Reference no: EM132728963

Questions -

Q1. Leland manufacturing uses 10 units of Part Number K137 each month in the production of radar equipment. the unit cost to manufacture one unit of K137 is presented below.

Direct materials P1,000

Materials handling (20% of direct material cost) 200

Direct labor 8,000

Manufacturing overhead (150% of direct labor) 12,000

Materials handling represents the direct variable costs of the receiving department that are applied to direct materials and purchased components on the basis of their costs. This is a separate charge in addition to manufacturing overhead. Leland's annual manufacturing overhead budget is one-third variable and two-thirds fixed. Scott Supply, one of Leland's reliable vendors, has offered to supply Part No. K137 at a unit price of P15,000.

1. If Leland purchase the K137 units from Scott, the capacity Leland used to manufacture these parts would be idle. Should Leland decide to purchase the parts from Scoot, what would be the impact on net income?

2. Assume Leland Manufacturing is able to rent all idle capacity for P25,000 per month. If Leland decides to purchase the 10 units from Scott Supply, What is the impact on costs of K137?

3. Assume that Leland does not wish to commit to a rental agreement but could use idle capacity to manufacture another product that would contribute P52,000 per month. If Leland elects to manufacture K137 in order to maintain quality control, What is the opportunity cost?

Q2. MC's Industries manufactures a product with the following costs per unit at the expected production of 30,000 units;

Direct Materials P4

Direct labor 12

Variable manufacturing overhead 6

Fixed manufacturing overhead 8

The company has the capacity to produce 40,000 units. The product regularly sells for P40. A wholesaler has offered to pay P32 a unit for 2,000 units.

If the firm is at capacity and the special order is accepted, what would be the effect on operating income?

Q3. Wallace Company produces 15,000 pounds of Product A and 30,000 pounds of Product B each week by incurring a common variable costs of P400,000. These two products can be sold as is or processed further. Further processing of either product does not delay the production of subsequent batches of the joint product. Data regarding these two products are as follows:

	Product A	Product B
Selling price per pound without further processing	P12.00	P9.00
Selling price per pound with further processing	15.00	11.00
Total separate weekly variable costs of further processing	P50,000	P45,000

To maximize Wallace Company's manufacturing contribution margin, should the company process further the product A and Product B?