Question

Martinez Company’s relevant range of production is 10,300 units to 15,300 units. When it produces and sells 12,800 units, its unit costs are as follows:

	Amount Per Unit
Direct materials	$	5.60
Direct labor	$	3.10
Variable manufacturing overhead	$	1.40
Fixed manufacturing overhead	$	3.60
Fixed selling expense	$	2.60
Fixed administrative expense	$	2.20
Sales commissions	$	1.20
Variable administrative expense	$	0.45

13.	If the selling price is $21.60 per unit, what is the contribution margin per unit sold? (Round your answer to 2 decimal places.)

14-a.

If 10,800 units are produced, what are the total amount of direct manufacturing costs incurred to support this level of production?

14-b.

If 10,800 units are produced, what are the total amount of indirect manufacturing costs incurred to support this level of production?

15.	What total incremental cost will Martinez incur if it increases production from 12,800 to 12,801 units? (Round your answer to 2 decimal places.)

Answer 1

Solution:

13)

Contribution Margin	$ / Unit
Unit Selling Price	$21.60
Less: Total Variable Cost per unit
Direct materials	$5.60
Direct labor	$3.10
Variable manufacturing overhead	$1.40
Sales commissions	$1.20
Variable administrative expense	$0.45
Total Unit Variable Cost	$11.75
Contribution Margin (Unit Sale Price $21.60 - Total Unit Variable Cost $11.75)	$9.85

Contribution Margin Per Unit Sold = $9.85

14(a) --

Direct manufacturing cost means the cost directly attributable to the product and traceable with the production volume. It includes direct material, direct labor and direct expenses.

	10,800 Units
Direct materials (10800*$5.60)	$60,480
Direct labor (10800*$3.10)	$33,480
Direct manufacturing cost	$93,960

Note – Variable manufacturing overhead ---- Overheads are not direct cost. Overheads are indirect cost. Hence not considered in Direct manufacturing cost.

Note – Fixed manufacturing overhead ---- Overheads are not direct cost. Overheads are indirect cost. Hence not considered in Direct manufacturing cost.

Note – Selling and Administrative Expenses – are not part of manufacturing cost.

14(b) --

Indirect manufacturing costs are the overheads that are incurred in manufacturing of product but not traceable directly with the production volume.

	10,800 Units
Variable manufacturing overhead (10800*$1.40)	$15,120
Fixed manufacturing overhead (12,800*3.60)	$46,080
Total Indirect manufacturing cost	$61,200

Note – In calculating variable manufacturing overheads we use units 10800 Units. Since variable manufacturing overheads are vary with the production volume.

Note – For Fixed MFR Ovehead we use 12,800 Units. Fixed Overheads will remain fixed in totality. It varies per unit but in total remain same. Hence $46,080 is the fixed overhead which will remain same irrespective of the production volume.

15)

Total Incremental Cost is the total variable cost which will be incurred in producing a single unit of product from 12,800 Units to 12,801 Unit

So, the total variable cost to be incurred to produce 1 unit = $11.75

Total Variable Cost per unit
Direct materials	$5.60
Direct labor	$3.10
Variable manufacturing overhead	$1.40
Sales commissions	$1.20
Variable administrative expense	$0.45
Total Incremental Cost	$11.75