Question

After Class Practice 8-1 (2HW)

The following are the Class Company’s unit costs of manufacturing and marketing a luxury pen at a level of 20,000 units per month:

               Direct materials                      $1.00

Direct labor                                1.20

Variable overhead                      .80

Fixed overhead                            .50

               Variable selling and administrative                                          1.50

               Fixed selling and administrative               .90

Consider each of the following questions independently. Unless otherwise stated, assume a selling price of $10 per pen. The first three questions review concepts covered in previous chapters. ck figure: c. 5091 units e. Decrease in income if buy(15,000)

a.            What unit cost would be presented on the balance sheet for inventory (review from Ch. 4)?

b.            Assume that Class Company’s volume increased to 25,000 units per month. What unit cost would be presented on the balance sheet for inventory (review from Chs 2-3)?

c.            What number of pens would Class Company have to sell each month to breakeven (Ch 3)?

d.            The company wants to enter a foreign market in which price competition is keen. The company seeks a one-time-only special order for 1,000 units. The company estimates shipping costs for these units to be $.75 per unit, but the fixed costs of obtaining the contract will be $2,000. No other variable selling and administrative costs will be incurred. What minimum sales price must be charged to cover the relevant costs?

e.            A proposal is received from an outside supplier who will make and ship the pens for $5 per pen. With the newly freed capacity, Class plans on making mechanical pencils that would contribute $1 per pencil. Class can produce 30,000 of the new pencils per month. None of the fixed costs nor variable selling costs (Class has to sell the pens whether the pens are manufactured or purchased) from the luxury pen could be avoided, but production of the new pencils will require an additional $5,000 in fixed costs per month. Should Class purchase the new pens?

f.     Class operates two divisions: Corporate and Individual.   The Individual division recently reported a net operating loss for the year: The income statement for the most recent year follows:

                                                          Individual                                           Corporate

               Sales                                             $125,000                                             $500,000

Variable expenses                                  50,000                                300,000

Contribution margin                                  75,000                                200,000

Direct fixed expenses                                  30,000                                110,000

Allocated fixed expenses                                  50,000                                  50,000

Operating income                                $(5,000)                                $40,000

                     Prepare an income statement showing segment margin for each division; Add a column for the whole company. By how much would total income change if the Individual division were dropped?

Answer 1

a.	Unit Cost Calculation
	DM	1
	DL	1.2
	Variable OH	0.8
	Fixed OH	0.5
	Variable Selling OH	1.5
	Fixed Selling OH	0.9
	Per Unit Cost	5.9
b.	Lets Assume that 20000 units per month is 100 % Capaciity of Class Company.
	Therefore any increase in the same will double the fixed costs.
	So the new Unit Cost will Be:
	Fixed OH	0.8	(((20000*0.5)*2)/25000)
	Fixed Selling Oh	1.44	(((20000*0.9)*2)/25000)
	Per Unit Variable Cost	4.5
	+Fixed Oh	0.8
	+Fixed Selling & Adm.	1.44
	New Per Unit Cost	6.74
c.	Already Solved
d.	Current Contribution Per Unit	4.1
	Calculation for 1000 Units:
	Direct material	1000
	Direct Labour	1200
	Variable OH	800
	Shipping Costs	750
	Contract Cost	2000
		5750	/1000
	Per Unit Cost	5.75
	Contibution PU	4.1
	Minimum Sales Price	9.85
	** Fixed Cost are not relavant for these calculations
e.	Already Solved
f.	Income Statement of Class Company
		Corporate	Individual	Whole
	Sales	125000	500000	625000
	Variable Exp	50000	300000	350000
	Contribution	75000	200000	275000
	Direct Fixed Exp	30000	110000	140000
	Allocated Fixed Ep	50000	50000	100000
	Operating income	-5000	40000	35000
	There Would be decrease in Income of 40000$ by dropping individual Division.