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PROBLEMS
1. A company has the following cost components for 100,000 units of product for the year:
Materials
P200,000
Labor
100,000
200,000
150,000
All costs are variable except for P100,000 of manufacturing overhead and P100,000 of
selling and administrative expenses. The total costs to produce and sell 110,000 units for
the year are:
a. P540,000
c. P715,000
b. P695,000
d. P650,000
Variable cost:
Materials and labor [(P200,000+P100,000)/100,000] x 110,000
110,000
Selling and adm. expenses (P50,000/100,000) x 110,000
Fixed cost (P100,000 + P100,000)
Total

P330,000
55,000
200,000
P695,000

2. A manufacturing company employs variable costing for internal reporting and analysis
purposes. However, it converts its records to absorption costing for external reporting.
The accounting department always reconciles the two operating income figures to assure
that no errors have occurred in the conversion. Financial data for the year are presented
below. The fixed manufacturing overhead cost per unit was based on the planned level of
production of 480,000 units.
Budgeted and Actual Levels for Sales and Production
Budget
Actual
Sales (in units)
495,000
510,000
Production (in units)
480,000
500,000
Standard Unit Manufacturing Costs
Variable
Costing
Variable costs
P10.00
0
Total unit manufacturing costs
P10.00

Absorption
Costing
P10.00
6.00
P16.00

The difference between the operating income calculated under the variable costing
method and the operating income calculated under the absorption costing method would
be
a. P120,000
c. P60,000
b. P90,000
d. P57,600

## Change in inventory (500,000 510,000)

x Fixed overhead cost per unit
Difference in income

10,000
P6
P60,000

5. A manufacturer can sell its single product for P660. Below are the cost data for the
product:
Direct materials
P170
Direct labor
225
90

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The relevant margin amount when beginning a theory of constraints (TOC) analysis is
a. P175
c. P345
b. P265
d. P490

Selling price
Less direct materials
Margin

P660
170
P490

## Items 6 and 7 are based on the following information:

Blackhall Corporation produces chemicals used in the cleaning industry. During the
previous month, Blackhall incurred P300,000 of joint costs in producing 60,000 units of
AR-01 and 40,000 units of JZ-02. Blackhall uses the units-of-production method to
allocate joint costs. Currently, AR-01 is sold at split-off for P3.50 per unit. Franck
Corporation has approached Blackhall to purchase all of the production of AR-01 after
further processing. The further processing will cost Blackhall P90,000.
6. Concerning AR-01, which one of the following alternatives is most advantageous?
a. Blackhall should process further and sell to Franck if the selling price is greater than
P3.00, which covers the joint costs.
b. Blackhall should continue to sell at split-off unless Franck offers at least P4.50 per
unit after further processing, which covers Blackhalls total costs.
c. Blackhall should process further and sell to Franck if the selling price is greater than
P5.00.
d. Blackhall should process further and sell to Franck if the selling price is greater than
P5.25, which maintains the same gross profit percentage.

## Selling price at split off

Break-even price

P3.50
1.50
P5.00

7. Assume that Blackhall Corporation agreed to sell AR-01 to Franck Corporation at P5.50 per
unit after further processing. During the first month of production, Blackhall sold 50,000
units with 10,000 units remaining in inventory at the end of the month. With respect to
AR-01, which one of the following statements is true?
a. The operating profit last month was P50,000, and the inventory value is P15,000.
b. The operating profit last month was P50,000, and the inventory value is P45,000.
c. The operating profit last month was P125,000, and the inventory value is P30,000.
d. The operating profit last month was P200,000, and the inventory value is P30,000.

Selling price
Less costs:
Joint cost (P300,000 100,000)
Further processing cost
Profit
Profit (50,000 x P1.00)
Inventory (10,000 x P4.50)

P5.50
P3.00
1.50

4.50
P1.00
P50,000
P45,000

8. Meemon Manufacturing, which is subject to a 40% income tax rate, had the following
operating data for the period just ended:
Selling price per unit
P60
Variable costs per unit
P22
Fixed costs
P504,000
Management plans to improve quality of its sole product by (1) replacing ta component
that costs P3.50 with a higher-grade unit that costs P5.50, and (2) acquiring a P180,000

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packaging machine. Meemon will depreciate the machine over a 10-year life with no
estimated salvage value by the straight-line method of depreciation. If the company
wants to earn after-tax income of P172,800 in the upcoming period, it must sell
a. 19,300 units.
c. 22,500 units.
b. 21,316 units.
d. 23,800 units.

## Fixed cost [P504,000 + (P180,00010)]

Desired profit (P172,800 60%)
Contribution margin
Contribution margin per unit (P60 <P22 + P2>)
Required sales in units

P522,000
288,000
P810,000
P36
22,500

## 9. Given the following data, what is the marginal propensity to consume?

Level of
Disposable income
P40,000
48,000
a. 1.33
b. 1.16

Level of
Consumption
P38,000
44,000
c. 0.95
d. 0.75

## Change in consumption (P44,000 P88,000)

Change in disposable income (P48,000 P40,000)
Marginal propensity to consume

P6,000
8,000
0.75

## Items 10 and 11 are based on the following information:

JSR Manufacturing has assembled the data appearing below pertaining to two products.
Past experience has shown that the unavoidable fixed manufacturing factory overhead
included in the cost per machine hour averages P10. JSR has a policy of filling all sales
orders, even if it means purchasing units from outside suppliers. Total machine capacity
is 50,000 hours.
Blender
Electric Mixer
Direct materials
P 6
P11
Direct labor
4
9
16
32
Cost if purchased from outside supplier
20
38
Annual demand (units)
20,000
28,000
10. If JSR Manufacturing desires to follow an optimal strategy, it should produce
a. 25,000 electric mixers and purchase all other units as needed.
b. 20,000 blenders and 15,000 electric mixers, and purchase all other units as needed.
c. 20,000 blenders and purchase all other units as needed.
d. 28,000 electric mixers and purchase all other units as needed.

Blender
Relevant cost to make:
Materials and labor (P6 + P4)
Total
Purchase price
Hours per unit (P16P16)
Savings per hour

P10
6
P16
20
P4
1
P4

Electric Mixer
(P11+P9)
(P32 P20*)

(P32P16)

## *Fixed overhead (P10 x 1 hr/unit = P10; P10 x 2hrs/unit = P20)

P20
12
P32
38
P6
2
P3

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Blenders savings per hour is higher than that of Mixer. The available 50,000 hrs should be
used to produce 20,000 units of Blenders and 15,000 units [(50,000 20,000) 2 hours] of Electric
mixers.

