2.16
Computing and interpreting manufacturing unit costs.
Minnesota Office Products (MOP) produces three different paper products at its
Vaasa lumber plant; Supreme, Deluxe, and Regular, Each products has its own
dedicated production line at the plant. It currently uses the following
three-part classification for its manufacturing costs; direct materials, direct
manufacturing labor, and manufacturing overhead costs. Total manufacturing
overhead costs of the plant in July 2011 are $150 million ($15 million of which
are fixed). This total amount is allocated to each product line on the basis of
the direct manufacturing labor costs of each line. Summary data (in millions)
for July 2011 are as follows :
|
|
Supremen
|
Deluxe
|
Regular
|
|
Direct
material costs
|
$ 89
|
$ 57
|
$ 60
|
|
Direct
manufacturing labor costs
|
$ 16
|
$26
|
$ 8
|
|
Manufacturing
overhead costs
|
$ 48
|
$ 78
|
$ 24
|
|
Units
produced
|
125
|
150
|
140
|
Required
1. Compute
the manufacturing cost per unit for each product produced in July 2011.
2. Suppose
that in August 2011, production was 150 million units of Supreme, 190 million
units of Deluxe, and 220 million unitsof Regular. Why might the July 2011
information on manufacturing cost per unit be misleading when predicting total
manufacturing costs in August 2011 ?
Answer
:
1.
- Supremen
= 
= $1,224
per unit
-
Deluxe
= 
= $1,073
per unit
-
Regular
= 
= $0,657 per
unit
2.
- Supremen
= 
= $1,020 per unit
- Deluxe
= 
= $0,847 per unit
-
Regular
= 
= $0,418 per unit
Because the amount of paper production in August more than in
July, so the manufacturing cost per unit less in August tahn in July, which
resulted in the prediction of manufacturing costs per unit in July misleading.
2.17 Direct, indirect, fixed, and variable costs. Best Breads
manufactures two types of bread, which are sold as wholesale products to
various specialty retail bakeries. Each loaf of bread requires a three step
process. The first step is mixing. The mixing department combines all of the
necessary ingredients to create the dough and processes it through high speed
mixers. The dough is then left to rise before baking. The second step is baking
, which is an entirely automated process. The baking department molds the dough
into its final shape and bakes each loaf of bread in a high temperature oven.
The final step is finishing , which is an entirely manual process. The
finishing department coats each loaf of bread with a special glaze, allows the
bread to cool, and then carefully packages each loaf in a speciaty carton for
sale in retail bakeries.
Required
1. Cost
involved in the process are listed next.
For each cost, indicate whether it is a
direct variable, direct fixed, indirect variable, or indirect fixed cost,
assuming “units of production of each kind of bread” is the cost object.
Costs:
Yeast Mixing department manager
Flour Materials handlers in each
department
Packaging materials Custodian
in factory
Depreciation on ovens Night guard in factory
Depreciation on mixing machines Machinist
(running the mixing machine)
Rent on factory building Machine maintenance personnel in each department
Fire insurance on factory
building Maintenance
supplies for factory
Factory utilities Cleaning supplies for factory
Finishing department hourly
laborers
2. If
the cost object were the “mixing department” rather than units of production of
each kind of bread, which preceding costs would nowbe direct instead of
indirect costs ?
Answer :
1.
Costs
:
-
Yeast
– direct variable
-
Flour
– direct variable
-
Packaging
materials – direct variable
-
Depreciation
on ovens – indirect fixed
-
Depreciation
on mixing machines – indirect fixed
-
Rent
on factory building – indirect fixed
-
Fire
insurance on factory building – indirect
fixed
-
Factory
utilities – indirect variable
-
Finishing
department hourly laborers – direct
variable
-
Mixing
department manager – indirect fixed
-
Materials
handlers in each department – indirect
fixed
-
Custodian
in factory – indirect fixed
-
Night
guard in factory – indirect fixed
-
Machinist
(running the mixing machine) – indirect
fixed
-
Machine
maintenance personnel in each department – indirect
fixed
-
Maintenance
supplies for factory – indirect variable
- Cleaning
supplies for factory – indirect fixed
2. -
Depreciation on ovens
- Depreciation
on mixing machines
- Mixing
department manager
- Materials
handlers
- Machinist
- Machine
maintenance personnel
- Maintenance
supplies
3-17.
CVP computations.
Garrett Manufacturing sold 410,000 units of its product for $68 per unit in
2011. Variable cost per unit is $60 and total fixed costs are $1,640,000.
Required
1.
Calculate
(a) contribution margin and (b) operating income.
2.
