Question

Fanning Modems, Inc. makes modem cards that are used in notebook computers. The company completed the following transactions during year 1. All purchases and sales were made with cash. 1. Acquired $775,000 of cash from the owners. 2. Purchased $320,000 of manufacturing equipment. The equipment has a $36,000 salvage value and a four-year useful life. 3. The company started and completed 6,000 modens. Direct materials purchased and used amounted to 545 per unit. 4. Direct labor costs amounted to $30 per unit. 5. The cost of manufacturing supplies used amounted to 59 per unit. 6. The company paid $55,000 to rent the manufacturing facility. 7. Magnificent sold all 6,000 units at a cash price of 5145 per unit. (Hint: It will be necessary to determine the manufacturing costs in order to record the cost of goods sold.) 8. The sales staff was paid a 59 per unit sales commission 9. Pald 544,000 to purchase equipment for administrative offices. The equipment was expected to have a $3,500 salvage value and a three-year useful life. 10. Administrative expenses consisting of office rental and salaries amounted to $72,700. Required a. Based on these data, identify each cost incurred by the company as (t) foed versus variable relative to the number of units produced and sold; and (2) product versus selling, general, and administrative (SG&A). The solution for the first item is shown as an example b. Complete the following table to indicate the product cost per unit assuming levels of production of 6.000, 7000. 8.000, and 9,000

Answer 1

Answer-A

Cost Item
Depreciation on manufacturing equipment	Fixed cost	Product cost
Direct materials	Variable cost	Product cost
Direct Labor	Variable cost	Product cost
Manufacturing supplies	Variable cost	Product cost
Rent on manufacturing facility	Fixed cost	Product cost
Sales commissions	Variable cost	Selling, General and Administrative
Depreciation on administrative equipment	Fixed cost	Selling, General and Administrative
Administrative costs (rent and salaries)	Fixed cost	Selling, General and Administrative

b-

Production Levels	Per unit	6,000	7,000	8,000	9,000
Variable Cost	$84	$504,000	$588,000	$672,000	$756,000
Fixed Cost		$126,000	$126,000	$126,000	$126,000
Total Cost (Cost of goods sold)		$630,000	$714,000	$798,000	$882,000
Cost per unit (Total cost/ no. of units)		$105	$102	$99.75	$98

Computation of total variable cost:
Direct material		45
Direct labor		30
Cost of manufacturing supplies		9
Total variable cost		84

Computation of total fixed cost:
Rent		55,000
Depreciation		71,000
(320,000-36,000)/4
Total fixed cost		126,000

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