Question

1. Cost Classification: The Lee’s have provided you with the following costs and relevant information that are assumed for year 20XY.

A. Classify each of the costs (a. through j.) below under C. as a variable cost or a fixed cost.

B. Explain the importance of distinguishing between variable and fixed costs.

C. Prepare a budgeted income statement, assuming 600 units to be produced and sold, a per unit selling price of $85, an income tax rate of 28% and the following information.

1. Cost of goods sold of $35 per unit
2. Labor = $400/month
   • One part-time employee will be hired to take care of packaging and shipping. This employee will be paid $10 per hour. He or she is estimated to work 40 hours total per month.
3. Advertising fees = $3,000
4. Bank fees = $200
5. Phone/internet = $150 per month
6. Shipping = $3 per unit
7. Utilities = $100 per month
8. Office Supplies = $900
1. Conference Exhibitor Fee = $3000
10. Travel Expenses for Conference (e.g. airfare, meals, taxi) = $1200

1. Break-Even Analysis: You have been asked to calculate how many units need to be sold to break even, based on the costs provided in task #3. Assume that only one conference will be attended and the estimated expenses associated with this conference are on target. Use the information in task #3 except do not consider taxes.)

Answer 1

A)

Classify each of the costs as Variable and fixed costs

Cost of Goods sold	Variable cost
labour per Month	Fixed cost
Part time Employee	Fixed cost
Advertising Fee	Fixed cost
bank fee	Fixed cost
Phone / Internet	Fixed cost
Shipping	Fixed cost
Utilities	Fixed cost
Office supplies	Fixed cost
Conference Exhibitor Fee	Fixed cost
Total travel for conference	Fixed cost

b)

Fixed cost are period costs. These are fixed and does not change in respect of Volume of products produced or services offered.

Variable costs are the costs that are change along with volume of the Products.

Once we know about fixed and variable costs, then these are helpful to find out how many products need to be produced and sold to reach the Break even point of the business. to know the Break even point we need to Differentiate the Costs as variable and Fixed costs.

Break even point in Units =   Fixed Cost /(Sale price - variable cost per unit) .

It also helps to reach a targeted profit ,  

For targeted profit   Units need to be Produced = (Fixed Cost + Target profit ) / (Sale price - variable cost per unit)

c)

Break Even Analysis

Break even points = Fixed cost / Contribution per unit = $16100/(85-38) =342.55