Cost Classification The Lees Have Provided You With The Foll

Cost Classificationthe Lees Have Provided You With The Following Cos

Cost Classification: The Lees have provided you with the following costs and relevant information that are assumed for year 20XY. A. Classify each of the costs (a. through j.) below under C. as a variable cost or a fixed cost. B. Explain the importance of distinguishing between variable and fixed costs. C. Prepare a budgeted income statement, assuming 600 units to be produced and sold, a per unit selling price of $85, an income tax rate of 28% and the following information.

a. Cost of goods sold of $35 per unit

b. Labor = $400/month — One part-time employee will be hired to take care of packaging and shipping. This employee will be paid $10 per hour. He or she is estimated to work 40 hours total per month.

c. Advertising fees = $3,000

d. Bank fees = $200

e. Phone/internet = $150 per month

f. Shipping = $3 per unit

g. Utilities = $100 per month

h. Office Supplies = $900

i. Conference Exhibitor Fee = $3,000

j. Travel Expenses for Conference (e.g., airfare, meals, taxi) = $. (Note: The specific amount for travel expenses appears missing—assuming it should be specified.)

Net Present Value: The Lees are considering adding a new piece of equipment that will speed up the process of building the bobble heads. The cost of the piece of equipment is $42,000. It is expected that the new equipment will lead to cash flows of $17,000, $29,000, and $40,000 over the next 3 years. If the appropriate discount rate is 12%, what is the NPV of this investment? Explain the findings.

Paper For Above instruction

The task involves two primary components: first, classifying specific costs as either variable or fixed, and second, analyzing the investment in new equipment using Net Present Value (NPV). Addressing these components requires an understanding of cost behavior, financial analysis, and investment appraisal methods. This paper will systematically classify each cost, discuss the importance of cost classification, and compute and interpret the NPV for the proposed equipment investment.

Cost Classification: Variable vs. Fixed

Accurate cost classification is essential in managerial accounting as it influences cost control, budgeting, and decision-making processes. Variable costs change proportionally with production volume, while fixed costs remain constant regardless of output within relevant ranges (Garrison, Noreen, & Brewer, 2018). Correctly identifying these costs helps managers understand how costs behave, will impact profit calculations, and informs strategic decisions such as pricing, product line selection, and capital investments.

Classifying the costs provided:

• a. Cost of Goods Sold (COGS) of $35 per unit: Variable cost. COGS varies directly with the number of units produced and sold. Since it is quoted per unit, it qualifies as a variable cost (Hansen & Mowen, 2019).
• b. Labor of $400/month: Fixed cost. This is a regular monthly expense not directly tied to production volume, especially given that a part-time employee working 40 hours at $10/hour incurs a predictable expense regardless of the number of units produced (Weygandt, Kimmel, & Kieso, 2019).
• c. Advertising fees of $3,000: Fixed cost. Advertising expenses are generally unvariable in the short term, remaining constant unless there's a strategic change.
• d. Bank fees of $200: Fixed cost. These fees tend to be recurring monthly expenses unaffected by production volume (Garrison et al., 2018).
• e. Phone/internet of $150 per month: Fixed cost. These are ongoing monthly fees regardless of sales volume.
• f. Shipping of $3 per unit: Variable cost. Shipping costs that are billed per unit sold are directly proportional to the number of units, categorizing them as variable (Hansen & Mowen, 2019).
• g. Utilities of $100 per month: Fixed cost. While some utilities may fluctuate with usage, for budgeting purposes, a fixed monthly estimate is often used unless detailed utility consumption data is available (Garrison et al., 2018).
• h. Office supplies of $900: Fixed cost. Office supplies are typically purchased periodically and are considered fixed expenses within the relevant period.
• i. Conference exhibitor fee of $3,000: Fixed cost. The fee is a set expense paid irrespective of sales volume.
• j. Travel expenses for conference: Variable or semi-variable. The specific expenses such as airfare and taxis usually depend on the number of attendees or travel distance, thus more variable. The precise classification depends on whether the amount was specified, but generally, travel expenses are considered variable (Weygandt et al., 2019).

  Importance of Distinguishing Between Variable and Fixed Costs

  Differentiating between variable and fixed costs is fundamental for effective managerial decision-making. Fixed costs influence break-even analysis, contribution margin calculations, and overall profitability analysis, enabling managers to understand the impact of scaling production or sales (Garrison et al., 2018). Conversely, variable costs are crucial for conducting marginal analysis, pricing strategies, and short-term decision making, as they fluctuate directly with sales volume. Additionally, understanding cost behavior assists in budgeting, forecasting, and variance analysis, which are vital for financial control and strategic planning (Hansen & Mowen, 2019). Moreover, accurate cost classification helps determine the contribution margin per unit, vital for evaluating product profitability and discontinuation decisions.