Garrett’s
current manufacturing process is labor intensive. Kate Schoenen, Garrett’s
production manager, has proposed investing in state-of-the-art manufacturing
equipment, which will increase the annual fixed costs to $5,330,000. The
variable costs are expected to decrease to $54 per unit. Garrett expects to
maintain the same sales volume and selling price next year. How would
acceptance of Schoenen’s proposal affect your answers to (a) and (b) in
requirement 1?
3.
Should
Garrett accept Schoenen’s proposal? Explain.
Answer:
1(a).
Sales ($68 per unit × 410,000 units) $27,880,000
Variable costs ($60 per unit × 410,000
units) $24,600,000 _
Contribution margin $ 3,280,000
1(b). Contribution margin (from above) $ 3,280,000
Fixed costs $ 1,640,000 _
Operating income $ 1,640,000
2(a).
Sales (from above) $27,880,000
Variable costs ($54 per unit × 410,000 units)
$22,140,000
_
Contribution margin $ 5,740,000
2(b).
Contribution margin $ 5,740,000
Fixed costs $
5,330,000 _
Operating income $ 410,000
3. Operating income is expected to decrease by
$1,230,000 ($1,640,000 − $410,000) if Ms.
Schoenen’s proposal is accepted. The management would consider other factors
before making the final decision. It is likely that product quality would
improve as a result of using state of the art equipment. Due to increased
automation, probably many workers will have to be laid off. Garrett’s
management will have to consider the impact
of such an action on employee morale. In addition, the proposal increases the company’s fixed costs dramatically. This
will increase the company’s operating leverage
and risk.
3-20.
CVP exercises. The
Doral Company manufactures and sells pens. Currently, 5,000,000 unit are sold
per year at $0.50 per unit. Fixed costs are $900,000 per year. Variable costs
are $0.30 per unit.
Required
Consider each
case separately:
1 a. What is the current annual operating
income?
b. What is the present breakeven point in
revenues?
Compute the new
operating income for each of the following changes:
2. A $0.04 per unit increase in variable costs
3. A 10% increase in fixed costs and a 10%
increase in units sold
4. A 20% decrease in fixed costs, a 20% decrease
in selling price, a 10% decrease in variable
cost per unit, and a 40% increase in units sold
Compute the new
breakeven point in units for each of following changes:
5. A 10% increase in fixed costs
6. A 10% increase in selling price and a $20,000
increase in fixed costs
Answer:
1 a. [Units sold (Selling price – Variable
costs)] – Fixed costs = Operating income [5,000,000 ($0.50 – $0.30)] – $900,000 =
$100,000
b. Fixed costs ÷ Contribution margin per
unit = Breakeven units
$900,000 ÷ [($0.50 – $0.30)] = 4,500,000 units
Breakeven units × Selling price = Breakeven
revenues
4,500,000 units × $0.50 per unit =
$2,250,000
Contribution margin ratio = Selling
price -Variable costs
Selling price
= $0.50 - $0.30
$0.50
= $ 0.40
Fixed costs ÷ Contribution margin ratio =
Breakeven revenues
$900,000 ÷ 0.40 = $2,250,000
2. 5,000,000 ($0.50 – $0.34) – $900,000 = $
(100,000)
3. [5,000,000 (1.1) ($0.50 – $0.30)] – [$900,000
(1.1)] = $ 110,000
4. [5,000,000 (1.4) ($0.40 – $0.27)] – [$900,000
(0.8)] = $ 190,000
5. $900,000 (1.1) ÷ ($0.50 – $0.30) = 4,950,000
units
6. ($900,000 + $20,000) ÷ ($0.55 – $0.30) =
3,680,000 units
3-24.
CVP analysis, margin of safety. Suppose Doral Corp.’s breakeven point
is revenues of $1,100,000. Fixed costs are $660,000.
Required
1.
Compute
the contribution margin percentage.
2.
Compute
the selling price if variable costs are $16 per unit.
3.
Suppose
95,000 units are sold. Compute the margin of safety in units and dollars.
Answer:
1.
Breakeven
point revenues = Fixed Costs_________
Contribution margin percentage
Contribution
margin percentage = $660,000_
$1,100,000
=
0.60 or 60%
2.
Contribution
margin percentage = Selling price – Variable cost per unit
Selling
price
0.60
= SP - $16
SP
0.60 SP = SP – $16
0.40 SP = $16
SP = $40
3.
Breakeven
sales in units = Revenues ÷ Selling price
= $1,100,000 ÷ $40
= 27,500 units
Margin of safety
in units = Sales in units – Breakeven sales in units
= 95,000 – 27,500
= 67,500 units
Revenues, 95,000
units × $40 $3,800,000
Breakeven
revenues $1,100,000
_
Margin
of safety $2,700,000
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