The total costs incurred in 2019 at various output levels in a factory have been measured as follows:

When output is 200 units or more, another factory unit must be rented and fixed costs therefore increase by 50%. Variable cost per unit is forecast to rise by 20% at the start of 2020.

Required:

Using the high-low method and least squares method-

a.       Calculate the Variable cost per unit.

b.      Calculate Total Fixed Cost.

c.       Develop the cost function that links Cost to Output (2020).

d.      Calculate the estimated total costs of producing 200 units in 2020.

e.       Calculate the estimated output if total cost is $15,400 in 2020.

Vogel Inc. manufactures memory chips for electronic toys within a relevant range of 88,400 to 142,800 memory chips per year. Within this range, the following partially completed manufacturing cost schedule has been prepared:

Complete the cost schedule below. When computing the cost per unit, round to two decimal places. Round all other values to the nearest dollar.

1. Relevant Range and Fixed and Variable Costs

   Child Play Inc. manufactures electronic toys within a relevant range of 20,000 to 150,000 toys per year. Within this range, the following partially completed manufacturing cost schedule has been prepared:

   Complete the cost schedule. When computing the cost per unit, round to two decimal places.

   Toys produced	40,000		80,000		120,000
   Total costs:
   Total variable costs	$720,000		d. $		j. $
   Total fixed costs	600,000		e.		k.
   Total costs	$1,320,000		f. $		l. $
   Cost per Unit
   Variable cost per unit	a. $		g. $		m. $
   Fixed cost per unit	b.		h.		n.
   Total cost per unit	c. $		i. $		o. $

Superior Micro Products uses the weighted-average method in its process costing system. During January, the Delta Assembly Department completed its processing of 26,600 units and transferred them to the next department. The cost of beginning work in process inventory and the costs added during January amounted to $760,050 in total. The ending work in process inventory in January consisted of 3,700 units, which were 80% complete with respect to materials and 60% complete with respect to labor and overhead. The costs per equivalent unit for the month were as follows:

Required:

1. Compute the equivalent units of materials, labor, and overhead in the ending work in process inventory for the month.

2. Compute the cost of ending work in process inventory for materials, labor, overhead, and in total for January.

3. Compute the cost of the units transferred to the next department for materials, labor, overhead, and in total for January.

4. Prepare a cost reconciliation for January. (Note: You will not be able to break the cost to be accounted for into the cost of beginning work in process inventory and costs added during the month.)

1.Compute the equivalent units of materials, labor, and overhead in the ending work in process inventory for the month.

2.

Compute the cost of ending work in process inventory for materials, labor, overhead, and in total for January.

3.  

Compute the cost of the units transferred to the next department for materials, labor, overhead, and in total for January.

4.

Prepare a cost reconciliation for January.

Superior Micro Products uses the weighted-average method in its process costing system. During January, the Delta Assembly Department completed its processing of 25,800 units and transferred them to the next department. The cost of beginning work in process inventory and the costs added during January amounted to $694,688 in total. The ending work in process inventory in January consisted of 3,800 units, which were 50% complete with respect to materials and 30% complete with respect to labor and overhead. The costs per equivalent unit for the month were as follows:

Required:

1. Compute the equivalent units of materials, labor, and overhead in the ending work in process inventory for the month.

2. Compute the cost of ending work in process inventory for materials, labor, overhead, and in total for January.

3. Compute the cost of the units transferred to the next department for materials, labor, overhead, and in total for January.

4. Prepare a cost reconciliation for January. (Note: You will not be able to break the cost to be accounted for into the cost of beginning work in process inventory and costs added during the month.)

Compute the equivalent units of materials, labor, and overhead in the ending work in process inventory for the month.

Compute the cost of ending work in process inventory for materials, labor, overhead, and in total for January.

Compute the cost of the units transferred to the next department for materials, labor, overhead, and in total for January.

Prepare a cost reconciliation for January.

Kubin Company’s relevant range of production is 27,000 to 29,000 units. When it produces and sells 28,000 units, its average costs per unit are as follows:

Required:

1. Assume the cost object is units of production:

a. What is the total direct manufacturing cost incurred to make 28,000 units?

b. What is the total indirect manufacturing cost incurred to make 28,000 units?

