Question

1. The cost structure of a new firm Atelier GD in Alsancak is given below. The firm produces artwork with a yearly capacity of 5000 labor hours. 50 labor hours is required to produce one unit of artwork on average.

Cost Item

Amount

Raw Material (per unit)

150 $

Labor Force (per hour)

10 $

Rent for the building (per year)

25000 $

Administrative Expenses (per year)

20000 $

Profit Margin

% 25

a. Calculate the unit price according to full cost pricing method. (5 pts)

b. Calculate the unit price according to direct cost pricing method. (5 pts)

c. Calculate the break-even price assuming the firm produces 100 units per year. (5 pts)

d. Calculate the break-even quantity assuming the unit price is 1212,5 $ (profit margin not included) (5 pts)

Answer 1

Direct costing method:

A method where only the variable manufacturing costs are assigned to inventory and the cost of goods sold. Fixed manufacturing costs are viewed as expenses of the period in which they are incurred. This method is not allowed for external financial statements, but can be used internally. External financial statements must have fixed manufacturing costs allocated to the products.

Total cost accounting method:

Add together your total direct materials costs, your total direct labor costs and your total manufacturing overhead costs that you incurred during the period to determine your total product costs. Divide your result by the number of products you manufactured during the period to determine your product cost per unit.k