11. With all other things constant, if JSR Manufacturing is able to reduce the direct materials
for an electric mixer to P6 per unit, the company should
a. produce 25,000 electric mixers and purchase all other units as needed.
b. produce 20,000 blenders and 15,000 electric mixers, and purchase all other units as
needed.
c. produce 20,000 blenders and purchase all other units as needed.
d. purchase all units as needed.

Blender
Relevant cost to make:
Materials and labor (P6 + P4)
Total
Purchase price
Hours per unit (P16P16)
Savings per hour

P10
6
P16
20
P4
1
P4

Electric Mixer
(P6+P9)
(P32 P20*)

P15
12
P27
38
P11
2
P5.5

(P32P16)

## *Fixed overhead (P10 x 1 hr/unit = P10; P10 x 2hrs/unit = P20)

Mixers savings per hour is higher than that of Blender. The available 50,000 hrs should be used to
produce 25,000 units of Mixers (50,000 hrs 2 hrs/unit) and purchase all the other additional units required.

12. Listed below are selected line items from the Cost of Quality Report for Watsup Products
for last month:
Rework
P 725
Equipment maintenance
1,154
Product testing
786
Product repair
695
What is Watsups total prevention and appraisal cost for last month?
a. P786
c. P1,940
b. P1,154
d. P2,665
Prevention cost (preventive equipment maintenance)
Appraisal cost (product testing)
Total prevention and appraisal cost

## 13. Donnie Auto has developed the following production plan:

January
February
March
April

P1,154
786
P1,940

10,000
8,000
9,000
12,000

Each unit contains 3 kilograms of direct materials. The desired direct materials ending
inventory each month is 120% of the next months production, plus 500 kilograms. (The
beginning inventory meets this requirement.) Donnie has developed the following direct
labor standards for production of these units.
Department 1
Department 2
Hours per unit
2.0
0.5
Hourly rate
P7.25
P12.00
Donnie Autos total budgeted direct labor pesos for February usage should be
a. P164,000.
c. P184,500.
b. P174,250.
d. P221,400.

February production
Labor cost per unit [(2 x P7.25) + (0.5 x P12)]
Budgeted labor cost

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8,000
P20.50
P164,000

14. Based on past experience, a company has developed the following budget formula for
estimating its shipping expenses. The companys shipments average 12 kg. per shipment:
Shipping costs = P16,000 + (P0.50 x kg. shipped)
The planned and actual activities regarding order and shipments for the current month are
given in the following schedule:
Plan
Actual
Sales orders
800
780
Shipments
800
820
Units shipped
8,000
9,000
Sales
P120,000
P144,000
Total kilograms shipped
9,600
12,300
The actual shipping costs for the month amounted to P21,000. The appropriate monthly
flexible budget allowance for shipping costs for the purpose of performance evaluation
would be
a. P20,680.
c. P20,800.
b. P20,920.
d. P22,150.

15.

## Variable cost (12,300 kgs. x P0.50)

Fixed cost
Flexible budget

P 6,150
16,000
P22,150

Ebony Company has the following expected pattern of collections on credit sales: 70
percent collected in the month of sale, 15 percent in the month after the month of sale,
and 14 percent in the second month after the month of sale. The remaining 1 percent is
never collected. At the end of May, Ebony Company has the following accounts receivable
balances:
From April sales
P21,000
From May sales
48,000
Ebony's expected sales for June are P150,000. What were total sales for April?
a. P150,000
c. P 70,000
b. P 72,414
d. P140,000

## April sales P21,000 15% = P140,000

16. The following information is given for the Alpha Division of Sorority Corporation.
Sales
P600,000
Var. cost of goods sold
200,000
Fixed manufacturing costs
50,000
Variable selling
30,000
20,000
Fixed selling (20% allocated)
50,000
Assets at cost
800,000
Accumulated depreciation
200,000
If Sorority Corporation uses ROI to evaluate division managers and uses historical cost as
the investment base, the ROI for Alpha Division is:
a. 31.25%
c. 41.67%
b. 33.75%
d. 45.00%

Page 6 of 25 pages

Sales
Var. cost of goods sold
Fixed manufacturing costs
Variable selling
Fixed selling (80% x P50,000)
Total cost
Division profit
Asset at cost
Division ROI

P600,000
200,000
50,000
30,000
10,000
40,000
P330,000
P270,000
800,000
33.75%

17. In the two following constraint equations, X and Y represent two products (in units)
produced by the Uncommon Products Corporation.
Constraint 1: 3X + 5Y < 4,200
Constraint 2: 5X + 2Y > 3,000
What is the maximum number of units of Product X that can be produced?
a. 4,200
c.
600
b. 3,000
d. 1,400

If Y = 0, X = 1,400 for constraint 1 and 600 for constraint 2. Take the higher value (1,400).

18. The projected sales price for a new product (which is still in the development stage of the
product life cycle) is P50. The company has estimated the life-cycle cost to be P30 and the
first-year cost to be P60. On this type of product, the company requires a P12 per unit
profit. What is the target cost of the new product?
a. P60
c. P38
b. P30
d. P43

Projected sales price of P50 less required profit of P12 = Target cost of P38.

19. A company annually consumes 10,000 units of Part C. The carrying cost of this part is P2
per year and the ordering costs are P100. The company uses an order quantity of 500
units. By how much could the company reduce its total costs if it purchased the economic
order quantity instead of 500 units?
a. P 500
c. P2,500
b. P2,000
d. P 0
EOQ =

Carrying cost (
Ordering cost (
Total cost

= 1,000
x P2)
x P100)

1,000 units
P1,000
1,000

(
(

x P2)
x P100)

P2,000

500 units
P 500
2,000
P2,500

## Savings if 1,000 units are ordered (P2,500 P2,000) = P500

20. Ning Company has only 25,000 hours of machine time each month to manufacture its two
products. Product X has a contribution margin of P50, and Product Y has a contribution
margin of P64. Product X requires 5 hours of machine time, and Product Y requires 8
hours of machine time. If Ning Company wants to dedicate 80 percent of its machine time
to the product that will provide the most income, the company will have a total
contribution margin of
a. P250,000.
c. P210,000.
b. P240,000.
d. P200,000.

