Question

In: Accounting

Exhibit I Fineprint Company Summary of Monthly Operating Costs volume, units                    150,000 Manufacturing Costs: Monthly...

Exhibit I
Fineprint Company
Summary of Monthly Operating Costs
volume, units                    150,000
Manufacturing Costs: Monthly Cost
     Direct material - variable $                    6,000
     Direct labor - variable                        1,500
     Direct labor - fixed                        3,000
     Manufacturing OH - variable                        1,500
     Manufacturing OH - fixed                        3,375
Total Manufacturing Costs $                  15,375
Non-manufacturing Costs:
     Sales - variable                        1,500
     Sales - fixed                        1,875
     Corporate - fixed                        3,750
Total Non-manufacturing Costs $                    7,125
Total Costs $                  22,500

If the company had excess capacity, would your decision change? Complete the pink areas of the spreadsheet to answer the question. (The first cell has been completed for you to get you started.) Once you sort out the costs, determine if the $10 per 100 brochures is enough to cover the relevant costs? Use the following tables to organize your thoughts and answer the question.  

Hints: The amounts in column D are determined by dividing the dollars listed in column C and by 150,000 units. The amounts in E are the same as the amounts in column D, but include only those costs that are relevant. In other words, include only those costs that are avoidable.  

Fineprint Company
Summary of Monthly Operating Costs
Manufacturing Costs 150,000 volume Per Unit Cost Relevant Cost Per Unit
Direct material – variable $6,000                        0.04                        0.04
Direct labor – variable 1,500                        0.01                        0.01
Direct labor – fixed 3,000                        0.02
Manufacturing overhead – variable 1,500                        0.01                        0.01
Manufacturing overhead – fixed 3,375                        0.02
Total Manufacturing costs $15,375 $                    0.10 $                    0.06
Nonmanufacturing costs:
Sales costs – variable 1,500 0.01
Sales costs – fixed 1,875 $                    0.01
Corporate – fixed 3,750 $                    0.03
Total non-manufacturing costs $7,125 $                    0.05 $                       -  
Total costs $22,500 $                    0.15 $                    0.06

Is the $10 per 100 brochures ($.10 per brochure) enough to cover the relevant costs? Explain with data.

Solutions

Expert Solution

First let us take 150000 units and see if $0.10 per brochure is sufficient.

Fineprint Company
Summary of Monthly Operating Costs
Manufacturing Costs 150,000 volume Per Unit Cost Relevant Cost Per Unit
Direct material – variable $6,000 $0.04 $0.04
Direct labor – variable 1,500 $0.01 0.01
Direct labor – fixed 3,000 $0.02
Manufacturing overhead – variable 1,500 $0.01 0.01
Manufacturing overhead – fixed 3,375 $0.02
Total Manufacturing costs $15,375 $0.10
Nonmanufacturing costs:
Sales costs – variable 1,500 $0.01 0.01
Sales costs – fixed 1,875 $0.01
Corporate – fixed 3,750 $0.03
Total non-manufacturing costs $7,125 $0.05
Total costs $22,500 $0.15

Total sales @0.10 per brochure is $ 15000. Total Variable cost is $ 10500 for 150000 units. Total Fixed cost is $ 12000. So there is a loss of $ 7500 (15000 - 10500 - 12000). The break even sales will be $ 22500 or sale price of $ 0.15 per unit at 150000 volume.

At $ 0.10 per brochure, the break even volume required is 225000 at $ 0.10 per brochure.


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