Question

A manufacturing company makes three products, A, B, and C. The fixed FO is $60,000, consisting of $10,000 for material handling, material waste, and procurement; $30,000 for rent and utilities; and $20,000 for safety and canteen costs. Other costs are shown in Table 6.16

	Product A	Product B	Product C
Number of Units Produced Per Month (-)	250	400	900
Total Material Costs Per Month ($)	5000	8000	4000
Labor Hours Per Unit (hr)	4	3.5	1.5
Labor Rate Per Unit ($/hr)	25	20	30
Machine Hour Per Unit (hr)	1	1	3

a.         Determine the product cost for products A, B, and C, using the ABC method.

b.         If products A, B, and C are sold at $400, $350, and $150 per unit, respectively, what is the gross profit for each product?

c.         What is the company’s total gross profit per month if all units produced are sold?

Answer 1

Solution:

Total Fixed overheads:

material handling, material waste, and procurement	$10,000
rent and utilities	$30,000
safety and canteen costs	$10,000
TOTAL	$60,000

Products	Product A	Product B	Product C
Number of Units Produced Per Month (nos)	250	400	900
Total Material Costs Per Month ($)	5000	8000	4000
Direct Material Costs Per unit ($)	=5000/250 =20	=8000/400 =20	=4000/900 =4.40
Labor Hours Per Unit (hr)	4	3.5	1.5
Labor Rate Per Unit ($/hr)	25	20	30
Labor Cost Per Unit ($)	=25*4 =100	=20*3.5 =70	=30*1.5 =45
Machine Hour Per Unit (hr)	1	1	3
Total Machine hours required (hr)	=250*1 =250	=400*1 =400	=900*3 =2700
Manufacturing overhead @17.91 per machine hour	17.91	17.91	53.73
Total cost of Product Per Unit($)	=20+100+17.91 =137.91	=20+70+17.91 =107.91	=4.4+45+53.73 =103.13

Calculation of Manufacturing overhead= 60000/total machine hours

                                                                       =60000/250+400+2700=17.91 per machine hour

Requirement (a): The product cost for products by using the ABC method is A=$137.91, B=107.91, and C=103.13 respectively.

Requirement (b): If products A, B, and C are sold at $400, $350, and $150 per unit, respectively, what is the gross profit for each product?

Products	Product A	Product B	Product C
Sales price per unit ($)	400	350	150
Cost per unit	137.91	107.91	103.13
Gross Profit Per Unit	=400-137.91 =262.09	=350-107.91 =242.09	=150-103.13 =46.87
Units sold	250	400	900
Total Gross profit	=250*262.09 =65522.5	=400*242.09 =96836	=900*46.87 =42183

Requirement (c): What is the company’s total gross profit per month if all units produced are sold?

Total gross profit per month if all units are sold =A+B+C=65522.5+96836+42183

                                                                                  =2,04,541.50