1. Assume the cost object is units of production:

a. What is the total direct manufacturing cost incurred to make 28,000 units? (Round per unit values to 2 decimal places.)

b. What is the total indirect manufacturing cost incurred to make 28,000 units? (Round per unit values to 2 decimal places.)

2. Assume the cost object is the Manufacturing Department and that its total output is 28,000 units.

a. How much total manufacturing cost is directly traceable to the Manufacturing Department?

b. How much total manufacturing cost is an indirect cost that cannot be easily traced to the Manufacturing Department?

2. Assume the cost object is the Manufacturing Department and that its total output is 28,000 units.

a. How much total manufacturing cost is directly traceable to the Manufacturing Department? (Round per unit values to 2 decimal places.)

b. How much total manufacturing cost is an indirect cost that cannot be easily traced to the Manufacturing Department?

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3. Assume the cost object is the company’s various sales representatives. Furthermore, assume that the company spent $117,600 of its total fixed selling expense on advertising and the remainder of the total fixed selling expense comprised the fixed portion of the company's sales representatives’ compensation.

a. When the company sells 28,000 units, what is the total direct selling expense that can be readily traced to individual sales representatives?

b. When the company sells 28,000 units, what is the total indirect selling expense that cannot be readily traced to individual sales representatives?

3. Assume the cost object is the company’s various sales representatives. Furthermore, assume that the company spent $117,600 of its total fixed selling expense on advertising and the remainder of the total fixed selling expense comprised the fixed portion of the company's sales representatives’ compensation.

a. When the company sells 28,000 units, what is the total direct selling expense that can be readily traced to individual sales representatives? (Round per unit value to 2 decimal places.)

b. When the company sells 28,000 units, what is the total indirect selling expense that cannot be readily traced to individual sales representatives?

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Suppose that at the certain factory setup cost is directly proportional to the number of machines used, and operating cost is inversely proportional to the number of machines used. Show that when the total costs is minimal, the setup cost is equal to the operating cost. Hint: Total cost = setup cost + operating cost)

Costing Meats figure out the cost of one serving of pork roast if: As Purchased (AP) cost is $2.70 a pound AP weight is 12 pounds After trim and Roasting Edible Portion (EP) is 9.5 pounds and the serving size is 8 oz. Total AP cost? =2.70*12 EP cost per pound? =32.40/9.5 EP cost per ounce? =3.41/16 cost per serving? =.213*8 1 figure out the cost of one serving of roast beef if: As Purchased (AP) cost is $2.95 a pound AP weight is 15 pounds After trim and Roasting Edible Portion (EP) is 13 pounds and the serving size is 8 oz. Total AP cost? EP cost per pound? EP cost per ounce? cost per serving? 2 figure out the cost of one serving of strip steak if: As Purchased (AP) cost is $4.20 a pound AP weight is 15 pounds After trim and Roasting Edible Portion (EP) is 11 1/4 pounds and the serving size is 13 oz. Total AP cost? EP cost per pound? EP cost per ounce? cost per serving? 3 figure out the cost of one serving of top round if: As Purchased (AP) cost is $2.25 a pound AP weight is 17 pounds After trim and Roasting Edible Portion (EP) is 14 pounds and the serving size is 6 oz. Total AP cost? EP cost per pound? EP cost per ounce? cost per serving? 4 figure out the cost of one serving of random chicken breast if: As Purchased (AP) cost is $2.25 a pound AP weight is 25 pounds There is a 90% yield, so how much usable chicken do you have? and the serving size is 6 oz. Total AP cost? EP cost per pound? EP cost per ounce? cost per serving? 5 figure out the cost of one serving of pepper and onion: Yield - weight after prep A 10 lb case on onions cost $5.50 and has an 85% yield Yield of onions: A 10 lb case of peepers coat $12.00 and has a 80% yield Yield of peppers: A serving of onions and peppers is 4oz (raw) Total AP cost of onion? Total AP cost of pepper? Total AP cost of onion and pepper? Adding all the prepped peppers and onions what Is the total (EP) weight? EP cost per pound? EP cost per ounce? cost per serving?