Contribution margin per unit
Machine hours per unit
Contribution margin per hour

Page 7 of 25 pages

Product X
P50
5
P10

Product Y
P64
8
P8

Product X has the higher contribution margin per hour, so 80% of the available time must be used to produce
4,000 units of X [(25,000 x 80%) 5 hrs/unit]. the remaining time should be used to produce 625 units of
Product Y [(25,000 x 20%) 8 hrs/unit.
Number of units to produce
x CM per unit
Total contribution margin

4,000
P50
P200,000

625
P64
P40,000

P240,000

21. Mangit Company is currently operating at a loss of P15,000. The sales manager has
received a special order for 5,000 units of product, which normally sells for P35 per unit.
Costs associated with the product are: direct material, P6; direct labor, P10; variable
overhead, P3; applied fixed overhead, P4; and variable selling expenses, P2. The special
order would allow the use of a slightly lower grade of direct material, thereby lowering the
price per unit by P1.50 and selling expenses would be decreased by P1. If Mangit wants
this special order to increase the total net income for the firm to P10,000, what sales price
must be quoted for each of the 5,000 units?
a. P23.50
c. P27.50
b. P24.50
d. P34.00

## Desired profit per unit [(P15,000) + P10,000] 5,000 units

Add relevant costs (P6 P1.50) + P10 + P3 + (P2 P1)
Selling price

P 5.00
18.50
P23.50

22. Briar Co. signed a government construction contract providing for a formula price of actual
cost plus 10%. In addition, Briar was to receive one-half of any savings resulting from the
formula price being less than the target price of P2,200,000. Briars actual costs incurred
were P1,920,000. How much should Briar receive from the contract?
a. P2,060,000
c. P2,156,000
b. P2,112,000
d. P2,200,000
Actual costs incurred
Multiply by 110% (cost + 10%) 1.10
Formula price
Target price
Savings

P1,920,000
x 110%
P2,112,000
2,200,000
P 88,000

## Amount to be received = (P88,000 x 50%) + 2,112,000 = P2,156,000

23. The following is a summarized income statement of Carr Co.s Profit Center No. 43 for
March 2013:
Contribution margin
P70,000
Period expenses:
Managers salary
P20,000
Facility depreciation
8,000
Corporate expense allocation
5,000
33,000
Profit center income
P37,000
Which of the following amounts would most likely be subject to the control of the profit
centers manager?
a. P70,000
c. P37,000
b. P50,000
d. P33,000

Page 8 of 25 pages

The manager of Carr Co.s Center No. 43 would be most likely to control the Centers contribution
margin of P70,000. The period expenses shown in the problem would not be subject to the managers control and
thus are irrelevant items

24. The budget for Edwin Auto Repair Shop for the year is as follows:
Direct labor per hour
P30
Total labor hours
10,000
Materials handling and storage
P10,000
Other (rent, utilities, depreciation, insurance)
P120,000
Direct materials cost
P500,000
Edwin allocates materials handling and storage costs per peso of direct materials cost.
of P8 per labor hour to cover profit margin. Cargo Trucking Co. has brought one of its
trucks to Edwin for an engine overhaul. If the overhaul requires twelve labor hours and
P800 parts, what price should Edwin charge Cargo for these repair services?
a. P1,160
c. P1,416
b. P1,256
d. P1,472

Materials
Materials handling [P800 x (P10,000P500,000)]
Labor, other overhead, and profit [P30+(P120,00010,000) + P8] x 12 hrs
Selling price

P 800
16
600
P1,416

## Items 25 to 29 are based on the following information:

The following information pertains to a product for a ten-week budget period:
Sales price
P11 per unit
Materials
P3 per unit
Manufacturing conversions costs: Fixed
P210,000
Variable
P2 per unit
P45,000
Variable
P1 per unit
Beginning accounts payable for materials
P40,000
Manufacturing and sales of 70,000 units are expected to occur evenly over the period.
Materials are paid for in the week following use. There are no beginning inventories.
25. What amount should be budgeted for cash payments to material suppliers during the
period?
a. P189,000
c. P229,000
b. P 40,000
d. P250,000

## Beginning accounts payable

Purchases (70,000 x P3)
Ending accounts payable tenth week (P210,000 x 1/10)
Cash payments to suppliers

P 40,000
210,000
(21,000)
P229,000

26. Using variable costing, what is the budgeted income for the period?
a. P 95,000
c. P420,000
b. P350,000
d. P210,000

## Contribution margin [70,000 x (P11 - <P3+P2+P1>)]

Less Fixed costs (P210,000 + P45,000)
Profit

27. Using absorption costing, what is the budgeted income for the period?

P350,000
255,000
P 95,000

a. P 95,000
b. P350,000

Page 9 of 25 pages

c. P420,000
d. P210,000

## Production = Sales Absorption Income = Variable Costing Income

28. Actual results are as budgeted, except that only 60,000 of the 70,000 units produced were
sold. Using absorption costing, what is the difference between the reported income and
the budgeted net income?
a. P50,000
c. P110,000
b. P30,000
d. P 20,000

## Decrease in contribution margin (10,000 x P5)

Less fixed overhead to be charged to inventory [10,000 x (P210,000/70,000)
Difference in income (reported income versus budgeted)

P50,000
30,000
P20,000

29. If a special order for 4,000 units would cause a loss of 1,000 regular sales, what minimum
amount of revenue must be generated from the special order so that net income is not
reduced? (All cost relationships remain unchanged.)
a. P 5,000
c. P24,000
b. P29,000
d. P20,000

## Decrease in CM from regular sales (1,000 x P5)

Add variable cost [4,000 x (P3+P2+P1)]
Required minimum amount of revenue

P 5,000
24,000
P29,000

30. Lifelong Company has been asked to evaluate the profitability of a product that it
manufactured and sold from Year 7 through Year 10. The product had a one-year
warranty from date of sale. The following information appears in the financial records:
Research, development, and design cost, Years 5 & 6
Manufacturing and distribution costs, Years 7 to 10
Warranty costs, Years 7 to 10
Warranty cost, Year 11
The life-cycle cost for this product is
a. P10,000,000.
b. P12,000,000.

P5,000,000
7,000,000
200,000
100,000

c. P12,200,000.
d. P12,300,000.

