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Mason Corporation began operations at the beginning of the current year. One of the company’s products, a refrigeration element, sells for $185 per unit. Information related to the current year’s activities follows.

Variable costs per unit:
Direct material	$	15
Direct labor		35
Manufacturing overhead		44
Annual fixed costs:
Manufacturing overhead	$	600,000
Selling and administrative		860,000
Production and sales activity:
Production (units)		24,000
Sales (units)		20,000

Mason carries its finished goods inventory at the average unit cost of production and is subject to a 30 percent income tax rate. There was no work in process at year-end.

1. Determine the cost of the December 31 finished goods inventory.

2. Compute Mason’s net income for the current year ended December 31

3. If next year’s production decreases to 23,000 units and general cost behavior patterns do not change, what is the likely effect on:

a. The direct-labor cost of $35 per unit?

• No change
• Increase
• Decrease

b. The fixed manufacturing overhead cost of $600,000?

• No change
• Increase
• Decrease

c.  The fixed selling and administrative cost of $860,000?

• No change
• Increase
• Decrease

d. The average unit cost of production?

• No change
• Increase
• Decrease

.

Answer 1

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Mason Corporation
Calculation of Average costs per unit	Amount $	Note
Variable costs
Direct material	15.00
Direct labor	35.00
Manufacturing overhead	44.00
Variable costs per unit	94.00	A
Production (units)	24,000.00	B
Variable costs of Production	2,256,000.00	C=A*B
Add: Annual fixed costs:
Manufacturing overhead	600,000.00	D
Total costs of Production	2,856,000.00	E=C+D
Production (units)	24,000.00	See B
Average costs per unit	119.00	F=E/B
Answer 1
Production (units)	24,000.00	See B
Sales (units)	20,000.00	G
Ending inventory	4,000.00	H=B-G
Average costs per unit	119.00	See F
Cost of Dec 31 Finished goods inventory	476,000.00	I=H*F
Sales (units)	20,000.00	See G
Average costs per unit	119.00	See F
Cost of goods sold	2,380,000.00	J=G*F
Sales (units)	20,000.00	See G
Sell price per unit	185.00	K
Total sales	3,700,000.00	L=G*K
Answer 2
Income Statement	Amount $
Sales	3,700,000.00	See L
Less: Cost of goods sold	2,380,000.00	See J
Gross Profit	1,320,000.00
Less: Selling and administrative	860,000.00
Income before tax	460,000.00	M
Less: Income tax	138,000.00	N=M*30%
Net Income	322,000.00	O=M-N
Answer 3 a
Variable costs per unit does not change with change in activity unless otherwise mentioned. Here it is given that next year also general cost behavior patterns will not change, so:
The direct-labor cost of $35 per unit will be same and there will be no change.
Answer 3 b
Total fixed costs does not change with change in activity unless otherwise mentioned. Here it is given that next year also general cost behavior patterns will not change, so:
The fixed manufacturing overhead cost of $600,000 will be same and there will be no change.
Answer 3 c
Total fixed costs does not change with change in activity unless otherwise mentioned. Here it is given that next year also general cost behavior patterns will not change, so:
The fixed selling and administrative cost of $860,000 will be same and there will be no change.
Answer 3 d
Calculation of average unit cost of production	Amount $
Variable costs
Direct material	15.00
Direct labor	35.00
Manufacturing overhead	44.00
Variable costs per unit	94.00	See A
Production (units)	23,000.00	P
Variable costs of Production	2,162,000.00	Q=A*P
Add: Annual fixed costs:
Manufacturing overhead	600,000.00	See D
Total costs of Production	2,762,000.00	R
Production (units)	23,000.00	See P
Average costs per unit	120.09	S=R/P
Increase by	$               1.09	T=S-F
So average unit cost of production will increase by $ 1.09.