Question

Total Manufacturing Cost, Income Statement, Unit Cost, and Selling Price Two inventors, recently organized as Innovation, Inc., consult you regarding a planned new product.They have estimates of the costs of materials, labor, overhead, and other expenses for 2016 but need to know how much to charge for each unit to earn a profit in 2016 equal to 15% of their estimated total long-term investment of $480,000 (ignore income taxes). Their plans indicate that each unit of the new product requires the following: Direct Material 4lb. of a material costing $6 per lb. Direct labor 2hrs. of a metal former's time at $13.20 per hr 0.6 hr. of an assembler's time at $9.60 per hr Major items of production overhead would be annual rent of $55,752 for a factory building, $34,392 rent for machinery, and $26,040 of indirect material. Other production overhead is estimated to be $279,936. Selling expenses are an estimated 30% of total sales, and non-factory administrative expenses are 20% of total sales. The consensus at Innovation is that during 2016 10,000 units of product should be produced for selling and another 2,000 units should be produced for the next year's beginning inventory. Also, an extra 3,000 pounds of material will be purchased as beginning inventory for the next year. Because of the nature of the manufacturing process, all units started must be completed, so work in process inventories are negligible Required a. Incorporate the above data into a schedule of estimated total manufacturing costs and compute the unit production cost for 2016 Do not use negative signs with any of your answers.

Answer 1

Answer:

A)

Estimated total Manufacturing cost
For the Year Ended Dec. 31, 2016
	Amount ($)	Amount ($)
Direct material
Beginning materials inventory	-
Cost of materials purchased (((10000+2000)*4)+3000)*6)	3,06,000
Cost of materials available	3,06,000
Less: Ending materials inventory(3000*6)	18,000
Total Materials used	2,88,000
Less:Indirect materials used	26,040
Direct materials used		2,61,960
Direct labor(2*13.20*12000)+(0.6*9.60*12,000)		3,85,920
Manufacturing Overhead:
Indirect material	26,040
Building rent	55,752
Machinery rent	34,392
Other factory overhead	2,79,936
Total Manufacturing Overhead:		3,96,120
Total manufacturing costs for 12,000 units		10,44,000
Product cost/unit 10,44,000/12,000 Units=		$87.00

Forming a linear equation , for Sales $-(COGS & S&A expenses)= Reqd. return on long-term investment as follows:

(10,000*x)*(1-(30%+20%))-870,000=15%*480,000

& Solving for x= Selling price /unit=188.40

b.
Income statement	Amount ($)
For the Year Ended Dec. 31, 2016
Sales (10000*188.40)	18,84,000
Less: Cost of Goods Sold(10000*87.00)	8,70,000
Gross profit on sales	10,14,000
Operating expenses:
Selling expenses(30%*18,84,000)	5,65,200
Administrative expenses(20%*18,84,000)	3,76,800
Net Income(480,000*15%)	$72,000

C. Unit sales price Innovation should charge for the new product=

$188.40