Question

Dynasty Company manufactures stackable plastic cubes that are used for storage in dorm rooms. In August 2010, Dynasty began producing multi-coloured cubes. During the month of August, 9,000 were produced, and 8,800 were sold at $7.50 each. The following costs were incurred:

Direct materials       $10,800

Direct labour               6,750

Variable overhead       5,850

Fixed overhead       27,900

A selling commission of 10 percent of sales price was paid. Administrative expenses, all fixed, amounted to $23,000.

Required:

Calculate the unit cost and the cost of ending inventory under absorption costing.

Calculate the unit cost and the cost of ending inventory under variable costing.

What is the contribution margin per unit?

Answer 1

Answer

(1) Calculation of unit cost under absorption costing.

Particular	Amount
Direct materials ( $10,800 / 9,000)	1.20
Direct labour   ( $6,750 / 9,000)	0.75
Variable overhead ( $5,850 / 9,000)	0.65
Fixed overhead ( $27,900 / 9,000)	3.10
Unit cost under absorption costing.	$5.70

Cost of ending inventory under absorption costing = (9,000 - 8,800) * $5.70 = $1,140

(2) Calculation of unit cost under variable costing.

Particular	Amount
Direct materials ( $10,800 / 9,000)	1.20
Direct labour   ( $6,750 / 9,000)	0.75
Variable overhead ( $5,850 / 9,000)	0.65
Unit cost under variable costing.	$2.60

Cost of ending inventory under variable costing = (9,000 - 8,800) * $2.60 = $520

(3)

Variable costs per unit = Unit cost under variable costing + Selling commission

= $2.60 + (10 % * $7.50) = $3.35

Contributon per unit = Selling price - Variable costs per unit = $7.50 - $3.35 = $4.15