Question

Stuart 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 $825,000 of cash from the owners.
2. Purchased $420,000 of manufacturing equipment. The equipment has a $45,000 salvage value and a four-year useful life.
3. The company started and completed 7,500 modems. Direct materials purchased and used amounted to $55 per unit.
4. Direct labor costs amounted to $40 per unit.
5. The cost of manufacturing supplies used amounted to $5 per unit.
6. The company paid $65,000 to rent the manufacturing facility.
7. Magnificent sold all 7,500 units at a cash price of $195 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 $9 per unit sales commission.
9. Paid $54,000 to purchase equipment for administrative offices. The equipment was expected to have a $4,500 salvage value and a three-year useful life.
10. Administrative expenses consisting of office rental and salaries amounted to $74,200.

Required

a. Based on these data, identify each cost incurred by the company as (1) fixed 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 7,500, 8,500, 9,500, and 10,500

Complete this question by entering your answers in the tabs below.

Based on these data, identify each cost incurred by the company as (1) fixed 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.

	Cost Item Depreciation on manufacturing equipment Fixed cost Product cost Direct materials Direct labor Manufacturing supplies Rent on manufacturing facility Sales commissions Depreciation on administrative equipment Administrative costs (rent and Salaries)

Complete the following table to indicate the product cost per unit assuming levels of production of 7,500, 8,500, 9,500, and 10,500. (Do not round intermediate calculations. Round "Cost per unit" to 2 decimal places.)

	Production Levels Per Unit 7,500 8,500 9,500 10,500 Variable cost $100 Fixed cost Total (Cost of goods sold) Cost per unit

Answer 1

A.	Cost Item	Fixed v/s Variable	Product v/s selling, general, and administrative
	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.	Calculation of Fixed Cost
	Particulars	Amount	Calculation
	Depreciation on Manufacturing Equipment	$                  93,750	=(420000-45000)/4
	Manufacturing facility Rent	$                  65,000
	Total	$               1,58,750
	Calculation of total Variable cost per unit
	Particulars	Amount
	Direct Material	$                           55
	Labour Cost	$                           40
	Supplies	$                             5
	Total	$                        100
	Production Levels	Per Unit	7,500	8,500	9,500	10,500
	Variable cost (a)	$                        100	$                              7,50,000	$         8,50,000	$         9,50,000	$       10,50,000
	Fixed cost (b)		$                              1,58,750	$         1,58,750	$         1,58,750	$         1,58,750
	Total (Cost of goods sold) (a+b=c)		$                              9,08,750	$       10,08,750	$       11,08,750	$       12,08,750
	Cost per unit (c / No. of units)		$                                  121.17	$             118.68	$             116.71	$             115.12
	Note - Selling, general & Administration overhead cost were not considered in calculating Product cost as they are not the part of Product cost