Question

a)    Complete the table below by classifying the cost items. You need to repeat an amount if it belongs to more than one category. You must provide a total for each column.

b)    Coffee-Culture Ltd manufactures barista quality coffee machines. The unit selling price is $900 and the variable cost per unit is $630. The monthly fixed cost for August 2020 is $27,000. Answer the questions below in the spaces provided. (Show the formula and workings for each)

Required: Answer the following questions in the spaces provided:

a)    Complete the following table by classifying the cost items. You need to repeat an amount if it belongs to more than one category. You must provide a total for each column.

Cost Items	Amount	Prime Costs	Conversion Costs	Product Costs	Period Costs
Raw materials	86,800
Factory supervisor’s salary	147,000
Factory workers’ wages	350,000
Depreciation on office building	7,280
Insurance on factory building	78,400
Advertising expenses	168,000
Totals

b)    Coffee-Culture Ltd manufactures barista quality coffee machines. The unit selling price is $900 and the variable cost per unit is $630. The monthly fixed cost for August 2020 is $27,000. (Show the formula and workings for each)

1. Calculate the contribution margin per unit.

2. Calculate the contribution margin as a ratio.

3. Calculate the break-even point in units. Calculate the break-even point in sales dollars.

4. Assume that the company sold 120 units of televisions in January 2019. Calculate the margin of safety in dollars.

5. If the target profit for February 2019 is$15,000, calculate the required sales in dollars for February 2019.

Answer 1

Answer with explanation:

a)

Prime costs include, direct materials cost and direct labor costs. Here, Raw materials cost is direct materials cost and Factory workers’ wages is direct labor cost.
Conversion costs include all the costs associated with conversion of raw materials into finished goods. It include cost of direct labor and other indirect manufacturing overheads. Here, Factory workers’ wages is direct labor cost and Factory supervisor’s salary and Insurance on factory building are indirect manufacturing overheads.
Product costs include all the costs associated with the production of a product. It include, costs of direct materials, direct labor and manufacturing overheads. Here, Raw materials, Factory supervisor’s salary, Factory workers’ wages and Insurance on factory building are product costs.
Period costs are such costs associated with the selling and administrative activities of the business. Here, Depreciation on office building and Advertising expenses are considered as period costs.

b)
It is given,
Unit selling price = $900
Variable cost per unit = $630
Fixed cost for August 2020 = $27,000

1. Contribution margin per unit = Selling price per unit - Variable cost per unit
= $900 - $630 = $270
Contribution margin per unit is $270.

2. Contribution margin ratio = (Selling price per unit - Variable cost per unit) / Selling price per unit
= ($900 - $630) / $900 = 0.30 = 30%
Contribution margin as a ratio is 30%.

3. Break-even point in units = Fixed Costs/ Contribution margin per unit
= $27,000 / $270 = 100 units

Break-even point in sales dollars = Break even point in units × Selling price per unit
= 100 × $900 = $90,000

Break-even point in units is 100 units
Break-even point in sales dollars is $90,000.

4. Margin of safety in dollars = Actual sales dollars - Break-even sales dollars =

Actual sales dollars = 120 units × $900 per unit = $108,000
Break-even sales dollars = $90,000

Margin of safety in dollars = $108,000 - $90,000 = $18,000

When the company sell 120 units of televisions in January 2019, Margin of safety in dollars is $18,000.

5. Required sales in units for February 2019 to achieve target profit of $15,000 = (Fixed costs + Target profit) / Contribution margin ratio
= ($27,000 + $15,000) / 30% = $140,000.

If the target profit for February 2019 is $15,000, the required sales in dollars for February 2019 is $140,000.