Question

Comprehensive review problem During their senior year at Clarkson College, two business students, Gerry Keating and Louis Lamont, began a part-time business making personal computers. They bought the various components from a local supplier and assembled the machines in the basement of a friend's house. Their only cost was $216 for parts; they sold each computer for $360. They were able to make three machines per week and to sell them to fellow students. The activity was appropriately called Keating & Lamont Computers (KLC). The product quality was good, and as graduation approached, orders were coming in much faster than KLC could fill them A national CPA firm made Ms. Lamont an attractive offer of employment, and a large electronics company was ready to hire Mr. Keating. Students and faculty at Clarkson College, however, encouraged the two to make KLC a full-time venture. The college administration had decided to require all students in the schools of business and engineering to buy their own computers beginning in the coming fall term. It was believed that the quality and price of the KLC machines would attract the college bookstore to sign a contract to buy a minimum of 1,000 units the first year for $400 each. The bookstore sales were likely to reach 2000 units per year, but the manager would not make an initial commitment beyond 1,000 The prospect of $400,000 in annual sales for KLC caused the two young entrepreneurs to wonder about the wisdom of accepting their job offers. Before making a decision, they decided to investigate the implications of making KLC a full-time operation. Their study provided the following information relating to the production of their computers: Components from wholesaler Assembly labor Manufacturing space rent Utilities $160 per computer 12 per hour 1,800 per month 360 per month 288 per month Janitorial services 2,304 per yoar 2 hours per computer Deprociation of oquipmont Labor The two owners expected to devote their time to the sales and administrative aspects of the business Required

Answer 1

a) classification of costs & Direct material's saler Components from whole = $ 160 per compoules 2) Direct Labour - assembly Labour. Labour - 3) manufacturing overheads, manufacturing space rent - utilities - Janitorial Services Depreciation on carlopment

costs into variable e fixed! variable costs sales → → - Components assembly Labour from whole labous 2) Fixed costs manufacturing space rent is → utilities v - Janitorial Sequices → depreciation on caruipment

c) ar cost per unit produced per paalicula 918 if 1000 units year. ) 160,000 6ooo Components from whole sales ($160 x 1000) assembly Labour ( 1000 x $12) manufactusing space rent ($1800x 12 months) 21600 utilities ($360x12 months) 4320 Janitorial seavices ($ 288x 12 months) 3456 Depreciation 2304 Total Cost 197.680 cost per unit = $197680 1000 computer, 3197.68

Cost pea produced unit pee if year 2000 units are particulare in 320,000 Components from whole sale ($160 x 2000) 12000 assembly ( 2000 labour $12) 2 manufacturing space sent 21600 4320 utilities Janitorial Depreciation service -3456 2304 Total costa $363,680 Cost per unit = $363,680 2000 computery = $ 787-84-

decision regarding accepting Job since the manager of book store has made an initial Commitment of 1000 computers, we should only calculate profit from 1000 computers to make a decision regarding accepting job offer. particulars sales Clooox & 4oo) 400,000 (-) Total cost of 1000 computers Calready calculated in part; -c) $ 197680 $202 320 Net profit Job offer for both Reating & Lamont = $1,100,000 since profit from KLC venture is more than Job they should plan for KLC full time offee, full time venture