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 he has invented and that he believes works much better than the drywall screws currently on the market. He 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 his target customers, he found that the ideal building in which to put up his factory was right here in Petersburg all along. To begin, he was able to purchase the building he needed outright for $730,000. Useful life of the building is 50 years and it is depreciated on a straight-line basis. Estimated salvage value is $30,000. Property taxes on the building each year are $5,500. 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. He purchased this machine outright for $175,000. The machine has a useful life of 25 years with no residual value and is depreciated on a straight-line basis. The machine can produce 10,750 boxes of screws and anchors per year. He is sure that he can sell every unit produced. It is determined that to produce the 32 screws in each box will require 80 ounces of metal which is the only material used to make the screws and to produce the 32 anchors in each box will take 40 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 $1.45 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 $.20 per pound. It takes 12 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 $17.00 per hour. Your friend hired a Vice President (VP) who has a degree in Marketing from VSU. She did some market research and determined that in order to be competitive with your new product you are going to charge $24.00 per box of screws and anchors. The Vice President is paid $52,750 per year. He also hired a Chief Operating Officer who will be paid $52,750 per year. Your friend has also asked you to serve as a consultant to his company to make sure that the business gets off to a good start. Your fee has not yet been determined and is not part of this problem. So far, you have helped your friend determine that estimated total cost of variable overhead that will be incurred in the first year of operations is $7,525. You determined that direct labor hours will be the best way to allocate variable overhead, at least for this first year, and helped estimate that there will be 2,150 direct labor hours during the 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: Variable Cost Plastic: Variable Cost Assembly Labor : Variable Cost Property Taxes: Fixed Cost Machine Depreciation: Fixed Cost COO Salary: Fixed Costs VP Salary: Fixed Costs 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 Overhead Cost per Box: 4) Variable Cost per Box: 5) Contribution Margin per Box: 6) Total Fixed Costs: 7) Break-Even Point in Boxes: 6) Prepare a memo addressed to your friend/client explaining your options and your recommendation. Which solution did you recommend to your friend? Why did you choose this particular solution? This memo should be no more than one page long. 7) Assume that all of the information given about all of the variable costs in the Information section of this assignment represent Standard Costs of a Flexible Budget. Every unit that could have been produced is still assumed to have been sold. - If it turns out that metal can actually be bought for $1.50 per pound, but each box only requires 75 ounces or metal, what are the Direct Materials Price, Efficiency, and Total Variances? What do these variances tell you? What are some possible explanations of these variances? - If it turns out that workers are actually paid $15.00 per hour, but take 15 minutes to work on each box, what are the Direct Labor Price, Efficiency, and Total Variances? What do these variances tell you? What are some possible explanations of these variances?

Answer 1

(2) (1) . Direct material cost per box will be as follows :-

Metal .(80x{1.45/16})	7.25
Plastic .{40x(0.20/16)}	0.5
Direct material cost	$7.75

(2) . Direct labour cost per box will be as follows :-

Assembly labour 17x12/60)	3.4
Total labor cost	$3.4

(3) . Variable overhead cost per box will be as follows :-

Variable overhead rate. 3.5 Labour hour per box 0.2 Variable overhead rate per box (3.5x0.2)	0.7

Note :- total variable cost = $7525

Total direct labour hours = 2150 hours.

Variable overhead rate per hour = 7525/2150 = $3.5 per direct labour hour.

(4) . Total variable cost per box will be as d followed

Direct material.	7.75
Direct labour	3.4
Variable overhead	0.7
Total variable cost	$11.85

(5). Contribution margin per box will be as follows :-

Sale price per box	24
Variable cost	11.85
Contribution margin per box	$12.15

(6) . Statement showing calculation of fixed cost :-

Depreciation - building	14000
Property tax	5500
Depreciation- machinery	7000
Salary of vice president	52750
Salary of chief operating officer	52750
Total fixed cost	$132000

(7) . Break even number of boxes = total fixed cost / contribution margin per box

= 132000/12.15 = 10864 boxes

Memo :-

To :- Michael Clark (entrepreneur)

From :- Ricky poning (consultant)

Re : final solution

Dear Michael Clarke

I have computed all the cost and revenue figure and derived the following useful information

Contribution margin per box = $12.15

Total fixed cost per year to be incurred = $132000

Break even units of boxes = 10864

Your production and expectation of sales of units of boxes = 10750 boxes

You can clearly see from above facts that your expectations of sales is 10750 whereas you would be able to breakeven at 10864 boxes . So you would have to bear losses going by these expectation. It would be better to either reduce your variable cost or increase sales price of $24 or search for a new location of building then only you will be able to make profitability from your new venture

Thanks ans regards

Ricky ponting

(8) . Direct material price variance = (standard price - actual price) x actual direct material purchased

= ({1.45-1.50}) x {75x10750}

= 2519.53 adverse.

Direct material efficiency variance = (standard qty. - actual qty. ) x standard rate per ounce

= [{80x10750}-{75x10750}x0.090625

= $4871.09

Total material cost variance ,= material price variance - material efficiency variance

= 4871.09-2519.53

= $2351.56 favourable

Variance explanation

1. Material price variance is adverse which tells that material has been purchased at a price higher than what it has been budgeted for.

2 . Material efficiency variance is favourable which tells that material has been used efficiently than it has been anticipated

Reasons :-

1. Material price variance is adverse which may occur because of carelessness of purchase department they may either have not surveyed the purchase price of the material or may not have called for tender or may not have negotiated with the suppliers properly.

2 .Material efficiency variance is favourable which may have occured because of higher learning g curve of labour, effective utilization of labour etc.

2 . Direct labour price variance ,,= (standard rate - actual rate)x actual hours

(17-15)x(10750x15)/60

= $5375 favourable

Direct efficiency variance ,= (std. Hours-actual hours)x std. Rate

={ (12x10750/60)-(15x10750/60)x17

= $9137.5 adverse

Direct labour cost variance = $3762.5 adverse

Variance explanation

1 . Direct labour price variance is favourable which indiacates that the labour has been hired at lower price than anticipated

2 . Direct labour efficiency variance is negative which indicates that labour has taken more than required a d has not worked optimally.

Reason for variances

1 . Direct price variance is favourable because of goods negotiation by management at the time of hiring labour

2. Direct material efficiency is adverse it shows that management has not taken strict control to observe how labour is performing their task and as a result they may have wastdd time unnecessarily and produced goods by taking more time than required.