Question

Hernandez Company's relevant range of production is 7,500 units to 12,500 units. When it produces and sells 10,000 units, its average costs per unit are as follows:

Average Cost per unit

DIRECT MATERIALS $6.00

DIRECT LABOR $3.50

VARIABLE MANUFACTURING OVERHEAD $1.50

FIXED MANUFACTURING OVERHEARD $4.00

FIXED SELLING EXPENSES $3.00

FIXED ADMINISTRATIVE EXPENSES $2.00

SALES COMMISSIONS   $1.00

VARIABLE ADMINISTRATIVE EXPENSES $.50

1. FOR FINANCIAL ACCOUNTING PURPOSES, WHAT IS THE TOTAL AMOUNT OF PRODUCT COSTS INCURRED TO MAKE 10,000 UNITS?

2. FOR FINANCIAL ACCOUNTING PURPOSES, WHAT IS THE TOTAL AMOUNT OF PERIOD COSTS INCURRED TO SELL 10,000 UNITS?

3. IF 8,000 UNITS ARE PRODUCED AND SOLD, WHAT IS THE VARIABLE COST PER UNIT PRODUCED AND SOLD?

4. IF 12,500 UNITS ARE PRODUCED AND SOLD, WHAT IS THE VARIABLE COST PER UNIT PRODUCED AND SOLD?

5. IF 8,000 UNITS ARE PRODUCED AND SOLD, WHAT IS THE TOTAL AMOUNT OF VARIABLE COSTS RELATED TO THE UNITS PRODUCED AND SOLD?

6. IF 12,5000 UNITS ARE PRODUCED AND SOLD, WHAT IT THE TOTAL AMOUNT OF VARIABLE COSTS RELATED TO THE UNITS PRODUCED AND SOLD?

7. IF 8,000 UNITS ARE PRODUCED, WHAT IS THE AVERAGE FIXED MANUFACTURING COST PER UNIT PRODUCED.

8. IF 12,500 UNITS ARE PRODUCED, WHAT IS THE AVERAGE FIXED MANUFACTURING COST PER UNIT PRODUCED.

9. IF 8,000 UNITS ARE PRODUCED, WHAT IS THE TOTAL AMOUNT OF FIXED MANUFACTURING COST INCURRED TO SUPPORT THIS LEVEL OF PRODUCTION.

10. IF 12,500 UNITS ARE PRODUCED, WHAT IS THE TOTAL AMOUNT OF FIXED MANUFACTURING COST INCURRED TO SUPPORT THIS LEVEL OF PRODUCTION.

11. IF 8,000 UNITS ARE PRODUCED, WHAT IS THE TOTAL AMOUNT OF MANUFACTURING OVERHEAD COST INCURRED TO SUPPORT THIS LEVEL OF PRODUCTION? WHAT IS THE TOTAL AMOUNT EXPRESSED ON A PER UNIT BASIS?

13. IF THE SELLING PRICE IS $22 PER UNIT, WHAT IS THE CONTRIBUTION MARGIN PER UNIT?

14. IF 11,000 UNITS PRODUCED, WHAT ARE THE TOTAL AMOUNTS OF DIRECT AND INDIRECT MANUFACTURING COSTS INCURRED TO SUPPORT THIS LEVEL OF PRODUCTION.

15. WHAT INCREMENTAL MANUFACTURING COST WILL HERNANDEZ INCUR IF IT INCREASES PRODUCTION FROM 10,0000 TO 10,001 UNITS?

Answer 1

1)

Direct materials ($6.00*10000)	$60000
Direct labor ($3.50*10000)	35000
Variable manufacturing overhead ($1.50*10000)	15000
Total variable manufacturing overhead		110000
Fixed manufacturing overhead ($4.00*10000)		40000
Total product cost		$150000

2)

Fixed selling expense ($3.00*10000)	$30000
Fixed administrative expenses ($2.00*10000)	20000
Total fixed selling and administrative expenses		50000
Sales commissions ($1.00*10000)	10000
Variable administrative expenses ($0.50*10000)	5000
Total variable selling and administrative expenses		15000
Total period cost		$65000

3) Calculation of Variable cost per unit

Direct materials	6.00
Direct labor	3.50
Variable manufacturing overhead	1.50
Sales commissions	1.00
Variable administrative expenses	0.50
Total variable cost per unit		$12.50

Variable cost per unit= $12.50 per unit

4) Variable cost per unit= $12.50 per unit

Variable cost per unit will remain same irrespective of the number of units produced but the total variable cost changes with the change in the number of units produced.

5) Total variable cost= Variable cost per unit*Number of units produced

= $12.50*8000= $100000

6) Total variable cost= Variable cost per unit*Number of units produced

= $12.50*12500= $156250

7) Total fixed manufacturing cost= $4.00*10000= $40000

Average fixed manufacturing cost per unit= Total fixed manufacturing cost/Number of units produced

= $40000/8000= $5.00 per unit

Total fixed manufacturing overhead will remain same if the company produce from 7500 units to 12500 units but the fixed manufacturing cost per unit will change with the change in the number of units produced.

8) Average fixed manufacturing cost per unit= Total fixed manufacturing cost/Number of units produced

= $40000/12500= $3.20 per unit

9) Total fixed manufacturing overhead will remain same if the company produce from 7500 units to 12500 units. As the fixed manufacturing overhead

Total fixed manufacturing cost= $4.00*10000= $40000

10) Total fixed manufacturing overhead will remain same if the company produce from 7500 units to 12500 units.

Total fixed manufacturing cost= $4.00*10000= $40000

11)

Variable manufacturing overhead ($1.50*8000)	$12000
Fixed manufacturing overhead ($4.00*10000)	40000
Total manufacturing cost	$52000

Total fixed manufacturing overhead will remain same if the company produce from 7500 units to 12500 units.

Manufacturing overhead cost per unit= Total manufacturing cost/Number of units produced

= $52000/8000= $6.50 per unit

13)

Sales		$22.00
Less: Variable cost
Direct materials	6.00
Direct labor	3.50
Variable manufacturing overhead	1.50
Sales commissions	1.00
Variable administrative expenses	0.50
Total variable cost per unit		12.50
Contribution margin per unit		$9.50

14) Calculation of total direct cost

Direct materials ($6.00*11000)	$66000
Direct labor ($3.50*11000)	38500
Total direct cost	$104500

Calculation of total indirect cost

Variable manufacturing overhead ($1.50*11000)	$16500
Fixed manufacturing overhead ($4.00*10000)	40000
Total indirect cost	$56500

Total fixed manufacturing overhead will remain same if the company produce from 7500 units to 12500 units.

15)

Direct materials per unit	$6.00
Direct labor per unit	3.50
Variable manufacturing overhead per unit	1.50
Incremental manufacturing cost per unit	$11.00

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