Question

In: Accounting

Anand Limited manufactures drones for industrial use. Most of their costs are either true variable costs or fixed costs. However, an account analysis shows the following items are mixed costs.

Anand Limited manufactures drones for industrial use. Most of their costs are either true variable costs or fixed costs. However, an account analysis shows the following items are mixed costs.

 

Account Analysis 2016 Total Cost
Production supervision 80% fixed $150,000
Utilities 20% fixed $60,000
Sales staff wages 70% fixed $200,000
Quality control inspections 90% fixed $40,000

 

*The 30% variable portion relates to sales commissions based on total sales.

**50% of manufactured units are inspected each year.

In 2016 Anand Limited produced and sold 500 drones at $2,000 each.

 

Required:

1. Management expects to sell 700 drones in 2017, does not anticipate any cost increases due to inflation, and plans to maintain the sales price of $2,000 per drone. Estimate total costs for each of the mixed cost items above. Be sure to show the variable and fixed components of the total cost.

Solutions

Expert Solution

 

Account Fixed
Cost
Variable
Cost
Total
Production supervision1 $120,000 $42,000 $162,000
Utilities2 $12,000 $67,200 $79,200
Sales staff wages3 $140,000 $84,000 $224,000
Quality control inspections4 $36,000 $5,600 $41,600

 

1Fixed: $150,000 × .8; Variable ($150,000 × .2)/500 × 700

2Fixed: $60,000 × .2; Variable ($60,000 × .8)/500 × 700

3Fixed: $200,000 × .7; Variable ($200,000 × .3)/(500 × $2,000) × (700 × $2,000)

4Fixed: $40,000 x .9; Variable ($40,000 x .1)/(500 x .5) x (700 x .5)


Production supervision = $162,000

Utilities = $79,200

Sales staff wages = $224,000

Quality control inspections = $41,600

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