1
BA 116
Third Long Exam
Problem 1
A recent accounting graduate from Brainy University evaluated the operating
performance of Scarlet Company’s four divisions. The following presentation was made
to Scarlet’s Board of Directors. During the presentation, the accountant made the
recommendation to eliminate the Southern Division stating that total net income would
increase by P60,000. (See analysis below.)
Other Three Divisions Southern Division Total
Sales P2,000,000 P480,000 P2,480,000
Cost of Goods Sold 950,000 400,000 1,350,000
Gross Profit 1,050,000 80,000 1,130,000
Operating Expenses 800,000 140,000 940,000
Net Income P 250,000 P (60,000) P 190,000
For the other divisions, cost of goods sold is 80% variable and operating expenses are
70% variable. The cost of goods sold for the Southern Division is 30% fixed, and its
operating expenses are 75% fixed. If the division is eliminated, only P15,000 of the fixed
operating costs will be eliminated.
Requirements:
Do you agree with the new accountant’s recommendation? Present a schedule to support
your answer.
Problem 2
Alvarez Chemical Corporation produces an oil-based chemical product which it sells to
paint manufacturers. In 2020, the company incurred P344,000 of costs to produce 40,000
gallons of the chemical. The selling price of the chemical is P12.00 per gallon. The costs
per unit to manufacture a gallon of the chemical are presented below:
Direct materials P6.00
Direct labor 1.20
Variable manufacturing overhead .80
Fixed manufacturing overhead .60
Total manufacturing costs P8.60
2
The company is considering manufacturing the paint itself. If the company processes the
chemical further and manufactures the paint itself, the following additional costs per gallon
will be incurred: Direct materials P1.70, Direct labor P0.60, Variable manufacturing
overhead P0.50. No increase in fixed manufacturing overhead is expected. The company
can sell the paint at P15.50 per gallon.
Required:
Determine the incremental per gallon increase in net income and the total increase in net
income if the company manufactures the paint.
Problem 3
The Sun Corp. is contemplating the acquisition of an automatic car wash. The following
information is relevant:
The cost of the car wash is P160,000
The anticipated revenue from the car wash is P100,000 per annum.
The useful life of the car wash is 10 years.
Annual operating costs are expected to be:
Salaries P30,000
