Question

ALASKA MANUFACTURING

……. began its first year of operations on January 1, 2018. Costs incurred for 2018 were as follows:

Direct materials used				$147,600	Variable
Direct manufacturing labor cots				38,400	Variable
Plant energy costs				2,000	Variable
Indirect manufacturing labor costs				14,000	Variable
Indirect manufacturing labor costs				19,000	Fixed
Other indirect production costs				11,000	Variable
Other indirect production costs				14,000	Fixed
Marketing, distribution and customer-service costs				128,000	Variable
Marketing, distribution and customer-service costs				48,000	Fixed
Administrative costs				56,000	Fixed

Variable manufacturing costs are variable with respect to units produced, while variable marketing, distribution and customer-service costs are variable with respect to units sold.

Inventory data is as follows:

Beginning : january 1, 2018 Ending: December 31, 2018

Direct Materials 0 lbs 2,400 lbs

Work in Progress 0 units 0 units

Finished goods 0 units ? units

In 2018, the company produced 123,000 units. Company standards require 2 pounds of direct material per unit.

Revenues for 2018 were $594,000. The selling price per unit and the purchase price per pound of direct materials were constant throughout the year. Finished-goods inventory at December 31, 2018 was $26,000.

Required:

1. What’s a variable cost? What’s a fixed cost? Give an example of each. WHY is this an important distinction to make?
2. What’s meant by a standard as used above?
3. Calculate the ending direct materials inventory (in $$) at December 31, 2018.
4. Calculate the ending finished-goods inventory (in units) at December 31, 2018.
5. Determine the selling price in 2018.
6. Compute the operating income for 2018.
7. What was the contribution margin per unit? What does this mean?
8. What was the contribution margin ratio? What does this mean?
9. What is the cost function (formula) that the company could use to estimate total costs for a year any level of production?

Please show all work. Looking to learn how to solve not just answers.

Answer 1

1	Variable costs;
		$
	Variable manufacturing costs;
	Direct Material used	147,600
	Direct Manufacturing Labor costs	38,400
	Plant enery costs	2,000
	Indirect manufacturing labor costs	14,000
	Other indirect production costs	11,000
	Total variable manufacturing costs	213,000
	Variable Marketing, distribution and customer-service costs	128,000
	Fixed costs
	Fixed manufacturing costs;
	Indirect manufacturing labor costs	19000
	Other indirect production costs	14000
	Total fixed manufacturing costs	33000
	Other fixed costs;
	Fixed Marketing, distribution and customer-service costs	48000
	Fixed Administrative costs	56000
	Total fixed selling and admin. Costs	104000
	Variable manufacturing costs are vary based each number of additional units produced. For example- Direct material, Labor etc.
	Fixed manufacturing costs are constant at any level of production. Examples - Plant depreciation, Factory rent etc.
	Variable selling and distribution costs are vary based on each additional unit sold. Examples - Sales commission, loading and unloading ete.
	Fixed selling and administration costs are constant at any level of sales volume. Example- Employees salary, Office rent etc..
2	Estimated cost of material, labor and overhead for manufacturing process is called standard costs.
		$
3	Variable manufacturing costs	213,000
	Fixed manufacturing costs	33000
	Total manufacturing costs	246,000
	Number of units produced ( units )	123000
	Manufacturing cost per unit ( $ 246,000 / 123,000 units )	$                     2.00	per unit
	Total finished-goods inventory December 31,2018	26000
	Manufacturing cost per unit	2
	Numer of units of ending inventory ( $ 26,000 / $ 2 per unit )	13,000	units
4	Total direct material required for production ( 123,000 units x 2 pound of material)	246000	lbs
	Cost of Direct Material used ( $ )	$         147,600.00
	Direct material cost per Pound ( $ 147,600 / 246,000 lbs )	$                     0.60	per Pound
5		Units
	Number of units produced	123000
	Add: Beginning inventory of finished goods January 1 ,2018	0
	Less: Ending Inventory of finished goods December 31,2018	(13,000)
	Number of units sold	110000
	Total sales Revenue ( $ )	$         594,000.00
	Selling price per unit ( $ 594,000 / 110,000 units )	$                     5.40
6	Operating income
		$	$
	Sales Revenue	594,000
	Less: Cost of goods sold ( 110,000 units x $ 2 per unit )	(220,000)
	Gross income		374,000
	Less: Operating expenses
	Variable Marketing, distribution and customer-service costs	128,000
	Total fixed selling and admin. Costs	104,000
	Total operating expenses`		(232,000)
	Operating income		142,000
		$
5	Selling price per unit	5.40
	Less: Variable Manufacturing cost per unit ( $ 213,000 / 123,000 units )	(1.73)
	Less: Variable selling and distribution costs ( $ 128,000 / 110,000 units )	(1.16)
	Contribution margin per unit	2.50
6	Contribution margin ratio ( $ 2.50 / $ 5.40 )	46.38%