## Research, development, and design cost, Years 5 & 6

Manufacturing and distribution costs, Years 7 to 10
Warranty costs, Years 7 to 10
Warranty cost, Year 11
Life-cycle cost

P 5,000,000
7,000,000
200,000
100,000
P12,300,000

31. Yellow Co. is considering the purchase of a new machine that costs P450,000. The new
machine will generate net cash flow of P150,000 per year and net income of P100,000 per
year for five years. Yellows desired rate of return is 6%. The present value factor for a
five-year annuity of P1, discounted at 6%, is 4.212. The present value factor of P1, at
compound interest of 6% due in five years, is 0.7473. What is the new machines net
present value?
a. P450,000
c. P181,800
b. P373,650
d. P110,475

Present value of net cash inflow (P150,000 x 4.212)
Less cost of investment
Net present value

Page 10 of 25 pages

P631,800
450,000
P181,800

## ITEMS 32 AND 33 ARE BASED ON THE FOLLOWING INFORMATION:

Assume that Micky Industries is considering investing in a project with the following
characteristics:
Initial investment
P500,000
10,000
Cash flows before income taxes for years 1 through 5
140,000
Yearly tax depreciation
90,000
Terminal value of investment
50,000
Cost of capital
10%
Present value of P1 received after 5 years discounted at 10%
0.621
Present value of an ordinary annuity of P1 for 5 years at 10%
3.791
Marginal tax rate
30%
Investment life
5 years
Assume that all cash flows come at the end of the year.
32. What is the amount of the after-tax cash flows in year 2?
a. P140,000
c. P 98,000
b. P125,000
d. P 70,000
Cash flow after tax but before depreciation (P140,000 x 70%)
Add tax savings due to depreciation (P90,000 x 30%)
After tax cash flows

P 98,000
27,000
P125,000

a. P175,000
c. P 1,135
b. P 58,000
d. P (12,340)

## Present value of cash flows from operations (P125,000 x 3.791)

Present value of working capital (P10,000 x 0.621)
Present value of terminal value (P50,000 x 0.621)
Total present value of cash inflows
Less cost of investment (P500,000 + P10,000)
Net present value

P473,875
6,210
31,050
P511,135
510,000
P 1,135

34. A company with P4.8 million in credit sales per year plans to relax its credit standards,
projecting that this will increase credit sales by P720,000. The companys average
collection period for new customers is expected to be 75 days, and the payment behavior
of the existing customers is not expected to change. Variable costs are 80% of sales. The
firms opportunity cost is 20% before taxes. Assuming a 360-day year, what is the
companys benefit (loss) from the planned change in credit terms?
a. P0
c. P144,000
b. P 28,800
d. P120,000

## Incremental contribution margin (P720,000 x 20%)

Less opportunity cost (
x 75 days x 20%)

P144,000
24,000

P120,000

## ITEMS 35 AND 36 ARE BASED ON THE FOLLOWING INFORMATION:

Page 11 of 25 pages

NOSIGNAL Telecom is considering a project for the coming year that will cost P50 million.
NOSIGNAL plans to use the following combination of debt and equity to finance the
investment.

Issue P15 million of 20-year bonds at a price of 101, with a coupon rate of 8%, and
flotation costs of 2% of par.

## Use P35 million of funds generated from earnings.

The equity market is expected to earn 12%. Treasury bills are currently yielding 5%. The
beta coefficient for NOSIGNAL is estimated to be 0.60. NOSIGNAL is subject to an
effective corporate income tax rate of 40%.
35.

Assume that the after-tax cost of debt is 7% and the cost of equity is 12%. Determine
the weighted-average cost of capital.
a. 10.50%
c. 9.50%
b. 8.50%
d. 6.30%

## Proceeds from issuance of bonds [P15,000,000 x (101% 2%)

Retained earnings
Total capital

P14,850,000
35,000,000
P49,850,000

## Weighted average cost of capital = [(7% x P14,850/P49,850) + (12% x 35,000/49,850) = 10.50%

36. The Capital Asset Pricing Model (CAPM) computes the expected return on a security by
that is adjusted by the companys beta. Compute NOSIGNALs expected rate of return.
a. 9.20%
c. 7.20%
b. 12.20%
d. 12.00%

## ITEMS 37 AND 38 ARE BASED ON THE FOLLOWING INFORMATION:

The following information is available for Armstrong Enterprises for 2013:
Net operating profit (income) after taxes
Depreciation expense
Change in net working capital
Capital expenditures
Invested capital (total assets current liabilities)
Weighted-average cost of capital
37.

P36,000,000
15,000,000
10,000,000
12,000,000
100,000,000
10%

a. P20,000,000
c. P15,000,000
b. P26,000,000
d. P36,000,000

## Profit after tax

Less capital charge on invested capital (P100,000,000 x 10%)

a. P36,000,000
b. P30,000,000

c. P29,000,000
d. P26,000,000

P36,000,000
10,000,000
P26,000,000

## Net operating profit after taxes

+ Depreciation expense
Change in net working capital
Capital expenditures
Free cash flow

Page 12 of 25 pages

P36,000,000
15,000,000
(10,000,000)
(12,000,000)
P29,000,000

39. A 2013 cash budget is being prepared for the purchase of Toytoy, a merchandise item.
Budgeted data are
Cost of goods sold for 2013
P300,000
Accounts payable 1/1/13
20,000
Inventory1/1/13
30,000
12/31/13
42,000
Purchases will be made in twelve equal monthly amounts and paid for in the following
month. What is the 2013 budgeted cash payment for purchases of Toytoy?
a. P295,000
c. P306,000
b. P300,000
d. P312,000

## Accounts payable, 1/1/13

2013 purchases [P312,000* (P312,000/12)]
Budgeted cash payment for purchases
Cost of goods sold
Add increase in inventory (P42,000 P30,000)
*Purchases

P 20,000
286,000
P306,000
P300,000
12,000
P312,000

40. Product Kitty has sales of P200,000, a contribution margin of 20%, and a margin of safety
of P80,000. What is Kittys fixed cost?
a. P16,000
c. P80,000
b. P24,000
d. P96,000

