs
Manufacturing P 90,000
Selling 112,500
Administration 45,000
Total fixed costs P247,500
Net income before income taxes P157,500
Income taxes (40%) (63,000)
Net income after income taxes P 94,500

Requirements: Compute the following:

1. The breakeven volume in tons of product for the year
2. If the sales volume is estimated to be 2,100 tons in the next year, and if the prices and costs
stay at the same levels and amounts next year, the after-tax income that NDMC can expect
for next year
3. NDMC has a potential foreign customer that has offered to buy 1,500 tons at P450 per ton.
Assume that all of NDMC’s costs would be at the same levels and rates as last year. What
net income after taxes would NDMC make if it took this order and rejected some business
from regular customers so as not to exceed capacity?
4. Without prejudice to your answers to previous questions, and assume that NDMC plans to
market its product in a new territory. NDMC estimates that an advertising and promotion
program costing P61,500 annually would need to be undertaken for the next two or three
years. In addition, a P25 per ton sales commission over and above the current commission
to the sales force in the new territory would be required. How many tons would have to be
sold in the new territory to maintain NDMC’s current after-tax income of P94,500?
5. Without prejudice to preceding questions, assume that NDMC estimates that the per ton
selling price will decline 10% next year. Variable costs will increase P40 per ton and the
fixed costs will not change. What sales volume in pesos will be required to earn an after-
tax income of P94,500 next year?
PROBLEM 3
Cecil Corporation recently expanded its manufacturing capacity to allow it to product up to 15,000
pairs of cross-country skis of either the mountaineering model or the touring model. The sales
department assures management that it can sell between 9,000 and 13,000 pairs (units) of either
product this year. Because the models are very similar, Cecil will produce only one of the two
models. The following data were compiled by the accounting department.

Mountaineering Touring
Selling price per unit P88.00 80.00
Variable cost per unit 52.80 52.80

Fixed costs will total P369,600 if the mountaineering model is produced but will be only P316,800
if the touring model is produced. Cecil Corporation is subject to a 40% income tax rate.
Requirements:
1. If Cecil Corporation desires an after-tax net income of P24,000, how many pairs of touring
model skis will the company have to sell?
2. The total sales revenue at which Cecil Corporation would make the same profit or loss
regardless of the ski model it decided to produce is
3. How much would the variable cost per unit of the touring model have to change before it
had the same breakeven point in units as the mountaineering model?
4. If the variable cost per unit of touring skis decreases by 10%, and the total fixed cost of
touring skis increases by 10%, the new breakeven point will be
5. If the Cecil Corporation sales department could guarantee the annual sale of 12,000 skis of
either model, Cecil would produce mountaineering skis or touring skis or both?
PROBLEM 4
Sarah Corporation is a small but growing manufacturer of telecommunications equipment. The
company has no sales force of its own; rather, it relies completely on independent sales agents to
market its products. These agents are paid a commission of 15% of selling price for all items sold.

Jerome Orillosa, Sarah’s controller, has just prepared the company’s budgeted income statement
for next year. The statement follows:

Sarah Corporation
Budgeted Income Statement
For the Year Ended December 31
Sales P16,000,000
Manufacturing costs:
Variable P7,200,000
Fixed overhead 2,340,000 9,540,000
Gross margin 6,460,000
Selling and administrative
costs:
Commissions to agents 2,400,000
Fixed marketing costs* 120,000
Fixed administrative costs 1,800,000 4,320,000
Net operating income 2,140,000
Less fixed interest cost 540,000
Income before income taxes 1,600,000
Less income tax (30%) 480,000
Net income P1,120,000
*Primarily depreciation on storage facilities

As Jerome handed the statement to Sarah Orillosa, Sarah’s president, she commented, “I went
ahead and used the agents’ 15% commission rate in completing these statements, but we’ve just
learned that they refuse to handle our products next year unless we increase the commission rate
to 20%.”

“That’s the last straw,” Sarah replied angrily. “Those agents have been demanding more and more,
and this time they’ve gone too far. How can they possibly defend a 20% commission rate?”

