In: Accounting
Problem 1-39 (Static) Cost Data for Managerial Purposes (LO 1-3)
Imperial Devices (ID) has offered to supply the state government with one model of its security screening device at “cost plus 20 percent.” ID operates a manufacturing plant that can produce 66,000 devices per year, but it normally produces 60,000. The costs to produce 60,000 devices follow:
Total Cost | Cost per Device |
|||||||
Production costs: | ||||||||
Materials | $ | 4,500,000 | $ | 75 | ||||
Labor | 9,000,000 | 150 | ||||||
Supplies and other costs that will vary with production | 2,700,000 | 45 | ||||||
Indirect cost that will not vary with production | 2,700,000 | 45 | ||||||
Variable marketing costs | 1,800,000 | 30 | ||||||
Administrative costs (will not vary with production) | 5,400,000 | 90 | ||||||
Totals | $ | 26,100,000 | $ | 435 | ||||
Based on these data, company management expects to receive $522 (= $435 × 120 percent) per monitor for those sold on this contract. After completing 500 monitors, the company sent a bill (invoice) to the government for $261,000 (= 500 monitors × $522 per monitor).
The president of the company received a call from a state auditor, who stated that the per monitor cost should be:
Materials | $ | 75 | |
Labor | 150 | ||
Supplies and other costs that will vary with production | 45 | ||
$ | 270 | ||
Therefore, the price per monitor should be $324 (= $270 × 120 percent). The state government ignored marketing costs because the contract bypassed the usual selling channels.
Required:
For each of the four situations, calculate the cost basis per device based on the information shown above. (Round intermediate calculations and final answers to 2 decimal places.)
Options:
Per Device Cost Basis | Recommended Price Per Device | |
Option A | ||
Option B | ||
Option C | ||
Option D |
Production costs: | 60000 | 66000 | |
Materials | $ | 4,500,000 | 4,950,000 |
Labor | 9,000,000 | 9,900,000 | |
Supplies and other costs that will vary with production | 2,700,000 | 2,970,000 | |
Indirect cost that will not vary with production | 2,700,000 | 2,700,000 | |
Variable marketing costs | 1,800,000 | 1,980,000 | |
Administrative costs (will not vary with production) | 5,400,000 | 5,400,000 | |
Totals | $ | 26,100,000 | 27,900,000 |
$ 422.73 |
Per Device Cost Basis | Recommended Price Per Device | |
Option A | $ 270 | $ 324 |
Option B | $ 435 | $ 522 |
Option C | $ 393 | $ 471 |
Option D | $ 423 | $ 507 |