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Peter Kanakarian has decided to open a printing shop. He has secured two contracts:

Peter Kanakarian has decided to open a printing shop. He has secured two contracts: (1) a five-year contract to print a popular regional magazine (5,000 copies each month), and (2) a three-year agreement to print tourist brochures for the province (10,000 brochures per month).

Peter has rented a building for $1,400 per month. His printing equipment was purchased for $40,000 and has a life expectancy of 20,000 hours with no salvage value. Depreciation is assigned to a period based on the hours of usage. Peter has scheduled the delivery of the products so that two production runs are needed. In the first run, the equipment is prepared for the magazine printing. In the second run, the equipment is reconfigured for brochure printing. It takes twice as long to configure the equipment for the magazine setup as it does for the brochure setup. The total setup costs per month are $600.

Insurance costs for the building and equipment are $140 per month. Power to operate the printing equipment is strongly related to machine usage. The printing equipment causes virtually all the power costs. Power costs will run $350 per month. Printing materials will cost $0.40 per copy for the magazine and $0.08 per copy for the brochure. Peter will hire workers to run the presses as needed (part-time workers are easy to hire). He must pay $10 per hour. Each worker can produce 20 copies of the magazine per printing hour or 100 copies of the brochure. Distribution costs are $500 per month. Peter will receive a salary of $1,500 per month. He is responsible for personnel, accounting, sales, and production—in effect, he is responsible for administering all aspects of the business.

1.  What are the total monthly manufacturing costs?
$

2.  What are the total monthly prime costs?
$

What are the total monthly prime costs for the regional magazine?
$

For the brochure?
$

3.  What are the total monthly conversion costs? Suppose Peter wants to determine monthly conversion costs for each product. Assign monthly conversion costs to each product using direct tracing and relationship tracing whenever possible. For those costs that cannot be assigned using a tracing approach, you may assign them using direct labour hours. Enter amounts as positive numbers. Do not round any divisions.

4.  Peter receives $1.80 per copy of the magazine and $0.45 per brochure. Prepare an income statement for the first month of operations.

Solutions

Expert Solution

other Cost


Distribution Cost500

Peter Salary1500

Total2000









Direct costMagazineBrochureTotal
Units produce500010000
Set up cost400200600
Printing Material cost20008002800

(0.40*5000)(0.08*10000)
Labor cost (working note)250010003500
Power cost (Working Note)250100350
Prime Cost515021007250
Building Rent10004001400
Depreciation (working note)500200700
Building Insurance10040140
Total Manufacturing Cost675027409490








Calculation of direct labour cost


Labour cost10 per hour






MagazineBrochureTotal
unit produced500010000
unit produced per hour20100
Hours worked250100350
Cost of labour250010003500








Allocation of other costs


ParticularsMagazinebrochureTotal
Machine hours250100350
power cost250100350

(350*250/350)(350*100/350)
Building Rent10004001400

(1400*250/350)(1400*100/350)
Insurance10040140

(140*250/350)(140*100/350)








Calculation of Depreciation of Equipment






Equipment purchased40000

Hours of usage20000

Depreciation per hour2

Magazine500(2*250)
Brochure200(2*100)
















Total Monthly Manufacturing Cost
9490
Total monthly Prime Cost
7250
prime cost of Magazine
5150
Prime Cost of Brochure
2100
Total Monthly Conversion Cost(Total Manufacturing Cost -Material Cost)6690
Conversion Cost of Magazine
4750
Conversion Cost of Brochure
1940
Income statement






Peter Kankarian Printing Shop


Income statement






Particulars
Amount
Revenue


Magazine18000

Brochure225020250
less : expenses


Direct Material2800

Direct labour3500

setup Cost600

depreciation on equipement700

Power Cost350

Building rent1400

Building Insurance140

Distribution Cost500

salary to peter150011490




Net income
8760



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