Question

Total Manufacturing Costs, Income Statement, Unit Cost, and Selling Price. You are consulted by Investors, Inc., a group of investors planning a new product. They have estimates of the costs of materials, labor, overhead, and other expenses for 2016 but need to know how much to charge for each unit to earn a profit in 2016 equal to 10% of their estimated investment of $500,000 (ignore income taxes).

Their plans indicate that each unit of the new product requires the following:

Direct Material

4 lb. of a material costing $6 per lb.

Direct Labor

3 hrs. of a die cutter’s time at $9 per hr.

2 hrs. of an assembler’s time at $8 per hr.

Major items of production overhead would be annual rent of $40,000 on the factory building and $25,000 on machinery as well as indirect material of $21,000. Other production overhead is an estimated 60% of total direct labor costs. Selling expenses are an estimated 20% of total sales, and non-factory administrative expenses are 10% of total sales.

The consensus at Investors is that during 2016 4,000 units of product should be produced for selling and another 1,000 units should be produced for the next year’s beginning inventory. Also, an extra 6,000 pounds of material will be purchased as beginning inventory for the next year. Because of the nature of the manufacturing process, all units started must be completed, so work in process inventories are negligible.

Required

a) Incorporate the above data into a schedule of estimated total manufacturing costs and compute the unit production cost for 2016.

b) Prepare an estimated income statement that would provide the target amount of profit for 2016.

c) What unit sales price should Investors charge for the new product?

Answer 1