Question

Columbia Products produced and sold 900 units of the company’s only product in March. You have collected the following information from the accounting records: Sales price (per unit) $ 448 Manufacturing costs: Fixed overhead (for the month) 50,400 Direct labor (per unit) 35 Direct materials (per unit) 112 Variable overhead (per unit) 70 Marketing and administrative costs: Fixed costs (for the month) 67,500 Variable costs (per unit) 14 Required Compute: Variable manufacturing cost per unit. Full cost per unit. Variable cost per unit. Full absorption cost per unit. Prime cost per unit. Conversion cost per unit. Profit margin per unit. Contribution margin per unit. Gross margin per unit. If the number of units produced increases from 900 to 1,200, which is within the relevant range, cost per unit will decrease (you can check this by redoing requirement [a] above). Therefore, we should recommend that Columbia Products increase its production to reduce its costs. Do you agree? Explain.

Answer 1

Variable Manufacturing Cost per Unit	$ 217
Full Cost per Unit	362
Variable Cost per Unit	231
Full Absorption Cost per Unit	273
Prime Cost per Unit	147
Conversion Cost per Unit	161
Profit Margin per Unit	86
Contribution Margin per Unit	217
Gross Margin per Unit	175

Fixed overhead per unit = $ 50,400 / 900 = $ 56

Fixed marketing and administrative cost per unit = $ 67,500 / 900 = $ 75

Variable manufacturing cost = Direct Materials + Direct Labor + Variable Overhead = $ 112 + $ 35 + $ 70 = $ 217

Full cost per unit = $ ( 112 + 35 + 70 + 14 + 56 + 75) = $ 362

Variable cost per unit = $ ( 112 + 35 + 70 + 14 ) = $ 231

Full absorption cost per unit = $ ( 112 + 35 + 70 + 56 ) = $ 273

Prime cost = Direct Materials + Direct Labor = $ 112 + $ 35 = $ 147

Conversion Cost = Direct Labor + Variable Overhead + Fixed Overhead per Unit = $ 35 + $ 70 + $ 56 = $ 161

Profit margin = Sales Price - Full Cost = $ 448 - $ 362 = $ 86

Contribution margin = Sales Price - Variable costs = $ 448 - $ 231 = $ 217

Gross margin = Sales Price - Full Absorption Cost = $ 448 - $ 273 = $ 175

Yes, if the volume of sales increases up to 1,200 units per month, total contribution margin, gross margin and profit margin will all increase, since the fixed costs have been fully absorbed, and no additional fixed cost would be incurred for production / sales beyond 900 units.Variable cost per unit remains constant, but total variable cost would increase with the volume of sales and production. On the other hand, total fixed costs remain unchanged for a given range, but unit fixed cost decreases with increased activity levels.