Question

Problem Five + The following table summarizes production costs and sales pries for Elite Gears during 2018: Sales price per unit $ 11.25 Variable factory overhead costs per unit $ 1.45 Direct materials costs per unit $ 160 Variable operating costs per unit Direct labor costs per unit $ 0.70 Total fixed factory overhead costs S 4,140 Total fixed operating costs $ 3,150 costs per unit $ 1.95 A. How much is the unit product cost under abortion costing if 3.000 units are produced? What happens to this cost when 3,500 units are produced, and why? 4,140 3,000 1.36 1-GO = $5,13 4140 3600 1.16 1.D - $4.93 perunit st B. How much is the unit product cost under variable costing if 3,000 units are produced? What happens to this cost when 3,500 units are produced? 1.60 7.70 + 1.45 $3.75 por unit C. Assume there are no beginning inventories. Also assume Elite produced and sold 1.800 units. calculate the following amounts and interpret the meaning of each as it applies to Elite Gears. 1. Gross margin per unit 2. Total gross margin 3. Gross margin ratio 4. Contribution margin per unit 9990/1800 - $5.55 per unit 5. Total contribution margin 6. Contribution margin ratio 0990 9990/20.25049.33 Variable Sales (11.25x1800) 20250 Absorption COGS sales (1125x1600) 20250 O IGO Y16002880 COGS OL 0.70 1800 1200 om 2280 Umow 1.45X1800 2010 OL 1200 - 1.05x1800 = 3510 10260 Mon 2010 Contribution 4140 9990 molt Margin Gross Margin 9 of 10

Answer 1

A. Under absorption costing, product cost includes direct material, direct labour, variable factory overhead and fixed factory overhead.

Therefore,

when no of units = 3000, Fixed factory overhead cost per unit = $4140/3000 = 1.38

when no of units = 3500, Fixed factory overhead cost per unit = $4140/3500 = 1.18

Calculation of product cost per unit under absorption costing

Particulars	3000 units	3500 units
Direct Material	1.60	1.60
Direct Labour	0.70	0.70
Variable factory overhead	1.45	1.45
Fixed factory overhead	1.38	1.18
Total Product cost per unit	5.13	4.93

B. Under variable costing, product cost includes direct material, direct labour and variable factory overhead.

Particulars	3000 units	3500 units
Direct Material	1.60	1.60
Direct Labour	0.70	0.70
Variable factory overhead	1.45	1.45
Total Product cost per unit	3.75	3.75

C. When no units produced and sold = 1800 units, fixed overhead cost per unit under absorption costing = 4140/1800 = 2.3

Absorption costing

Particulars	1800 units
Sales Price	11.25
Less: Direct Material	1.60
Direct Labour	0.70
Variable factory overhead	1.45
Fixed factory overhead	2.30
Gross margin per unit	5.20
Total Gross margin	$9360

3. Gross margin ratio =
_{Gross Margin Net Sales
^{= 5.20 / 11.25 = 46.22%}}

Variable Costing

Particulars	1800 units
Sales Price	11.25
Less: Direct Material	1.60
Direct Labour	0.70
Variable factory overhead	1.45
Variable operating cost	1.95
Contribution margin per unit	5.55
Total Contribution margin	$9990

6. Contribution margin ratio =  
_{Contribution Margin Net Sales}
= 5.55/ 11.25 = 49.33%