Question

Group Case 2: Costing and profitability management

Atlantic manufacturing company uses process costing. All materials are added at the beginning of the process. The company uses weighted average method in measuring unit costs. There are 100,000 units in the beginning work-in-process in the month of May (The company started its production in late April and did not finish producing any unit). The conversion work is 70% complete.

The costs of beginning WIP are $1,250,000, including $100,000 of input of materials ($1 per EU), and $140,000 for labor costs ($2 per EU) and 1,010,000 overhead costs. The overhead costs include only fixed costs: $410,000 for factory rent and $600,000 for insurance.

During May, 800,000 units were started and 700,000 units finished. The concurrent costs includes $800,000 for materials, $1,500,000 for labor costs and $1,010,000 overhead costs. The ending work-in-process in May is 200,000 units with conversion work 60% complete. The company does not have any beginning balance of finished good inventory account.

During May, it sold 700,000 units of its product. The price of per unit is $10.

1. (1 point) What is the gross margin of the company?
2. (2 points) Suppose the company only sold 600,000 units instead of all 700,000 units. What is its gross margin?
3. (2 points) Suppose during May, the managers decide to increase production from 800,000 units to 1,200,000 units and finished 1,100,000 units. The concurrent costs includes $1,200,000 for materials, $2,300,000 for labor costs and $1,010,000 overhead costs. The ending work-in-process in May is still 200,000 units with conversion work 60% complete.

The sales volume turns out to be still 600,000.

What is the gross margin under this production plan?

Bonus Question:

1. (1 point) Explain comment on the relation between gross margin and sales for each case above? Do you notice anything unusual about the relation? If so, what is your explanation?

Answer 1

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Atlantic
Calculation of Gross margin	Answer A	Answer B	Answer C
Sell Price	10.00	10.00	10.00
Less: Costs per equivalent unit	5.46	5.46	4.66
Gross margin per unit	4.54	4.54	5.34
Number of units sold	700,000.00	600,000.00	600,000.00
Gross margin	3,175,609.76	2,721,951.22	3,206,557.38
Sales Revenue	7,000,000.00	6,000,000.00	6,000,000.00
Gross margin % of sales	45.37%	45.37%	53.44%
The company is using weighted average method. So the unsold inventory includes fixed overhead cost. For part a and b the margin is same because 700,000 units are produced so cost per unit is same. If the production is increase the cost will decrease.
That is why in part c the margin had increased.