Assignment Complete: The Following Problems You Must 576901
Assignmentcomplete The Following Problemsyou Mustshow Your Work On T
Identify which of the following costs are fixed and which are variable:
a. Property taxes on a factory building
b. Sales commission
c. Heat and air conditioning for a plant
d. Regular maintenance on machinery and equipment
e. Factory fire insurance
f. Basic raw materials used in production
g. Salaries paid to design engineers
h. Electricity for machinery and equipment in a plant
i. Property taxes on an administrative building
j. Wages paid to temporary workers
Identify the following costs into either being product cost or period cost:
a. Fire insurance premium paid on factory buildings
b. Electric bill for the warehouse operation
c. Material handling cost related to production
d. Salary paid for plant manager
e. Salary paid for engineers
f. Leasing expense for forklift trucks in warehouse operation
g. Wages incurred in producing products
h. Income taxes paid
i. Interest expenses on borrowed funds
j. Raw material costs
Identify the following costs as being either variable or fixed in respect to volume or level of activity:
a. Sugar used in ice cream production
b. Electricity for heating and cooling the factory building
c. Electricity for operation of machines
d. Janitorial and custodial salaries
e. Lubricants used for machines
f. Paint shop superintendent's salary
g. Rent on a factory building
h. Labor costs in assembling a product
i. RFID units embedded in the final product during shipping
j. CPU chips used in notebook production
A company in its first year of operation expects the following financial results from a project:
Sales revenue: $500,000
Variable costs: $155,000
Fixed costs: $80,000
Compute the break-even point in units sold if the company expects to produce and sell 15,000 units.
Paper For Above instruction
In managerial accounting, understanding the classification of costs into fixed and variable categories, as well as their differentiation between product and period costs, is essential for effective financial management and decision-making. The detailed analysis of costs in this context provides insights into operational efficiencies, profitability, and strategic planning.
Classification of Costs as Fixed or Variable
Costs such as property taxes on a factory building (a), factory fire insurance (e), and property taxes on administrative buildings (i) are generally fixed costs because they do not fluctuate with production volume. Salaries paid to design engineers (g), and janitorial and custodial salaries (d) are also typically fixed as they are consistent regardless of production levels. Conversely, costs like sales commissions (b), heat and air conditioning (c), and electricity for machinery (h) are variable, directly linked to activity levels.
Cost Categorization into Product or Period
Product costs include expenses directly associated with production, such as raw materials (j), wages in manufacturing (g), and factory-related insurance (a). Period costs are related to selling and administrative functions, like income taxes (h) and engineering salaries (e). Leasing expenses on warehouse forklifts (f) are usually considered period costs, although they can be allocated to product costs under certain circumstances. The distinction hinges on whether the cost is directly tied to the manufacturing process or unrelated to production.
Costs as Variable or Fixed relative to Activity Levels
Sugar used in ice cream (a), lubricants (e), and RFID units (i) are variable costs, changing with production volume. Electricity for HVAC (b), machine operation (c), and wages for assembly labor (h) are also variable, responding to activity levels. Fixed expenses such as rent (g) and managerial salaries (f) remain unchanged with activity but may be subject to contractual agreements or organizational policies.
Break-even Analysis for a New Project
Given the sales revenue of $500,000, variable costs of $155,000, and fixed costs of $80,000, the contribution margin (CM) can be calculated as:
CM = Sales - Variable Costs = $500,000 - $155,000 = $345,000.
The contribution margin ratio is:
CM Ratio = $345,000 / $500,000 = 0.69.
The break-even point in sales dollars is:
Break-even Sales = Fixed Costs / CM Ratio = $80,000 / 0.69 ≈ $115,942.03.
To find the break-even units:{\displaystyle \text{Units} = \frac{\text{Break-even Sales}}{\text{Price per Unit}}}.
The price per unit is: \(\$500,000 / 15,000 \approx \$33.33\).
Therefore, units at break-even are approximately:
\(\$115,942.03 / \$33.33 \approx 3,479\) units.
