Question

Question 1 Accounting 7000

Required information Problem 16-30 (Static) Relevant costs, special sales order-idle versus full capacity LO 2, 3 [The following information applies to the questions displayed below.] Petro Motors Inc. (PMI) produces small gasoline-powered motors for use in lawn mowers. The company has been growing steadily over the past five years and is operating at full capacity. PMI recently completed the addition of new plant and equipment at a cost of $7,800,000, thereby increasing its manufacturing capacity to 100,000 motors annually. The addition to plant and equipment will be depreciated on a straight-line basis over 10 years. Sales of motors were 60,000 units prior to the completion of the additional capacity. Cost records indicated that manufacturing costs had totaled $60 per motor, of which $48 per motor was considered to be variable manufacturing costs. PMI has used the volume of activity at full capacity as the basis for applying fixed manufacturing overhead. The normal selling price is $80 per motor, and PMI pays a 5% commission on the sale of its motors. LawnPro.com offered to purchase 35,000 motors at a price of $60 per unit to test the viability of distributing lawn mower replacement motors through its website. PMI would be expected to produce the motors, store them in its warehouse, and ship individual motors to LawnPro.com customers. As orders are placed directly through the LawnPro.com website, they would be forwarded instantly to PMI. No commissions will be paid on this special sales order, and freight charges will be paid by the customer purchasing a motor. Problem 16-30 (Static) Part a Required: a. Calculate the cost per motor, for cost accounting purposes, after completion of the additional plant capacity. Cost per motor

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Answer 1

Solution 1. COST PER UNIT

PARTICULARS	$
Current cost per unit	60
Less : Variable Cost	48
Fixed cost per unit	12
Units at full capacity	60,000
Total Fixed cost (60,000 units x $12)	720,000
Annual increase in fixed cost $7800,000/10)	780,000
Total Fixed cost	15,00,000
Unit at full capacity (Revised)	100,000
Fixed cost per unit	15
Variable cost per unit	60
Total cost per unit	75

SOLUTION 2 : RELEVANT COST

· Variable manufacturing cost per unit - Relevant

· Cost associated with storage                  - Relevant

· Fixed Cost                                               - Not relevant as sunk cost

Commissions & Freight                          - Not relevant as not paid in special order

SOLUTION 3

Since no other alternative options are available offer from LawnPro.com may be accepted as it generate a contribution margin of $12 per unit

Selling price per unit                       $60

Less: Variable cost                         $48        

Contribution per unit $12        

SOLUTION 4

If relevant costing analysis was not considered, it is likely to not accept the special order as total cost per unit would be $75 but selling price is only $60.