Question

Bendix Ltd is a car parts manufacturer. It supplies you the following information regarding costs at various levels of monthly production:

Production volume	8 000 units	12 000 units
Direct materials	$80 000	$120 000
Direct labour	64 000	96 000
Indirect materials	24 000	36 000
Supervisors’ salaries	12 000	12 000
Depreciation on plant	10 000	10 000
Maintenance	32 000	44 000
Utilities	15 000	21 000
Insurance on plant and equipment	1 600	1 600
Property taxes on plant	2 000	2 000
Total	$241 600	$342 600

                                                         

In the above table there are some pure variable costs, some pure fixed costs and some mixed costs.

Required:

1. Identify and make separate lists of the pure variable costs, pure fixed costs and mixed costs and calculate their totals.
2. Split the total mixed costs into Fixed and Variable elements using High/Low method, calculate total fixed cost and develop the equation for total monthly production costs?
3. Explain to the management how to use the cost equation you developed in (2) above to predict total costs for the monthly production volume of 9 000 units and also calculate the correct unit cost.
4. In 2019 the company has produced 9 000 units. According to the Accountant’s calculations the unit cost was $28.05 ($336 600 / 12 000). The company added 10% margin to the cost and had set a selling price of $30.85.

However, the financial results show that there was a gross loss in the year. The company management cannot understand this mystery.

Explain to the management why there was a loss.

Answer 1

List of Costs 8,000 units 12,000 units Variable cost Direct materials Direct labour Indirect materials Total Variable costs $80,000 $64,000 $24,000 $168,000 $120,000 $96,000 $36,000 $252,000 a Pure Fixed costs Supervisors' salaries Depreciation on plant Insurance on plant and equipment Property taxes on plant Total Fixed costs $12,000 $10,000 $1,600 $2,000 $25,600 $12,000 $10,000 $1,600 $2,000 $25,600 b Mixed Costs Maintenance Utilities Total Mixed Cost $32,000 $15,000 $47,000 $44,000 $21,000 $65,000C Total Costs $240,600 $342,600 a+b+c Working notes: Production volume Direct materials Cost per unit 8,000 units 12,000 units Explanation $80,000 $120,000 $100 $10 Variable cost per unit Direct labour Cost per unit $64,000 $8 $96,000 $8 Variable cost per unit Indirect materials Cost per unit $24,000 $3 $36,000 $3 Variable cost per unit Supervisors' salaries Depreciation on plant $12,000 $10,000 $12,000 Fixed cost since no changes $10,000 Fixed cost since no changes Maintenance Cost per unit $32,000 $4.00 $44,000 $3.67 Mixed cost Utilities Cost per unit $15,000 $1.88 $21,000 $1.75 Mixed cost Insurance on plant and equipment Property taxes on plant $1,6001 $2,000 $1,600 Fixed cost since no changes $2,000 Fixed cost since no changes High Low method Maintenance cost Maintenance cost Machine hours 8 000 units 12 000 units $32,000 $44,000 8,000 12,000 Difference $12,000 4,000 Variable cost per unit Difference in maintenance cost Difference in units $12,000 4,0001 $3.00 Calculation of Fixed cost Units Variable cost per unit Variable cost Fixed cost Prior year Current year 8,000 12,000 a $3.00 $3.00 b $24,000 $36,000 a "b $8,000 $8,000 Utilities cost Utilities cost Machine hours 8 000 units 12 000 units $15,000 $21,000 8,000 12,000 Difference $6,000 4,000 Variable cost per unit Difference in Utilities cost Difference in units $6,000 4,000 $1.50 Calculation of Fixed cost Units Variable cost per unit Variable cost Fixed cost Prior year Current year 8,000 12,000 a $1.50 $1.50lb $12,000 $18,000 a*b $3,000 $3,000 Variable Fixed Cost Cost $10.00 $8.00 $3.000 $3.00 $1.50 Direct materials Direct labour Indirect materials Maintenance Utilities Supervisors' salaries Depreciation on plant Insurance on plant and equipment Property taxes on plant Total $8,000 $3,000 $12,000 $10,000 $1,600 $2,000 $36,600 $25.50 Y = $36,600 + $25.5 X Monthly Cost equation Y= a + bx Y = Total cost a= Fixed cost b= Variable cost per unit X=number of units The cost can be predicted with help of above equation Y = $36,600 + $25.5 X Y = $36,600 + $25.5 * 9,000 units Total cost = $266,100 Unit cost Total cost Total units Correct unit cost $266,100 a 9,000 6 $29.57 a/b The average cost calculated by the accountant is wrong Hence there was a gross loss. The total cost predicted for 9,000 units is wrong The selling price should be fixed on above unit cost Correct unit cost Margin at 10% Correct selling price $29.57 $2.96 $32.52