INTRODUCTIONThe vice president at your company, Columbia Holdings, has given you a new assignment: “Recently I asked the folks at Patterson Manufacturing to develop a strategy for improving their profitability. They have responded with a proposal. I want you to evaluate the proposal: Is it viable? Is it sustainable? Visit their operations and bring back a recommendation.”As you travel to the site you review a brief history of the firm. Patterson Manufacturing was founded in a small northeastern city more than a century ago. Wesley Patterson started the firm alongside a fast-moving stream that provided mechanical power to drive cutting tools, grinders, lathes, and polishers. These tools were used to produce precision parts other manufacturers needed. The firm quickly established a reputation for producing high-quality products to exacting tolerances. The firm prospered.Wesley studied the industries he served to develop new products that could fill his customers’ emerging needs. He often met with customers to design unique products for them. He referred to his approach as providing “customer-driven creative solutions.” He also kept abreast of new manufacturing materials and technology to ensure his products were of the highest quality.The firm grew steadily and, by 1925, was (and still is) the community’s largest employer. Wesley donated the land that is now the city’s central park. He also paid for constructing the first municipal buildings. More recently, the company was the primary donor for the construction of the municipal library and the local hospital. And the taxes paid by the firm and its employees are responsible for an excellent array of community services, including the Patterson Sports Complex and Patterson Community Center. The Great Depression in the 1930s brought hard times to the company, yet none of its employees were discharged. Instead, the firm and its employees cooperated to spread the available work among its employees by reducing each individual’s working hours (and wages). During that time, the firm also suspended paying dividends to its owners. After the company returned to prosperity in the 1940s, it continued to emphasize customer-driven creative solutions, and its loyal workforce enthusiastically overcame product design challenges. Wesley passed leadership of his business to his son, who later passed it down to Wesley’s grandson, and then to Wesley’s great granddaughter, Jessica Patterson. But five years ago, when Jessica wanted to retire, there was no heir willing to take over the business. Consequently, the plant was sold to your employer, Columbia Holdings.BACKGROUNDColumbia invests in family-owned businesses with a strong presence in niche markets. Columbia retains existing management and local business practices but provides centralized services, such as finance, accounting, insurance, IMA EDUCATIONAL CASE JOURNAL VOL. 6, NO. 4, ART. 1, DECEMBER 20131ISSN 1940-204XPatterson ManufacturingShane MoriarityUniversity of Oklahoma and Unitec New ZealandAndrew Slessor Unitec New Zealand

and corporate-level management. Patterson has remained profitable since the acquisition, but its return on investment has been declining. Your first stop at the Patterson complex is a meeting with the controller. He provides some additional background: “Jessica, like her predecessors, spent most of her time with customers developing new products to meet customer needs. She didn’t concern herself with costs. Customers were willing to pay for products that solved problems. Upon Jessica’s retirement, Columbia appointed Paul, our former production manager, to CEO. Paul has done wonders in rationalizing and standardizing our product lines. He substantially reduced manufacturing costs, which led to record profits in the two years following the sale of the company. Those early results have apparently set high expectations for our continuing performance. Our proposal will help move us toward meeting those expectations,” he said.“Our proposal is to stop manufacturing our largest-selling product, the Gudgeon EH40, and instead acquire it from an overseas supplier,” continued the controller. “This product currently represents 30% of our total sales revenue and production volume. But sales have been declining because competitors are offering a similar product at lower prices. We think that by reducing our price by 5% we can increase our unit sales volume by 15%. The increased volume coupled with a lower product cost from the offshore supplier should nearly double our firm-wide profit.”The controller also provided some supporting documents. Exhibit 1 summarizes operations for the five years since Patterson Manufacturing was sold to Columbia Holdings. Year 1 represents the first full year after Jessica retired, and Year 5 is the year that just past. Exhibits 2, 3, and 4 provide an income statement for Year 5, the current employee staffing levels by job title, and a detailed price proposal from the overseas supplier.The controller continued: “The analysis is pretty straightforward. Sales of the Gudgeon EH40 were $27 million last year. The direct material costs came to $14.3 million, while overhead costs of $4.2 million were allocated to the product. But only $2.9 million of the overhead will be avoided if we stop manufacturing the Gudgeon EH40. The remaining overhead costs are nearly all fixed and not subject to reduction in the near future. Our direct selling costs consist mostly of an 8% commission paid to sales representatives. In addition, there’s a $2 million advertising allowance devoted to promoting the Gudgeon EH40 in trade magazines.”He also said, “By outsourcing the Gudgeon EH40, we can release three administrative managers, eight administrative support staff, 128 general production personnel, and 10 supervisors.The firm will incur a one-time charge of $1 million for severance pay and pension contributions for dismissed employees. We’ll also need to spend $200,000 for the construction of receiving facilities for the outsourced product.”The controller continued: “The supplier’s cost quotation (Exhibit 4) needs to be adjusted for the expected 15% increase in volume. The cost for materials and labor will increase proportionately, but the overhead and ‘other’ costs are unlikely to be affected. The supplier’s mark-up will be 10% of the new total cost. In addition to the product cost, Patterson will incur transportation costs to get the product from the manufacturer to our warehouse. The transportation costs are variable and would have been $0.6 million for the volume of product in Year 5.”THE TASKAfter his brief overview, the controller hands you the exhibits and says, “You should go through the numbers yourself to ensure that my projection for the increase in profit is correct.” As you make your way to an empty office to review the numbers, the marketing manager approaches you. She pleads, “Don’t let them do this. The proposed action will deal a devastating financial blow to our community. Wesley Patterson would have never approved such a move. He loved this town.