  Preparation of Budgeted Income Statement

  Assuming a production and sales volume of 600 units, with a selling price of $85 per unit, the budgeted income statement can be assembled by calculating revenue, cost of goods sold, gross profit, and deducting operating expenses. Applying a 28% income tax rate finalized the net income cycle.

  Revenue: 600 units x $85 = $51,000

  Cost of Goods Sold (COGS): 600 units x $35 = $21,000

  Gross Profit: $51,000 - $21,000 = $30,000

  Operating expenses comprise fixed costs such as advertising, bank fees, utilities, office supplies, exhibitor fees, and fixed portions of other expenses.

  • Advertising: $3,000
  • Bank fees: $200
  • Phone/Internet: $150 x 12 months = $1,800
  • Utilities: $100 x 12 months = $1,200
  • Office Supplies: $900
  • Exhibitor Fee: $3,000

  Variable expenses include COGS and shipping costs:

  • COGS (already included in gross profit): $21,000
  • Shipping: 600 units x $3 = $1,800

  Total operating expenses:

  $3,000 + $200 + $1,800 + $1,200 + $900 + $3,000 + $1,800 (shipping) = $12,700

  Operating Income before taxes:

  $30,000 - $12,700 = $17,300

  Income Tax (28%): $17,300 x 0.28 = $4,844

  Net Income:

  $17,300 - $4,844 = $12,456

  NPV Calculation for Equipment Investment

  The Net Present Value (NPV) method evaluates the profitability of an investment by discounting future cash flows at the appropriate rate and subtracting the initial investment. Here, the initial outlay is $42,000, and projected cash inflows over three years are $17,000, $29,000, and $40,000. Using a discount rate of 12%, the NPV is calculated as follows:

  NPV = (CF₁ / (1 + r)¹) + (CF₂ / (1 + r)²) + (CF₃ / (1 + r)³) - Initial Investment

  Where:

  • CF₁ = $17,000
  • CF₂ = $29,000
  • CF₃ = $40,000
  • r = 12% or 0.12

  Calculations:

  Present value of Year 1: $17,000 / (1 + 0.12)¹ ≈ $17,000 / 1.12 ≈ $15,179

  Year 2: $29,000 / 1.2544 ≈ $23,139

  Year 3: $40,000 / 1.4049 ≈ $28,477

  Total present value of cash flows: $15,179 + $23,139 + $28,477 = $66,795

  NPV = $66,795 - $42,000 = $24,795

  Interpretation:

  The positive NPV of approximately $24,795 indicates that the investment in the new equipment is financially viable and likely to add value to the business. The cash flows generated exceed the initial investment after discounting for the time value of money, suggesting profitability over the three-year period. This aligns with sound investment principles, where positive NPV projects should generally be accepted (Ross, Westerfield, & Jaffe, 2019).

  In sum, the classification of costs underscores the importance of understanding cost behavior in financial planning and decision-making. Meanwhile, the NPV analysis demonstrates how capital budgeting tools facilitate evaluating investment opportunities, ultimately aiding managers in making informed decisions that enhance long-term profitability and competitiveness.

  References

  • Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting (16th ed.). McGraw-Hill Education.
  • Hansen, D. R., & Mowen, M. M. (2019). Management Accounting (11th ed.). Cengage Learning.
  • Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2019). Financial & Managerial Accounting (next edition). Wiley.
  • Ross, S. A., Westerfield, R. W., & Jaffe, J. (2019). Corporate Finance (12th ed.). McGraw-Hill Education.
  • Drury, C. (2018). Management and Cost Accounting (10th ed.). Cengage Learning.
  • Horngren, C. T., Datar, S. M., & Rajan, M. (2018). Cost Accounting: A Managerial Emphasis (16th ed.). Pearson.
  • Anthony, R. N., Govindarajan, V., & Wan, H. (2019). Management Control Systems (14th ed.). McGraw-Hill Education.
  • Brigham, E. F., & Houston, J. F. (2019). Fundamentals of Financial Management (15th ed.). Cengage Learning.
  • Kaplan, R. S., & Norton, D. P. (2004). Strategy Maps: Converting Intangible Assets into Tangible Outcomes. Harvard Business Review.
  • Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset (2nd ed.). Wiley.