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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.
other Cost | |||
Distribution Cost | 500 | ||
Peter Salary | 1500 | ||
Total | 2000 | ||
Direct cost | Magazine | Brochure | Total |
Units produce | 5000 | 10000 | |
Set up cost | 400 | 200 | 600 |
Printing Material cost | 2000 | 800 | 2800 |
(0.40*5000) | (0.08*10000) | ||
Labor cost (working note) | 2500 | 1000 | 3500 |
Power cost (Working Note) | 250 | 100 | 350 |
Prime Cost | 5150 | 2100 | 7250 |
Building Rent | 1000 | 400 | 1400 |
Depreciation (working note) | 500 | 200 | 700 |
Building Insurance | 100 | 40 | 140 |
Total Manufacturing Cost | 6750 | 2740 | 9490 |
Calculation of direct labour cost | |||
Labour cost | 10 per hour | ||
Magazine | Brochure | Total | |
unit produced | 5000 | 10000 | |
unit produced per hour | 20 | 100 | |
Hours worked | 250 | 100 | 350 |
Cost of labour | 2500 | 1000 | 3500 |
Allocation of other costs | |||
Particulars | Magazine | brochure | Total |
Machine hours | 250 | 100 | 350 |
power cost | 250 | 100 | 350 |
(350*250/350) | (350*100/350) | ||
Building Rent | 1000 | 400 | 1400 |
(1400*250/350) | (1400*100/350) | ||
Insurance | 100 | 40 | 140 |
(140*250/350) | (140*100/350) | ||
Calculation of Depreciation of Equipment | |||
Equipment purchased | 40000 | ||
Hours of usage | 20000 | ||
Depreciation per hour | 2 | ||
Magazine | 500 | (2*250) | |
Brochure | 200 | (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 | |||
Magazine | 18000 | ||
Brochure | 2250 | 20250 | |
less : expenses | |||
Direct Material | 2800 | ||
Direct labour | 3500 | ||
setup Cost | 600 | ||
depreciation on equipement | 700 | ||
Power Cost | 350 | ||
Building rent | 1400 | ||
Building Insurance | 140 | ||
Distribution Cost | 500 | ||
salary to peter | 1500 | 11490 | |
Net income | 8760 |