Question

Total Manufacturing Cost, Income Statement, Unit Cost, and Selling Price Two inventors, recently

organized as Innovation, Inc., consult you regarding a planned new product. They have estimates of the

costs of materials, labor, overhead, and other expenses for 2016 but need to know how much to charge for

each unit to earn a profit in 2016 equal to 15% of their estimated total long-term investment of $400,000

(ignore income taxes). Their plans indicate that each unit of the new product requires the following:

Direct material

4 lb. of a material costing $5/lb.

Direct labor

2 hrs. of a metal former’s time at $11/hr.

0.6 hr. of an assembler’s time at $8/hr.

Major items of production overhead would be annual rent of $46,460 for a factory building, $28,660

rent for machinery, and $21,700 of indirect material. Other production overhead is estimated to be

$233,280. Selling expenses are an estimated 30% of total sales, and non-factory administrative expenses

are 20% of total sales.

The consensus at Innovation is that during 2016 10,000 units of product should be produced for

selling and another 2,000 units should be produced for the next year’s beginning inventory. Also, an

extra 3,000 pounds of material will be purchased as beginning inventory for the next year. Because

of the nature of the manufacturing process, all units started must be completed, so work in process

inventories are negligible.

Required

a. Incorporate the above data into a schedule of estimated total manufacturing costs and compute

the unit production cost for 2016.

b. Prepare an estimated income statement that would provide the target amount of profit for 2016.

c. What unit sales price should Innovation charge for the new product?

Answer 1

			A	B=A*12000
			Unit Cost	Total cost
		Direct material cost(5*4)	$20	$240,000
		Direct labor(2*11)-Metal former	$22	$264,000
		Direct labor(0.6*8)-Assembly	$4.80	$57,600
		Annual rent -Factory building		$46,460
		Annual rent -Machinery		$28,660
		Indirect material		$21,700
		Other production overhead		$233,280
		Total manufacturing cost		$891,700
		Unit productioncost=(891700/12000)	$74.31
	a	Unit Production cost for 2016	$74.31	-74.3083
	b	Target Profit for 2016	$60,000	(0.15*400000)
		Production cost for 10000 units	$743,083	(10000*74.3083)
		Total	$803,083
		Assume Sales Revenue=S
		Selling expense=0.3S
		Non factory admin expenses=0.2S
		(0.3S+0.2S)+803083=S
		0.5S=803083
		S=803083/0.5=	$1,606,167
		ESTIMATED INCOME STATEMENT
		Sales Revenue		$1,606,167
		Cost of goods sold		$743,083
		Gross Profit		$863,083
	(0.3*1606167)	Selling expense	$481,850
	(0.2*1606167)	Non factory admin expenses	$321,233
		Total Selling and general admin expenses		$803,083
		Operating Income		$60,000
	c	Unit sales price to be charged=	$160.62	(1606167/10000)