“They claim that after paying for advertising, travel, and the other costs of promotion, there’s
nothing left over for profit,” replied Jerome. “I say it’s just plain robbery,” retorted Sarah. “And I
also say it’s time we dumped those guys and got our own sales force. Can you get your people to
work up some cost figures for us to look at?”

“We’ve already worked them up,” said Jerome. “Several companies we know about pay a 7.5%
commission to their own salespeople, along with a small salary. Of course, we would have to
handle all promotion costs, too.
We figure our fixed costs would increase by P2,400,000 per year, but that would be more than
offset by the P3,200,000 (20% x P16,000,000) that we would avoid on agents’ commissions.”

The breakdown of the P2,400,000 cost figure follows:

Salaries:
Sales manager P 100,000
Salespersons 600,000
Travel and entertainment 400,000
Advertising 1,300,000
Total P2,400,000

“Super,” replied Sarah. “And I note that the P2,400,000 is just what we’re paying the agents under
the old 15% commission rate.” “It’s even better than that,” explained Jerome. “We can actually
save P75,000 a year because that’s what we’re having to pay the auditing firm now to check out
the agents’ reports. So our overall administrative costs would be less.”

“Pull all of these number together and we’ll show them to the executive committee tomorrow,”
said Sarah. “With the approval of the committee, we can move on the matter immediately.”

Requirements:
1. What is the breakeven point in pesos for next year assuming that the agents’ commission
rate remains unchanged at 15%?
2. What is the breakeven point in pesos for next year assuming that the agents’ commission
rate is increased to 20%?
3. What is the breakeven point in pesos for next if the company employs its own sales force?
4. Assume that Sarah Corporation decides to continue selling through agents and pays the
20% commission rate. The volume of sales that would be required to generate the same
net income as contained in the budgeted income statement for next year would be:
5. The volume of sales at which net income would be equal regardless of whether Sarah
Corporation sells through agents at a 20% commission rate or employs its own sales force:
PROBLEM 5
Remot Corporation, a wholesale supply company, engages independent sales agents to market the
company’s products throughout the country. These agents currently receive a commission of 20
percent of sales, but they are demanding an increase to 25 percent of sales made during the year
ending December 31, 2021. The controller already prepared the 2021 budget before learning of
the agents’ demand for an increase in commission. The budgeted 2021 income statement is shown
below. Assume that cost of goods sold is 100 percent variable cost.
Sales P10,000,000
Cost of goods sold 6,000,000
Gross margin P 4,000,000
Selling and administrative
Commissions P2,000,000
Other expenses (fixed) 100,000 2,100,000
Income before taxes P 1,900,000
Income tax (30%) 570,000
Net income P 1,330,000

Remot’s management is considering the possibility of employing full-time sales personnel. Three
individuals would be required, at an estimated annual salary of P30,000 each, plus commissions
of 5 percent of sales. In addition, a sales manager would be employed at a fixed annual salary of
P160,000. All other fixed costs, as well as the variable cost percentages, would remain the same
as the estimates in the 2021 budgeted income statement.

Requirements:
1. How much is the estimated break-even point in peso sales for the year ending December
31, 2021, based on the budgeted income statement prepared by the controller?
2. How much is the estimated break-even point in peso sales for the year ending December
31, 2021, if the company employs its own sales personnel?
3. How much volume in peso sales would be required for the year ending December 31, 2021,
to yield the same net income as projected in the budgeted income statement, if Remot
continues to use the independent sales agents and agrees to their demand for a 25 percent
sales commission?
4. How much is the estimated volume in peso sales that would generate an identical net
income for the year ending December 31, 2021, regardless of whether Remot employs its
own sales personnel or continues to use the independent sales agents and pays them a 25
percent commission?
PROBLEM 6
Gapasin Corporation produces toys and other items for use in beach and resort areas. A small, inflatable
toy has come onto the market that the company is anxious to produce and sell. Enough capacity exists in
the company’s plant to produce 16,000 units of the toy each month. Variable costs to manufacture and sell
one unit would be P12.50, and fixed costs associated with the toy would total P350,000 per month.