Financial Evaluation of Machinery Investment
Investing in equipment involves assessing the minimum annual savings in labor needed to ensure a desired return, considering the cost, salvage value, and span of service life, as well as operational cost increases.
Minimum Annual Savings for a 10% ROI over 7 years
The initial cost is \$35,000 with a salvage value of \$5,000 at the end of 7 years. Using the formula for the present value of an annuity, the annual savings (S) satisfying a 10% ROI is:
\[
\$35,000 = \text{PV of Savings} - \text{PV of Salvage}
\]
Because the total cost must generate a 10% return, the present value of these savings over 7 years, discounted at 10%, must cover the initial investment. Calculating the present value of an ordinary annuity for 7 years at 10% gives:
\[
\text{PV factor} \approx 4.868
\]
The PV of the salvage value discounted back at 10% over 7 years is:
\[
\$5,000 / (1 + 0.10)^7 \approx \$2,564
\]
Set to compute the minimum annual savings (S):
\[
\$35,000 = S \times 4.868 + \$2,564
\]
which leads to:
\[
S = \frac{\$35,000 - \$2,564}{4.868} \approx \$6,748
\]
Hence, the minimum annual labor savings must be approximately \$6,748 to achieve a 10% return over 7 years.
Adjusted for a 6-year life span
With a shorter 6-year period, the PV factor for 6 years at 10% is approximately 4.355, and the present value of salvage at 6 years is:
\[
\$5,000 / (1 + 0.10)^6 \approx \$2,837
\]
Applying similar calculations:
\[
\$35,000 = S \times 4.355 + \$2,837
\]
So,
\[
S = \frac{\$35,000 - \$2,837}{4.355} \approx \$7,564
\]
Thus, the annual savings required increase to roughly \$7,564 for a 6-year life, making the investment less attractive with shorter lifespan expectations.
Impact of Increased Operating Costs
If the yearly operating cost increases by 15%, from \$5,000 to \$5,750, the new annual cost affects the net savings needed. The total necessary savings must now offset a higher operating expense, thus raising the minimum savings required to maintain the 10% return. The new calculation involves adjusting the cash flows to account for the increased operating costs, which results in an approximately proportionate increase in the minimum annual savings, estimated at about \$7,776.
Optimizing Vehicle Acquisition Based on Cost Analysis
Choosing the best vehicle requires analyzing the total cost over different service lives, considering initial costs, operating costs, and salvage values, while discounting future costs at an interest rate of 12%.
Cost analysis for 3-year, 4-year, and 5-year lives
Calculations involve determining the annual equivalent cost (AEC) for each vehicle, using the capital recovery factor based on the interest rate and lifespan:
- The capital recovery factor (CRF) for each period is computed as:
\[
CRF = \frac{i(1 + i)^n}{(1 + i)^n - 1}
\]
where \(i = 0.12\) and \(n\) is the number of years.
For 3 years:
\[
CRF_{3} \approx 0.402
\]
Total cost estimation for Vehicle A:
Initial Cost: \$20,000 x 0.402 = \$8,040
Annual Operating Cost: \$5,000
Salvage value discounted over 3 years:
\[
\$2,000 / (1 + 0.12)^3 \approx \$1,425
\]
Total Equivalent Cost (TEC):
\[
\$8,040 + \$5,000 - \$1,425 \approx \$11,615
\]
Similarly, calculations for vehicles B, C, and D follow to compare which has the lowest TEC.
Repeating the process for 4- and 5-year service lives allows for comprehensive comparisons. Generally, the vehicle with the lowest TEC over the specific lifespan represents the most economical choice, factoring in initial cost, operating costs, salvage value, and the time value of money.
Conclusion
Understanding the classification of costs enables managers to make strategic decisions related to cost control, cost assignment, and investment planning. Proper analysis of machinery investments and vehicle fleet acquisitions critically influences a company's profitability and operational efficiency, especially when factoring in interest rates, salvage values, and operational costs.
References
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