Question

Mary's Mugs produces and sells various types of ceramic mugs. The business began operations on January 1, year 1, and its costs incurred during the year include these: Variable costs (based on mugs produced): Direct materials cost $ 3,400 Direct manufacturing labor costs 25,280 Indirect manufacturing costs 1,140 Administration and marketing 2,350 Fixed costs: Administration and marketing costs 11,800 Indirect manufacturing costs 4,180 On December 31, year 1, direct materials inventory consisted of 3,400 pounds of material. Production in that year was 17,000 mugs. All prices and unit variable costs remained constant during the year. Sales revenues for year 1 was $52,500. Finished goods inventory was $6,000 on December 31, year 1. Each finished mug requires 0.4 pounds of material. (Do not round intermediate calculations.) Required: a. Compute the direct materials inventory cost, December 31, year 1. b. Compute the finished goods ending inventory in units on December 31, year 1. (Do not round intermediate calculations.) c. Compute the selling price per unit. (Round your answer to 2 decimal places.) d. Compute the operating profit (loss) for year 1.

Answer 1

a. Compute the direct materials inventory cost, December 31, year 1.

Direct Material cost per unit = Direct material cost / units produced = $3,400/17000 mugs = $0.20 per mug

Direct material used per mug = 0.40 pounds

Direct material cost per pound = $0.20 / 0.40 = $0.50 per round

Direct material inventory = 3400 * $0.50 = $1,700 (Answer)

b. Compute the finished goods ending inventory in units on December 31, year 1. (Do not round intermediate calculations.)

Finished Goods inventory (in units) = Finished goods inventory / manufacturing cost per unit

Manufacturing cost per unit = (Direct material + Direct Labour + Indirect manufacturing cost)/Units Produced

= ($3,400+$25,280+$1,140+$4,180)/17000 = $2 per unit

Finished Goods inventory (in unit) :

Year 1 = $6,000/$2 = 3000 units

c. Compute the selling price per unit. (Round your answer to 2 decimal places.)

Selling price per unit = Revenues / units sold

Units sold = Units produced - units in the ending finished goods inventory = 17000-3000 = 14000

Selling price per unit = $52,500/14000 = $3.75

d. Compute the operating profit (loss) for year 1

Operating income for the year :

Revenues (a)		$52,500
Cost of goods sold (14000*$2) (b)		28000
Gross Margin(c = a-b)		$24,500
Less marketing and admin cost
Variable cost	$2,350
Fixed cost	$11,800	$14,150
Operating Profit		$10,350

Hence the operating profit for year 1 is $10,350