Question

Longboat Manufacturing produces a single product requiring the following direct material and direct labor:

	Cost per Unit of Input	Required Amount per Unit of Product
Material A	$9 / pound	20 ounces
Material B	$7 / pound	4 ounces
Material C	$25 / gallon	0.4 gallon
Cutting labor	$12 / hour	45 minutes
Shaping labor	$15 / hour	15 minutes
Finishing labor	$14 / hour	75 minutes

Manufacturing overhead consists of indirect materials, $0.60 per unit of product; indirect labor, $1,000 per month plus $0.75 per unit of product; factory maintenance, $17,000 per year plus $0.65 per unit of product; factory depreciation, $18,000 per year; and annual factory property taxes, $10,000. Selling and administrative expenses include the salaries of a sales manager, $40,000 per year; an office manager, $22,000 per year; and two salespersons, each of whom is paid a base salary of $15,000 per year and a commission of $4 per unit sold. Advertising and promotion of the product are done through a year-round media package program costing $1,500 per week.

a. Analyze all cost and expense factors to determine a general formula (based on units of production) for total cost.

Round variable cost per unit answers to two decimal places, if applicable.

		Total Fixed Costs		Variable Cost per Unit
Material A		Answer		Answer
Material B		Answer		Answer
Material C		Answer		Answer
Cutting labor		Answer		Answer
Shaping labor		Answer		Answer
Finishing labor		Answer		Answer
Manufacturing overhead:
Indirect material		Answer		Answer
Indirect labor		Answer		Answer
Factory maintenance		Answer		Answer
Factory depreciation		Answer		Answer
Factory property taxes		Answer		Answer
Selling and administration expenses
Sales administration salaries		Answer		Answer
Office administration salaries		Answer		Answer
Sales salaries and commissions		Answer		Answer
Advertising and promotion		Answer		Answer
Total component cost		Answer		Answer

b. Assuming a relevant range of 10,000 to 30,000 units, what is the estimated unit cost for producing and selling 10,000 units? 25,000 units? Explain the variation in unit cost at the two levels of production.

Round answers to two decimal places.

Estimated per unit cost for 10,000 units $Answer

Estimated per unit cost for 25,000 units $Answer

c. If 22,000 units are produced and sold in a year, what selling price results in a net income before income tax of $75,000?

Round answers to two decimal places, if needed.

$Answer

Answer 1

a

	Total fixed cost	Total variable cost
Material A		$11.25 ($9*20/16)
Material B		1.75 ($7*4/16)
Material C		10 ($25*0.4)
Cutting labor		9 ($12*45/60)
Shaping labor		3.75 ($15*15/60)
Finishing labor		17.5 ($14*75*60)
Manufacturing overhead:
Indirect material		0.6
Indirect labor	$12,000 ($1,000*12)	0.75
Factory maintenance	17,000	0.65
Factory depreciation	18,000
Factory property taxes	10,000
Selling and administration expenses:
Sales administration salaries	40,000
Office administration salaries	22,000
Sales salaries and commission	30,000 ($15,000*2)	4
Advertising and promotion	78,000 ($1,500*52)
Total component cost	$227,000	$59.25

General formula = Fixed cost + Variable cost per unit * number of units

b. Estimated unit cost for producing and selling: 10,000 units

Unit cost = ($227,000 + $59.25*10,000) / 10,000

Unit cost = $227,000+592,500 / 10,000

Unit cost = $81.95 per unit

Estimated unit cost for producing and selling: 25,000 units:

Unit cost = ($227,000+$59.25*25,000) / 25,000

Unit cost = $227,000+1,481,250 / 25,000

Unit cost = $68.33

The variation in unit cost is due to fixed cost which remains the same at all unit sales level, more the units sold lower the unit cost and lesser the units sold higher will be the unit cost.

c

Let selling price per unit be x

22,000 x = $227,000(fixed cost) + $59.25*22,000 (variable cost)+ 75,000 (desired net income)

22,000 x =$227,000+1,303,500+75,000 = $1,605,500

x = $1,605,500 / 22,000 = $72.98 (rounded off)

Hence selling price is $72.98 per unit results in net income of $75,000