The company’s Marketing Department predicts that demand for the new toy will exceed the 16,000 units
that the company is able to produce. Additional manufacturing space can be rented from another company
at a fixed cost of P10,000 per month. Variable costs in the rented facility would total P14 per unit, due to
somewhat less efficient operations than in the main plant. The new toy will sell for P30 per unit.

Requirements:
1. The breakeven units for the new toy would be:
2. How many units should the company need to sell in order to earn a before-tax profit of P150,000?
3. If the sales manager receives a bonus of P1.00 for each unit sold in excess of the break-even point,
how many units must be sold each month to earn a return of 25% on the monthly investment in
fixed costs?
4. Assuming that Gapasin Corporation will just rent a manufacturing space for a month in order to
produce special order for 8,000 toys. What is the acceptable minimum selling price to Gapasin
Corporation for the special sale?

PROBLEM 7
Torino Corporation’s income statement for last month is given below:
Sales (15,000 units @ P30) P450,000
Less variable expenses 315,000
Contribution margin 135,000
Less fixed expenses 90,000
Net income P 45,000

The industry in which Torino Corporation operates is quite sensitive to cyclical movements in the economy.
Thus, profits vary considerably from year to year according to general economic conditions. The company
has a large amount of unused capacity and is studying ways of improving profits.

A new equipment has come onto the market that would allow Torino Corporation to automate a portion of
its operations. Variable costs would be reduced by P9 per unit. However, fixed costs would increase to a
total of P225,000 each month.

Requirements:
1. How much income for the month would the company earn if the new equipment is purchased?
2. How many units are required as increase or decrease in breakeven point if the new equipment is
purchased?
3. The degree of operating leverage during the month where the new equipment is used is:
4. Refer to the original data. Rather than purchase a new equipment, the president is thinking about
changing the company’s marketing method. Under the new method, sales would increase by 20% each
month and net income would increase by one-third. Fixed costs could be slashed to only P48,000 per
month. Compute the break-even point for the company after the change in marketing method.
5. Assuming that during the month following the month new equipment has been started in use, the unit
sales increased by 4,500 units. The variable expenses per unit and the monthly fixed costs as affected
by the acquisition of the new equipment are expected to remain constant. What is the expected profit
of the company for that month?
PROBLEM 8

Praise Company operates a chain of shoe stores around the country. The stores carry many styles
of shoes that are all sold at the same price. To encourage sales personnel to be aggressive in their
sales efforts, the company pays a substantial sales commission on each pair of shoes sold. Sales
personnel also receive a small basic salary.

The following cost and revenue data relate to Libungan sales outlet and are typical of the
company’s many sales outlets:
Selling price P800
Variable expenses:
Invoice costs P360
Sales commission 140
P500

Fixed expenses per year:

Rent P1,600,000
Advertising 3,000,000
Salaries 1,400,000
Total P6,000,000

Requirements:
1. How many units are required for the company’s Libungan sales outlet to breakeven?
2. If 18,000 pairs of shoes are sold in a year, what would be Libungan sales outlet’s net income?
3. The company is considering paying the store manager of Libungan sales outlet an incentive
commission of P75 per pair of shoes (in addition to the salesperson’s commission). If this
change is made, what will be the new breakeven in pairs of shoes?
4. Instead of paying the manager a straight P75 per pair of shoes commission on all pairs of shoes
sold, the company is considering paying the store manager P50 commission on each pair of
shoes sold in excess of the breakeven point. If this change is made, what will be the sales
outlet’s net income or loss if 25,000 pairs of shoes are sold?
5. If the company would pay the manager P50 commission on each pair of shoes sold in excess
of the breakeven point, how many pairs of shoes are required to earn P900,000 profit?
6. The company is considering eliminating sales commissions entirely in its stores and increasing
fixed salaries by P2,142,000 annually. If this change is made, what will be the number of pairs
of shoes to be sold by Libungan outlet to be indifferent to commission basis?
PROBLEM 9
Due to erratic sales of its sole product - a high-capacity battery for laptop computers, Rob
Corporation has been experiencing difficulty for some time. The company’s income statement for
the most recent month is given below:
Sales (19,500 units @ P300) P5,850,000
Less variable expenses 4,095,000
Contribution margin 1,755,000
Less fixed expenses 1,800,000
Net loss P (45,000)

