Question

Miller Safe Way Company manufactures a unique model of bicycle Headgear. The company began operations December 1, 2013. Its accountant quit the second week of operations, and the company is searching for a replacement. The company has decided to test the knowledge and ability of all candidates interviewing for the position. Each candidate will be provided with the information below and then asked to prepare a series of reports, schedules, budgets, and recommendations based on that information. The information provided to each candidate is as follows.

Cost Items and Account Balances

Administrative salaries                                          $15,500

Advertising for Headgears                                      11,000

Cash, December 1                                                       –0–

Depreciation on factory building                           1,500

Depreciation on office equipment                            800

Insurance on factory building                                 1,500

Miscellaneous expenses—factory                         1,000

Office supplies expense                                                300

Professional fees                                                            500

Property taxes on factory building                           400

Raw materials used                                                  70,000

Rent on production equipment                              6,000

Research and development                                   10,000

Sales commissions                                                    40,000

Utility costs—factory                                                    900

Wages—factory                                                         70,000

Work in process, December 1                                 –0–

Work in process, December 31                               –0–

Raw materials inventory, December 1                 –0–

Raw materials inventory, December 31              –0–

Raw material purchases                                          70,000

Finished goods inventory, December 1                –0–

Production and Sales Data

Number of Headgears produced                        10,000

Expected sales in units for December

($40 unit sales price)                                          8,000

Expected sales in units for January                    10,000

Desired ending inventory                       20% of next month’s sales

Direct materials per finished unit                      1 kilogram

Direct materials cost                                              $7 per kilogram

Direct labor hours per unit                                  .35

Direct labor hourly rate                                         $20

Cash Flow Data

Cash collections from customers: 75% in month of sale and 25% the following month.

Cash payments to suppliers: 75% in month of purchase and 25% the following month.

Income tax rate: 45%.

Cost of proposed production equipment: $720,000.

Manufacturing overhead and selling and administrative costs are paid as incurred.

Desired ending cash balance: $30,000.

Instructions

Using all the data presented above, do the following.

7. Compute the unit variable cost for a Headgear.

8. Compute the unit contribution margin and the contribution margin ratio.

9. Calculate the break-even point in units and in sales dollars.

Answer 1