Question

Cost Formulas Shorewood Manufacturing produces a single product requiring the following direct material and direct labor:

Description | Cost per unit of Input | Required Amount per Unit of Product

Material A $8/pound 10 ounces

Materia B $5/pound 8 ounces

Material C 20/gallon 0.3 gallon

Cutting labor 9/hour 30 minutes

Shapping labor 11/hour 15 minutues

Finishing labor 12/hour 45 minutes

Manufacturing overhead consits of indirect material, $0.60 per unit of product; indirect labor, $1,000 per month plus $0.70 per unit of product; factory maintenance, $14,000 per year plus $0.55 per unit of product; factory depreciation, $15,000 per year; and annual factory property taxes, $8,000. Selling and administrative expenses include the salaries of a sales manager, $30,000 per year; an office manager, $18,000 per year; and two salespersons, each of whom is paid a base salary of $11,000 per year and a commission of $3 per unit sold. Advertising and promotion of the product are done through a year- round media package program costing $1,000 per week.

Required

a. Analyze all cost and expense factors to determine a general formula (based on units of production) for total cost.

b. Assuming a relevant range of 10,000 to 20,000 units, what is the estimated unit cost for producing and selling 10,000 units? 20,000 units? Explain the variation in unit cost at the two levels of production.

c. If 15,000 units are produced and sold in a year, what selling price results in a net income before income tax of $60,000?

Answer 1

The difference in the cost to produce and sell 10,000 units nad 20,000 units are due to variable costs as these costs changes according to the level of production.