Question

Hixson Company manufactures and sells one product for $34 per unit. The company maintains no beginning or ending inventories and its relevant range of production is 20,000 units to 30,000 units. When Hixson produces and sells 25,000 units, its unit costs are as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Fixed selling expense Fixed administrative expense Sales commissions Variable administrative expense Amount Per Unit $8.00 $5.00 $1.00 $6.00 $3.50 $2.50 $4.00 $1.00

Answer 1

1). Product costs are the direct costs involved in producing a product. In our Case

Per Unit Product Cost                         = Per Unit Direct Material + Per Unit Direct Labor + Per Unit Variable

   Manufacturing Overhead

= 8 + 5 + 1

= 14

So, if the product cost incurred per unit is $14, then Total Product Cost for 25,000 units will be 25,000 x 14 = $350,000

Overhead or sales, general, and administrative costs are considered period costs

Per Unit Period Cost             = Fixed Selling Expenses + Fixed Administrative Expenses + Sales Commission +

            Variable Administrative Expenses

= 3.50 + 2.50 + 4.00 + 1.00

= 11

So if the period cost incurred per unit is $11, then Period Cost incurred to sell 25,000 units will be

25,000 x 11 = $275,000

2). Variable Manufacturing Cost includes Direct Labor, Direct Material and Variable Manufacturing Overhead.

Per Unit Variable Manufacturing Cost           = Per Unit Direct Material + Per Unit Direct Labor +

    Per Unit Variable Manufacturing Overhead

= 8 + 5 + 1

= 14

Note: Irrespective of how many Units Hixson Company Manufactures, the variable cost since they are variable will remain constant at per unit. Total variable cost however will vary depending upon the number of units.

Like in case of 24,000 units are produced, the Total Variable Manufacturing Cost will amount to 24,000 x 14 = $336,000

Total fixed manufacturing cost          = Total Units Produced x Fixed Manufacturing Cost per unit

                                                            = 25,000 x 6

                                                            = 150,000

Average fixed manufacturing cost     = Total Fixed manufacturing Cost / Desired Number of Units

                                                            = 150,000/24,000

                                                            = $ 6.25

3). Variable Manufacturing Cost includes Direct Labor, Direct Material and Variable Manufacturing Overhead.

Per Unit Variable Manufacturing Cost           = Per Unit Direct Material + Per Unit Direct Labor +

    Per Unit Variable Manufacturing Overhead

= 8 + 5 + 1

= 14

Note: Irrespective of how many Units Hixson Company manufactures, the variable cost since they are variable will remain constant at per unit. Total variable cost however will vary depending upon the number of units.

Like in case of 24,000 units are produced, the Total Variable Manufacturing Cost will amount to 26,000 x 14 = $364,000

Total fixed manufacturing cost          = Total Units Produced x Fixed Manufacturing Cost per unit

                                                            = 25,000 x 6

                                                            = 150,000

Average fixed manufacturing cost     = Total Fixed manufacturing Cost / Desired Number of Units

                                                            = 150,000/26,000

                                                            = $ 5.77

4). Direct Manufacturing Cost includes Direct Labor, Direct Material and Variable Manufacturing Overhead.

Per Unit Direct Manufacturing Cost             = Per Unit Direct Material + Per Unit Direct Labor +

    Per Unit Variable Manufacturing Overhead

= 8 + 5 + 1

= 14

If 27,000 units are produced, the Total Direct Manufacturing Cost will amount to 27,000 x 14 = $378,000

Total fixed manufacturing cost          = Total Units Produced x Fixed Manufacturing Cost per unit

                                                            = 25,000 x 6

                                                            = 150,000

Average fixed manufacturing cost     = Total Fixed manufacturing Cost / Desired Number of Units

                                                            = 150,000/27,000

                                                            = $ 5.55

5). Incremental Cost is the extra cost incurred to produce one extra unit of production.

In our case of Hixson Company is incurring a per unit direct cost of $14 per unit as established earlier in the solution. Hence we can say that the Incremental cost to go from producing 25,000 units to 25,001 unit will be $14.

Note: Fixed manufacturing costs will remain unchanged as they are not affected by the number of units produced. Also selling and administrative expenses will not be taken into consideration as they are not a part of manufacturing expenses.

6). Contribution Margin per unit        = Product Price per Unit – Total Variable Cost Per Unit

                                                            = 34 – 19

                                                            = 15

Where Total Variable Cost Per Unit = Per Unit Direct Material + Per Unit Direct Labor + Per Unit Variable

   Manufacturing Overhead + Sales Commission Per unit + Variable

   Administrative Expenses

= 8 + 5 + 1 + 4 +1

Contribution Margin Ratio     = Contribution Margin per unit / Product price

                                                = 15/34

                                                = 0.44