Sales
Less margin of safety
Break-even sales
x CM ratio
Fixed costs

P200,000
80,000
P120,000
20%
P 24,000

## At break even, fixed costs = contribution margin.

41. Hector Corporation uses an activity-based costing system with the following three activity
cost pools:
Activity Cost Pool
Total Activity
Fabrication
20,000 machine-hours
Order processing
200 orders
Other
Not applicable
The Other activity cost pool is used to accumulate costs of idle capacity and organizationsustaining costs.
The company has provided the following data concerning its costs:
Wages and salaries
P480,000
Depreciation
120,000
Occupancy
200,000
Total
P800,000

The distribution of resource consumption across activity cost pools is given below:

## Wages and salaries

Depreciation
Occupancy

Fabrication
55%
10%
25%

Page 13 of 25 pages

Order Processing
20%
45%
40%

Other
25%
45%
35%

Total
100%
100%
100%

The activity rate for the Order Processing activity cost pool is closest to:
a. P1,400 per order
c. P1,150 per order
b. P1,600 per order
d. P800 per order

## Wages and salaries (P480,000 x 20%)

Depreciation (P120,000 x 45%)
Occupancy (P200,000 x 40%)
Total
Number of orders
Rate per order

P 96,000
54,000
80,000
P230,000
200
P 1,150

## 42. The following information relates to Snowball Corporation:

Sales at the break-even point
P312,500
Total fixed expenses
P250,000
Net operating income
P150,000
What is Snowball's margin of safety?
a. P62,500
b. P187,500

c. P100,000
d. P212,500

Sales (P250,000 + P150,000)
Less break even sales
Margin of safety

P400,000
312,500
P187,500

## USE THE FOLLOWING TO ANSWER QUESTIONS 43-47:

The Ben Company uses standard costing for the single product the company makes and
sells. The following data are for the month of April:
Actual cost of direct material purchased and used: P62,400
Material price variance: P4,800 unfavorable
Total materials variance: P14,400 unfavorable
Standard cost per pound of material: P6
Standard cost per direct labor hour: P8
Actual direct labor hours: 3,800 hours
Labor efficiency variance: P1,600 favorable
Standard number of direct labor hour per unit of product: 2
Total labor variance: P680 unfavorable
43. The total number of units produced during April was:
a. 8,000
c. 2,000
b. 12,000
d. 3,800
44. The standard quantity of material allowed to produce one unit of product was:
a. 1 pound
c. 6 pounds
b. 4 pounds
d. 2 pounds
45. The actual material cost per pound was:
a. P6.50
b. P6.00

c. P5.00
d. P7.20

Page 14 of 25 pages

46. The actual direct labor rate per hour was:
a. P16.00
b. P 6.50

c. P8.00
d. P8.60

47. The labor rate variance was:
a. P2,280 favorable
b. P2,280 unfavorable

c. P920 favorable
d. P920 unfavorable

SOLUTION TO Numbers 43 to 47:
Materials:
Actual cost (9,600 x P6.50)
Actual quantity used at standard price (9,600 x P6)
Std. cost (8,000 x P6)

P62,400
57,600
48,000

Price variance
P4,800 unfavorable
Quantity variance 9,600 unfavorable

P32,680
30,400
32,000

Rate variance
Time variance

## Standard quantity per unit = 8,000 2,000 = 4

Labor:
Actual cost (3,800 x P8.60)
Actual time x Std. rate (3,800 x P8)
Std. cost (4,000 x P8)

2,280 unfavorable
1,600 favorable

## Actual production = 4,000 hours 2 = 2,000 units

48. The Nut House, Inc., sells three types of nuts: almonds, cashews, and walnuts. Ten
thousand cans of nuts were sold in 2011, and the amount of walnuts sold were twice as
much as the number of cans of cashews, whereas almond sales were one-half the amount
of cashew sales. Fixed costs were P37,680, and the unit sales prices and unit variable
costs were as follows:
Product
Almonds
Cashews
Walnuts

P8
10
6

## Unit Variable Cost

P4
5
4

The company plans to earn profit of P6,280. The overall break-even unit sales is:
a. 10,000
c. 12,000
b. 14,000
d. 6,857
Contribution margin per unit
x sales mix ratio
Weighted contribution margin

Almond
P4

P2

Cashew
P1
1
P5

Walnut
P2
2
P4

Total
3.50
P11

## Weighted average contribution margin = P11/3.50 = P3.14

Over-all break even unit sales = P37,680 P3.14 = 12,000

49. Jacob Corporation is a wholesaler that sells a single product. Management has provided
the following cost data for two levels of monthly sales volume. The company sells the
product for P103.40 per unit.
Sales volume (units)
5,000
6,000
Cost of sales
P315,500
P378,600
Selling, general, and administrative costs P162,500
P177,600

Page 15 of 25 pages

The best estimate of the total contribution margin when 5,300 units are sold is:
a. P 56,710
c. P 41,340
b. P133,560
d. P213,590
Cost of sales
Total
Sales volume (units)
Selling price
Variable cost per unit (P78,200 1,000)
Contribution margin per unit
x number of units
Contribution margin

Low
P315,500
P162,500
P478,000

High
P378,600
P177,600
P556,200

Difference

5,000

6,000

1,000

P78,200

P103.40
78.20
P 25.20
5,300
P133,560

50. Steady Company produces a single product. Last year, the company's net operating
income computed by the absorption costing method was P6,400, and its net operating
income computed by the variable costing method was P9,100. The company's unit product
cost was P17 under variable costing and P20 under absorption costing. If the ending
inventory consisted of 2,100 units, the beginning inventory in units must have been:
a. 1,200
c. 3,000
b. 2,100
d. 4,800

## Difference in income (P9,100 P6,400)

Fixed overhead cost per unit (20 P17)
Decrease in inventory*
Beginning inventory

P2,700
3.00
900
2,100
3,000

*Inventory decreased. Absorption costing income is less than variable costing income.

51. Big Tool Company has a production capacity of 1,500 units per month, but current
production is only 1,250 units. The manufacturing costs are P60 per unit and marketing
costs are P16 per unit. Small Hall offers to purchase 250 units at P76 each for the next
five months. Should Big accept the one-time-only special order if only absorption-costing
data are available?
a. Yes, good customer relations are essential.
b. No, the company will only break even.
c. No, since only the employees will benefit.
d. Yes, since operating profits will most likely increase.
Since the P60 absorption cost per unit is most likely not all variable costs and since the entire P16 per unit
of marketing costs may not be incurred, operating profits will most likely increase.

## THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 51 THROUGH 53:

Page 16 of 25 pages

Konrados Engine Company manufactures part TE45 used in several of its engine models.
Monthly production costs for 1,000 units are as follows:
Direct materials
Direct labor
Total costs

P 40,000
10,000
30,000
20,000
P100,000

It is estimated that 10% of the fixed overhead costs assigned to TE45 will no longer be
incurred if the company purchases TE45 from the outside supplier. Konrados Engine
Company has the option of purchasing the part from an outside supplier at P85 per unit.
51. If Konrados Engine Company accepts the offer from the outside supplier, the monthly
avoidable costs (costs that will no longer be incurred) total:
a. P 82,000
c. P 50,000
b. P 98,000
d. P100,000

## P40,000 + P10,000 + P30,000 + (P20,000 x 10%) = P82,000

52. If Konrados Engine Company purchases 1,000 TE45 parts from the outside supplier per
month, then its monthly operating income will:
a. increase by P2,000
c. decrease by P3,000
b. increase by P80,000
d. decrease by P85,000

## Avoidable costs = P82,000 (P85 x 1,000 units) = decrease of P3,000

53. The maximum price that Konrados Engine Company should be willing to pay the outside
supplier is:
a. P80 per TE45 part
c. P98 per TE45 part
b. P82 per TE45 part
d. P100 per TE45 part

## Avoidable costs P82,000 / 1,000 units = P82 per part

54. King Company produces a single product. During March, the company had net operating
income under absorption costing that was P3,500 lower than under variable costing. The
company sold 7,000 units in March, and its variable costs were P7 per unit, of which P3
was variable selling expense. If fixed manufacturing overhead was P2 per unit under
absorption costing, then how many units did the company produce during March?
a. 5,250 units
c. 6,500 units
b. 8,750 units
d. 6,125 units

Sales in units
Less change in inventory (P3,500 P2)
Production

7,000
1,750
5,250

55. XYZ Company believes that its collection costs could be reduced through modification of
collection procedures. This action is expected to result in a lengthening of the average
collection period from 28 days to 34 days; however, there will be no change in uncollectible
accounts. The companys budgeted credit sales for the coming year are P27,000,000, and
short-term interest rates are expected to average 8%. To make the changes in collection
procedures cost beneficial, the minimum savings in collection costs (using a 360-day year)
for the coming year would have to be
a. P360,000
b. P180,000

c. P36,000
d. P30,000

Page 17 of 25 pages

## [(P27million/360 days) x (34-28)] x 8% = P36,000

56. Presented below are excerpts from the income statements of Jesse Company for the years
ended December 31, 2013 and 2012:
2013
2012
Sales
P1,584,000
P1,600,000
Cost of goods sold
928,000
960,000
Gross profit
P 656,000
P 640,000
The 2013 selling price was 10% lower than in 2012.
The change in gross profit due to the change in the numbers of units sold is:
a. P17,600 unfavorable
c. P128,000 favorable
b. P160,000 unfavorable
d. P64,000 favorable
Sales variance:
2013 sales
2013 units at 2012 sales price (P1,584,000 90%)
2012 sales

P1,584,000
1,760,000
1,600,000

## Price variance P176,000

Volume variance 160,000

unf
fav

## Price variance P128,000

Volume variance 96,000

fav
unf

## % change in volume = P160,000 P1,600,000 = 10% increase

Cost variance:
2013 cost of sales
2013 units x 2012 cost price (P960,000 x 110%)
2012 cost of sales

P928,000
1,056,000
960,000

Change in gross profit due to change in volume or units sold = (P160,000 fav - P96,000 unf) = P64,000 fav

57. Sanrok Company makes a household appliance with model number RSR1914. The goal for
2013 is to reduce direct materials usage per unit. No defective units are currently
produced. Manufacturing conversion costs depend on production capacity defined in terms
of RSR1914 units that can be produced. The industry market size for appliances increased
5% from 2012 to 2013. The following additional data are available for 2012 and 2013:
Units of RSR1914 produced and sold
Selling price
Direct materials (square feet)
Direct material costs per square foot
Manufacturing capacity for RSR1914 (units)
Total conversion costs
Conversion costs per unit of capacity

2012
10,000
P100
30,000
P10
12,500
P250,000
P20

2013
10,500
P95
29,000
P11
12,000
P240,000
P20

## What is the revenue effect of the growth component?

a. P2,500 unfavorable
c. P52,500 unfavorable
b. P47,500 favorable
d. P50,000 favorable
(10,500 - 10,000) P100 = P50,000 F

58. Labor Day, Inc. is considering a 10-year capital investment project with forecasted
revenues of P40,000 per year and forecasted cash operating expenses of P29,000 per
year. The initial cost of the equipment for the project is P23,000 and Labor Day expects
to sell the equipment for P9,000 at the end of the tenth year. The equipment will be
depreciated over 7 years. The project requires a working capital investment of P7,000 at

Page 18 of 25 pages

its inception and another P5,000 at the end of year 5. Assuming a 40% income tax rate,
the expected net cash flow from the project in the tenth year is
a. P32,000
c. P20,000
b. P24,000
d. P11,000
Cash flow from operations, net of tax (P40,000 P29,000) x 60%
Salvage value, net of tax (P9,000 x 60%)
Working capital to be recovered (P7,000 + P5,000)
Cash flow, tenth year

P 6,600
5,400
12,000
P24,000

59. Apple Enterprises is experiencing a growth rate of 9% with a return on assets of 12%. If
the debt ratio is 36% and the market price of the stock is P38 per share, what is the
return on equity?
a. 18.75%
c. 9.0%
b. 12.0%
d. 7.68%

Assume that the firm has P100 in assets, with debt of P36 and equity of P64. Income (return) is P12.
The return on equity is (P12 P64) 18.75%.

