Question

Bendix Ltd is a car parts manufacturer. It supplies you the following information regarding costs at various levels of monthly production:

Production volume	8 000 units	12 000 units
Direct materials	$80 000	$120 000
Direct labour	64 000	96 000
Indirect materials	24 000	36 000
Supervisors’ salaries	12 000	12 000
Depreciation on plant	10 000	10 000
Maintenance	32 000	44 000
Utilities	15 000	21 000
Insurance on plant and equipment	1 600	1 600
Property taxes on plant	2 000	2 000
Total	$241 600	$342 600

                                                         

In the above table there are some pure variable costs, some pure fixed costs and some mixed costs.

Required:

1. Identify and make separate lists of the pure variable costs, pure fixed costs and mixed costs and calculate their totals.
2. Split the total mixed costs into Fixed and Variable elements using High/Low method, calculate total fixed cost and develop the equation for total monthly production costs?
3. Explain to the management how to use the cost equation you developed in (2) above to predict total costs for the monthly production volume of 9 000 units and also calculate the correct unit cost.
4. In 2019 the company has produced 9 000 units. According to the Accountant’s calculations the unit cost was $28.05 ($336 600 / 12 000). The company added 10% margin to the cost and had set a selling price of $30.85.

However, the financial results show that there was a gross loss in the year. The company management cannot understand this mystery.

Explain to the management why there was a loss.

Answer 1

rectifaction : in this question Total cost for 8000 units given is241,600 which is wrong it is read as 240,600

Q.1Identify and make separate lists of the pure variable costs, pure fixed costs and mixed costs and calculate their totals.

Answer:

PARTICULARS	8000 UNITS	12000 UNITS
PURE VERIABLE COST
Direct Material(80,000/8000)	80,000	120,000
Direct Labour(64,000/8000)	64,000	96,000
Indirect material(24000/8000)	24,000	36,000
TOTAL(A)	168,000	252,000
VERIABLE COST PER UNIT	21	21
PURE FIXED COST
Property taxes on plant	2000	2000
Insurance on plant and equipment	1600	1600
DEPRICATION	10,000	10,000
Supervisors’ salaries	12,000	12,000
TOTAL(B)	25,600	25,600
MIXED COST
Utilities	15,000	21,000
Maintenance	32,000	44,000
TOTAL(C)	47,000	65,000
TOTAL COST	240 600	342 600

Q.2Split the total mixed costs into Fixed and Variable elements using High/Low method, calculate total fixed cost and develop the equation for total monthly production costs?

SOLUTION 2 :

Split the total mixed costs into Fixed and Variable elements using High/Low method:

VARIABLE COST = TOTAL COST AT HIGH ACTIVITY -TOTAL COST AT LOW ACTIVITY

HIGHEST ACTIVITY UNIT - LOWEST ACTIVITY UNIT

= 65,000 - 47,000

12,000 - 8,000

= 18,000/4000

= 4.5 PER UNIT

FIXED COST = 65,000 - (4.5 X 12,000)

FIXED COST = 11,000

SO total fixed cost = 11,000 +25,600 = 36,600

Total variable cost = 21 + 4.5 = 25.5

equation for total monthly production costs:

= FIXED COST + VARIABLE COST X UNITS

= 36,600+ 25.5 X (UNITS)

SOLUTION 4 calculation of the total cost at 9000 units

by applying equation calculation of total cost

TOTAL COST= 36,600 + 25.5 x9000 units

TOTAL COST=26,61,00

PER UNIT COST = 26,61,00/9000

=29.57

SELLING PRICE PER UNIT =

PER UNIT COST = 29.57

ADD: MARGIN @10% = 2.957

SO SELLING PRICE = 32.53

Here management directly divide total cost with 12000 units which is wrong because of total cost is a mixer of variable cost , fixed cost and mixed cost so first we calculate variable cost per unit, fixed cost and then we sum all the fixed cost and variable cost .so through this wrong calculation company selling price per unit got reduced and company suffer loss which is wrong.

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