Question

David Happy has developed a new product that he is considering the production and selling of it. To proceed with this project, David will be renting a small building to rent for $1,250 a month that will house production facilities. Utility cost of building is expected to be $400 per month. One major piece of equipment that will be used to manufacture the product will be rented for $600 a month. Material costs to make the product are estimated at $8 per unit. Monthly advertising costs for the product are estimated at $1,000. David will be using salespeople for selling the product. Sales commission is $4.00 per unit. David has rented a truck for delivery of the products to customer at $350 per month. David will be paying himself $5,000 per month as salary. David will be spending about 75% of his time for manufacturing the product and 25% for promotion and delivery of the product. Answer the following independent questions.

(David’s belief stated in the problem: David believes that he could produce and sell 2000 units per month.)

1. How much is David’s total fixed costs per month?

2. How much is David’s total variable costs per month?

3. How much is David’s product costs per month?

4. How much is David’s factory overhead cost per month?

Answer 1

1. Computation of fixed cost(2000units):

PARTICULARS	AMOUNT
Rent For the Building	1,250
Utility cost of Building	400
Rent paid on equipment used for production	600
Monthly advertisement expenses	1,000
Rent paid to truck for delivery of products	300
Salary paid to David	5,000
TOTAL FIXED COST	$8550

2. COMPUTATION OF VARIABLE COST (2000units):

PARTICULARS	AMOUNT
Material cost (2000×8)	16,000
Sales Commission to selling persons (2000×4)	8,000
TOTAL VARIABLE COST	$24,000

3. COMPUTATION OF TOTAL COST) (2000units

Total cost of production of 2000 units

                       = Total fixed cost + Total variable cost

                       =$8,550 + $24,000

                      =$32,550.

4. COMPUTATION OF FACTORY OVERHEARDS :( 2000units)

PARTICULARS	AMOUNT
Rent For the Building	1,250
Utility cost of Building	400
Rent paid on equipment used for production	600
Salary paid to David (To the extent related to manufacturing process)	3,750
TOTAL FACTORY OVERHEADS	6,000

NOTES

1. Factory overheads are those which are incurred in relation to manufacturing      but not include direct materials and labour.

2. Total salary paid to David = $5000

   To the extent of Manufacturing Process =75%

    Hence amount to be charged to factory overhead = 5000 × 75%

                              = $3,750

     Remaining 25% = $1,250 to be charged to selling and distribution overhead.

3. Truck was exclusively used for distribution of finished goods.so, it will also covers

     Under selling and distribution overheads