60. A vendor offered Tanya Company P25,000 in compensation for losses resulting from faulty
raw materials. Alternatively, a lawyer offered to represent Tanya in a lawsuit against the
vendor for a P12,000 retainer and 50% of any reward over P35,000. Possible court
awards with their associated probabilities are as follows:
Award
P75,000
0

Probability
60%
40%

Compared with accepting the vendors offer, the expected value for Tanya to litigate the
matter to a verdict provides a
a. P38,000 gain
c. P8,000 gain
b. P21,000 gain
d. P4,000 loss

## Proceeds if award is P75,000 = P75,000 [P12,000 + (<P75,000 P35,000> x 50%)] = P43,000

Tanyas loss if award is zero = P12,000 retainers fee.
Expected value if award is P75,000= (43,000 x 60%) + (-12,000 x 40%) =
Proceeds from vendor
Loss if the case is litigated to a verdict

P21,000
25,000
P 4,000

THEORIES
1. Management accounting:
a. focuses on estimating future revenues, costs, and other measures to forecast
activities and their results
b. provides information about the company as a whole
c. reports information that has occurred in the past that is verifiable and reliable
d. provides information that is generally available only on a quarterly or annual basis
2. The terms direct costs and indirect costs are commonly used in accounting. A particular
cost might be considered a direct cost of a manufacturing department but an indirect cost

Page 19 of 25 pages

of the product produced in the manufacturing department. Classifying the cost as either
direct or indirect depends upon
a. Whether an expenditure is unavoidable because it cannot be changed regardless of
any action taken.
b. The cost object to which the cost is being related.
c. Whether the cost is expensed in the period in which it is incurred.
d. The behavior of the cost in response to volume changes.
3. Costs are allocated to cost objects in many ways and for many reasons. Which one of the
following is purpose of cost allocation?
a. Aiding in variable costing for internal reporting.
b. Budgeting cash and controlling expenditures.
c. Measuring income and assets for external reporting.
d. Evaluating revenue center performance.
4. Which of the following is correct regarding a relevant range?
a. The relevant range cannot be changed after being established.
b. Actual fixed costs usually fall outside the relevant range.
c. Total fixed cost will not change.
d. Total variable costs will not change.
5. Discretionary costs are costs that
a. will be unaffected by current managerial decisions.
b. are governed mainly by past decisions that established the present levels of
operating and organizational capacity and that only change slowly in response to
small changes in capacity.
c. are likely to respond to the amount of attention devoted to them by a specified
manager.
d. management decides to incur in the current period to enable the company to
achieve objectives other than the filling of orders placed by the customers.
6. An imputed cost is
a. a cost that continues to be incurred even though there is no activity.
b. a cost that does not entail any peso outlay but is relevant to the decision-making
process.
c. a cost that cannot be avoided because it has already been incurred.
d. the difference in total costs that results from selecting one alternative instead of
another.
7. An accounting system that collects financial and operating data on the basis of the
underlying nature and extent of the cost drivers is
a. Variable costing
c. Activity-based costing
b. Cycle-time costing
d. Direct costing
8. A difference between standard costs used for cost control and budgeted costs
a. cannot exist because they should be the same amounts.

Page 20 of 25 pages

b. can exist because budgeted costs are historical costs, whereas standard costs are
based on engineering studies.
c. can exist because standard costs represent what costs should have been, whereas
budgeted costs represent expected actual costs.
d. can exist because standard costs must be determined after the budget is completed.
9. A standard costing system is most often used by a firm in conjunction with
a. flexible budgets
c. target (hurdle) rates of return
b. participative management programs
d. management by objectives
10. The
a.
b.
c.

## use of activity-based costing (ABC) normally results in

equalizing set-up costs for all product lines.
decreased set-up costs being charged to low volume products.
substantially lower unit costs for low-volume products than is reported by traditional
product costing.
d. substantially greater unit costs for low-volume products than is reported by

11. Which of the following statements is true regarding absorption costing and variable
costing?
a. Gross margins are the same under both costing methods.
b. Variable manufacturing costs are lower under variable costing.
c. If finished goods inventory increases, absorption costing results in higher income.
d. Overhead costs are treated in the same manner under both costing methods.
12. A firm that is deploying just-in-time manufacturing for the first time will
a. acquire considerable computer processing capability to manage the demands of the
data-dependent kanban inventory management system.
b. maintain a carefully calibrated safety stock since interruptions in supply are
inevitable.
c. establish contracts with a few carefully chosen suppliers since an interruption in
supply is extremely disruptive of the production process.
d. establish contracts with many suppliers since an interruption in supply is extremely
disruptive of the production process.
13. Each organization plans and budgets its operations for slightly different reasons. Which
one of the following is not a significant reason for planning?
a. Checking progress toward the objectives of the organization.
b. Ensuring profitable operations.
c. Forcing managers to consider expected future trends and conditions.
d. Providing a basis for controlling operations.
14. Which of the following statements concerning approaches for the budget development
process is correct?

Page 21 of 25 pages

a. Since department managers have the most detailed knowledge about organizational
operations, they should use this information as the building blocks for the operating
budget.
b. With the information technology available, the role of budgets as an organizational
communication device has declined.
c. To prevent ambiguity, once departmental budgeted goals have been developed, they
should remain fixed even if the sales forecast upon which they are based proves to
be wrong in the middle of the fiscal year.
d. The top-down approach to budgeting will ensure adherence to strategic
organizational goals.
15. When compared with ideal standards, practical standards
a. serve as a better motivating target for manufacturing personnel.
b. incorporate very generous allowance for spoilage and worker inefficiencies.
c. result in a less desirable basis for the development of budgets.
d. produce lower per-unit product costs.
16. The correlation coefficient that indicates the weakest linear association between two
variables is
a. 0.35
c. -0.11
b. 0.12
d. -0.73
16. Through the use of decision models, managers thoroughly analyze many alternatives and
decide on the best alternative for the company. Often, the actual results achieved from a
particular decision are not what was expected when the decision was made. In addition,
an alternative that was not selected would have actually been the best decision for the
company. The appropriate technique to analyze the alternatives by using expected inputs
and altering them before a decision is mad is
a. Program Evaluation Review Technique
c. Linear programming
b. Sensitivity analysis
d. Expected value analysis
17. Which of the following may be used to estimate how inventory warehouse costs are
affected by both the number of shipments and the weight of materials handled?
a. Economic order quantity analysis
c. Correlation analysis
b. Probability analysis
d. Multiple regressions analysis
18. Breakeven analysis assumes that over the relevant range
a. unit revenues are non-linear.
c. total costs are unchanged.
b. unit variable costs are unchanged.
d. total fixed costs are non-linear.
19. Division A is considering a project that will earn a rate of return which is greater than the
imputed interest charge for invested capital, but less than the divisions historical return
on invested capital. Division B is considering a project that will earn a rate of return that
is greater than the divisions historical return on invested capital. if the objective is to
maximize residual income, should these divisions accept or reject their projects?

a.
b.
c.
d.