Requirements:
1. The break even in peso sales for Rob Corporation is:
2. The president believes that a P160,000 increase in the monthly advertising budget, combined
with an intensified effort by the sales staff, will result in an P800,000 increase in monthly sales.
If the president is right, what will be the effect on the company’s monthly net income or loss?
3. Refer to the original data. The sales manager is convinced that a 10% reduction in the selling
price, combined with an increase of P600,000 in the monthly advertising budget, will cause
unit sales to double. What will the new profit or loss if these changes are adopted?
4. Refer to the original data. The Marketing Department thinks that a fancy new package for the
laptop computer battery would help sales. The new package would increase packaging costs
by P7.50 per unit. Assuming no other changes, how many units would have to be sold each
month to earn a profit of P97,500?
5. Refer to the original data. By automating certain operations, the company could reduce variable
costs by P3 per unit. However, fixed costs would increase by P72,000 each month.
6. How would the breakeven point in units change if the company automated the operations?
7. At what level of production would the automation of the production process be indifferent to
the present process?
8. Which of the two methods (the present or the automated) has higher income at the level of
sales of 26,000 units?
PROBLEM 10

Duga Corporation manufactures and sells adjustable canopies that attach to motor homes and
trailers. The market covers new unit purchases as well as replacement canopies. Duga developed
its 2021 business plan based on the assumption that canopies would sell at a price of P400 each.
The variable costs for each canopy were projected at P200, and the annual fixed costs were
budgeted at P100,000. Duga’s after–tax profit objective was P240,000; the company’s effective
tax rate is 40 percent.

While Duga’s sales usually rise during the second quarter, the May financial statements reported
that sales were not meeting expectations. For the first five months of the year, only 350 units had
been sold at the established price, with variable costs as planned, and it was clear that the 2021
after-tax profit projection would not be reached unless some actions were taken. Duga’s president
assigned a management committee to analyze the situation and develop several alternative courses
of action. The following mutually exclusive alternatives, labeled A, B, and C, were presented to
the president.

Reduce the sales price by P40. The sales organization forecast that with the significantly reduced
sales price, 2,700 units can be sold during the remainder of the year. Total fixed and variable unit
costs will stay as budgeted.

Lower the variable costs per unit by P25 through the use of less expensive materials and slightly
modified manufacturing techniques. The sales price will also be reduced by P30, and sales of 2,200
units for the remainder of the year are forecast.

Cut fixed costs by P10,000, and lower the sales price by 5 percent. Variable costs per unit will be
unchanged. Sales of 2,000 units are expected for the remainder of the year.

Requirements:
1. Assuming no changes were made to the selling price or cost structure, how many units must
Duga sell to break even?
2. Assuming no changes were made to the selling price or cost structure, how many units must
Duga sell to achieve its after-tax profit objective?
3. If management decides to reduce the selling price by P40, what will Duga's after-tax profit be?
4. If the management can reduce the variable cost per unit by P25 through the use of less
expensive materials and slightly modified manufacturing techniques, with the sales price
reduced by P30, and sales of 2,200 units for the remainder of the year are forecast, the amount
of expected income for the year was:
5. How much would be the expected income for the year if the management cut fixed costs by
P10,000, and lower the sales price by 5 percent, with variable costs per unit unchanged and
sales of 2,000 units are expected for the remainder of the year?
6. If the sales price is reduced by 6.25 percent starting June 1, an analysis indicates that 2,500
unit sales can be made if the company has to spent for additional advertising. What is the
maximum amount of advertising cost that the company can spend and still the profit objective
is achieved?