Exhibit 1:
Patterson Manufacturing Five-Year Summary of Operations

Total Revenues

Net Income

Domestic Sales

International Sales

Sales of Established Products*

Sales of New Products*

Research and Development

Return on Assets

Number of Employees

Year 5

$90.2

$3.1

$74.7

$15.5

$73.9

$16.3

$0.9

2.0%

480

Year 4

$94.9

$3.8

$76.9

$18.0

$75.1

$19.8

$1.1

2.3%

485

Year 3

$99.1

$4.4

$79.3

$19.8

$74.4

$24.7

$1.5

2.7%

502

Year 2

$106.2

$7.3

$85.0

$21.2

$76.3

$29.9

$1.2

4.1%

492

Year 1

$111.4

$7.5

$88.1

$23.3

$76.6

$34.8

$1.3

4.2%

510

Note: Dollar figures are in millions.
*Established products are those that have been marketed for five years or more. New products have been marketed for less than five years.

Exhibit 2:
Summary Income Statement for Patterson Manufacturing

Sales

Cost of Goods Sold (COGS)

Gross Margin

Administrative Costs

Selling Costs

Operating Income

Year 5

$90.2

74.3

15.9

1.6

11.2

$ 3.1

Note: Dollar figures are in millions. Interest expense and income taxes are only shown on Columbia’s consolidated financial statements.

Exhibit 3:
Distribution of Current Patterson Employees by Job Title

Job Title

Administrative Manager

Administrative Staff

Production Supervisor

General Production Personnel

Number of Employees

10

24

29

417

Average Salary Per Employee

$45,000

32,000

50,000

37,000

Exhibit 4:
Off-Shore Supplier’s Price Proposal for the Volume of Product in Year 5

Material Costs $12.7

Labor Costs 1.8

Overhead Costs 2.7

Other 1.5

Total 18.7

Profit Mark-Up (10%) 1.9

Total Price $20.6

Note: Dollar figures are in millions. The total price is quoted for supplying the quantity of product Patterson sold in Year 5. The quoted price is FOB the supplier’s manufacturing plant.

Questions:

1. Using the controller’s projections, prepare an analysis of the expected effect of outsourcing the product on Patterson’s profitability.

2. Would it be a viable alternative to produce the product locally and lower the price to achieve the increase in sales volume?

3. Does the firm have an obligation to maintain employment levels in the town?

4. What risks are associated with the proposal?

5. Make a recommendation to your vice president on whether the proposal should be accepted. Provide your reasoning and any suggestions for additional or alternative actions that Patterson should take.