A
Accept
Reject
Reject
Accept

Page 22 of 25 pages

B
Accept
Accept
Reject
Reject

20. Which measures would be useful in evaluating the performance of a manufacturing
system?
I. Throughput time
II. Total setup for time machines/Total production time
III. Number of rework units/Total number of units completed
a. I and II only
b. II and III only

## c. I and III only

d. I, II, and III only

21. The discount rate (hurdle rate of return) must be determined in advance for the
a. Payback period method.
c. Net present value method.
b. Time-adjusted rate of return method.
d. Internal rate of return method
22. To assist in an investment decision, Gift Co. selected the most likely sales volume from
several possible outcomes. Which of the following attributes would that selected sales
volume reflect?
a. The midpoint of the range.
c. The greatest probability.
b. The median.
d. The expected value.
23. If everything else remains constant and a firm increases its cash conversion cycle, its
profitability will likely
a. Increase.
c. Decrease.
b. Increase if earnings are positive.
d. Not be affected.
24. In considering cost of quality methodology, quality circles are associated with
a. Prevention.
c. Internal failure.
b. Appraisal.
d. External failure.
25. Management of organizations that engage in business process management view business
processes as
a. Requirements for good control over the organization.
b. Systems that provide information for good management.
c. Strategic assets that must be understood, managed and improved.
d. Mechanisms that keep employees from shirking.
26. The balanced scorecard has been adopted by many corporations. Which of the following
best describes the balanced scorecard?

a.
b.
c.
d.

A
A
A
A

Page 23 of 25 pages

## strategy that meets managements objectives.

diagram illustrating cause and effect relationships.
table of key actions to achieve strategic objectives.
strategic performance measurement and management framework.

27. The
a.
b.
c.
d.

## most likely strategy to reduce the breakeven point, would be to

Increase both the fixed costs and the contribution margin.
Decrease both the fixed costs and the contribution margin.
Decrease the fixed costs and increase the contribution margin.
Increase the fixed costs and decrease the contribution margin.

28. A technique that is often used in project management to identify tasks where attention
should be focused because they are the most critical is referred to as
a. ABC Analysis.
c. Work breakdown analysis.
b. Milestone analysis.
29. Which of the following statements regarding transfer pricing is false?
a. When idle capacity exists, there is no opportunity cost to producing intermediate
products for another division.
b. Market-based transfer prices should be reduced by any costs avoided by selling
internally rather than externally.
c. No contribution margin is generated by the transferring division when variable costbased transfer prices are used.
d. The goal of transfer pricing is to provide segment managers with incentive to
maximize the profits of their divisions.
30. Another name for return on investment is the:
a. net present value
c. residual income
b. accounting rate of return
d. internal rate of return
31. A manager would like to see a decreasing trend in all of the following operating
measures except:
a. Customer complaints as a percentage of units sold.
b. Scrap as a percentage of total cost.
c. Setup time.
d. Manufacturing cycle efficiency
32. Which of the following would produce a labor rate variance?
a. Poor quality materials causing breakage and work interruptions.
b. Use of persons with high hourly wage rates in tasks that call for low hourly wage
rates.
c. Excessive number of hours worked in completing a job.
d. An unfavorable variable overhead spending variance.

Page 24 of 25 pages

33. XIAN Manufacturing produces a unique valve, and has the capacity to produce 50,000
valves annually. Currently XIAN produces 40,000 valves and is thinking about increasing
production to 45,000 valves next year. What is the most likely behavior of total
manufacturing costs and unit manufacturing costs given this change?
a. Total manufacturing costs will increase and unit manufacturing costs will stay the
same.
b. Total manufacturing costs will increase and unit manufacturing costs will decrease.
c. Total manufacturing costs will stay the same and unit manufacturing costs will stay
the same.
d. Total manufacturing costs will stay the same and unit manufacturing costs will
decrease.
34. Project Noble has an expected cash flow of P500,000 at the end of year 5. Project Heroic
has expected cash flows of P100,000 to be received at the end of each year for the next
five years. What can be said of the net present value of Project Noble compared to
Project Heroic?
a. They are the same because both cash flows total P500,000 over the lives of the
projects.
b. Project Noble is preferred because of the largest lump-sum payment in year 5.
c. Project Heroic is preferred because of the periodic payments made consistently
throughout the years and are made earlier.
d. Both Project Noble and Project Heroic have the same internal rate of return and
either should be accepted.
35. At Key Enterprises, the controller is responsible for directing the budgeting process. In this
role, the controller has significant influence with executive management as individual
department budgets are modified and approved. For the current year, the controller was
instrumental in the approval of a particular line managers budget without modification ,
even though significant reductions were made to the budgets submitted by other line
managers. As a token of appreciation, the line manager has given the controller a gift
certificate for a popular local restaurant. In considering whether or not to accept the
certificate, the controller should refer to which section of IMAs Statement of Ethical
Professional Practice?
a. Competence
c. Integrity
b. Confidentiality
d. Credibility
36. Inventoriable costs are
a. include only the prime costs of manufacturing a product.
b. include only the conversion costs of manufacturing a product.
c. are expensed when products become part of finished goods inventory.
d. are regarded as assets before the products are sold.
37. Which of the following items would have to be included for a company preparing a
schedule of cash receipts and disbursements for calendar Year 1?
a. A purchase order issued in December Year 1 for items to be delivered in February Year
2.
b. Dividend declared in November Year to be paid in January Year 2 to shareholders of
record as of December Year 1.

Page 25 of 25 pages

## c. The amount of uncollectible accounts for Year 1.

d. The borrowing of funds from a bank on a note payable taken out in June Year 1 with
an agreement to pay the principal and interest in June Year 2.
38. As a business owner you have determined that the demand for your product is inelastic.
Based upon this assessment you understand that
a. Increasing the price of your product will increase total revenue.
b. Decreasing the price of your product will increase total revenue.
c. Increasing the price of your product will have no effect on total revenue.
d. Increasing the price of your product will increase competition.
39. What technology is needed in order to convert a paper document into a computer file?
a. Optical character recognition.
c. Bar-coding scanning.
b. Electronic data interchange.
d. Joining and merging.
40. In a make-versus-buy decision, the relevant costs include variable manufacturing costs, as
well as
a. factory management costs
c. avoidable fixed costs.
b. general office costs.
d. depreciation costs.