RELEVANT AND DIFFERENTIAL COSTING

1. JL processing Company is considering whether to make 2,000 units of product A which costs Php 16 a unit or buy it from outside for Php 15 a unit. A further analysis shows that if product A is outsourced, fixed costs of Php 8,000 attributable to this product will be reduced by 25%.

Should the Company make or buy?

(Show solution and explanation)

2 . BB Co expects to incur the following costs at the planned production level of 10,000 units:

Direct Materials, Php 100,000

Direct Labor, Php 120,000

Variable Overhead, Php 60,000

Fixed Overhead, Php 30,000

The selling price is Php50 per unit. The company currently operates at full capacity of 10,000 units. Capacity can be increased to 13,000 units by working overtime. Variable costs would increase by Php14 per unit for overtime production. Fixed overhead costs remain unchanged when overtime operations occur. BB has received a special order from Florante, Inc who has offered to buy 2,000 units at Php45 each.

Should the Company accept the offer?

(Show solution and explanation)