Question

You are an eager and ambitious young graduate of the Reginal F. Lewis College of Business at Virginia State University with a new Accounting degree and a great life ahead of you. One of your closest friends is an inventor and an entrepreneur who wants to start a business selling a break-through new drywall screw that she has invented and that she believe works much better than the drywall screws currently on the market. She wants to start the business by opening a factory to produce the screws which can then be sold to either wholesalers or retailers who will then sell them to the general public. After searching all over creation for the right sized building in the perfect location to properly meet the needs of her target customers, she found that the ideal building in which to put up her factory was right here in Petersburg all along. To begin, she was able to purchase the building she needed outright for $500,000. Useful life of the building is 40 years. Estimated salvage value is $100,000. Property taxes on the building each year are $5,000. There is a new machine that another fellow VSU grad has invented that takes the metal for the screws and molds them into their proper size and shape, and takes the plastic for the anchors and molds them into their proper size and shape; an assembly line is attached to the machine where workers put the screws and anchors into boxes. The finished product is a box of 32 drywall screws and their plastic anchors that work unlike any that have come before them. She purchased this machine outright for $75,000. The machine has a useful life of 10 years with no residual value. The machine can produce 20,000 boxes of screws and anchors per year. She is sure that she can sell every unit produced. It is determined that to produce the 32 screws in each box will require 64 ounces of metal which is the only material used to make the screws and to produce the 32 anchors in each box will take 32 ounces of plastic which is the only material used to make the anchors. The metal you need is produced by multiple suppliers and you've found one so far that will allow you to buy it at $1.75 per pound. The plastic used is also produced by multiple suppliers and you've found one so far that will allow you to buy it at $.50 per pound. It takes 5 minutes for the workers on the assembly line to box the screws and anchors because they are put in there in a way that prevents them from becoming disorderly. This is part of the quality aspect of the product. Assembly line workers are paid at a rate of $12.00 per hour. She hired a Vice President (VP) who has a degree in Marketing from VSU. He did some market research and determined that in order to be competitive with your new product you are going to charge $14.00 per box of screws and anchors. The Vice President is paid $50,000 per year. She also hired a Chief Operating Officer who will be paid $50,000 per year. Questions It can be assumed here that 1 unit is 1 box of screws and anchors. 1) Please determine if each of the following is a Variable or a Fixed Cost: Metal Plastic Assembly Labor Property Taxes Machine Depreciation COO Salary VP Salary 2) Using what you read in the Information section, please determine the following: 1) Direct Materials Cost per Box 2) Direct Labor Cost per Box 3) Variable Cost per Box 4) Contribution Margin per Box 5) Total Fixed Costs 6) Break-Even Point in Boxes Prepare a variable costing format income statement assuming you make and sell the maximum possible number of units. If your income is negative, what is the reason? Your friend asks you for advice on how to increase her income. Give her at least two possible solutions to the problem. Which solution do you recommend to the company? Why did you choose this particular solution? Prepare a memo addressed to your friend/client explaining your recommendation. This memo should be no more than one page long. What is the new break-even point after implementing your solution? What is the maximum income the company can make after implementing your solution? Is this enough profit to justify going into business? Why or why not? Prepare both an absorption costing income statement and a variable costing income statement to reflect your solution. State your assumptions about the number of units produced and the number sold. Prepare the following budgets for the second year: Sales, Production, Direct Materials Purchased (one each for plastic and metal) and Direct Labor. Assume that your ending inventory of finished goods will be 5% of that year’s sales and that ending inventory of both metal and plastic will be 10% of what was needed for that year’s production. After the second year of business, a large competitor approaches your friend and offers to buy her business (including the patent for the drywall screw and the machine) for $500,000. Her employees would be hired by this competitor. She would be left with the building which she can rent out for $10,000 per year. Another option would be to sell the building for $520,000. Which option do you recommend? Why? Show calculations. (Ignore the time value of money.) Assuming she sells the building, what is the journal entry to record the sale?

Answer 1