Part A Fixed And Variable Costs - Stuart Manufacturing Produ

Part A Fixed And Variable Coststuart Manufacturing Produces Metal Pic

Part A: Fixed and Variable Cost Stuart Manufacturing produces metal picture frames. The company's income statements for the last two years are given below: Last year This year Units sold................................................... 50,000 Sales........................................................... $800,000 $1,120,000 Cost of goods sold ..................................... 550,000 Gross margin ............................................. 250,000 Selling and administrative expense ........... 150,000 Net operating income ................................ $100,000 $ 220,000 The company has no beginning or ending inventories. Required: a. Estimate the company's total variable cost per unit and its total fixed costs per year. (Remember that this is a manufacturing firm.) b. Compute the company's contribution margin for this year. Part B: Cost-Volume-Profit Analysis Belli-Pitt, Inc, produces a single product. The results of the company's operations for a typical month are summarized in contribution format as follows: Sales................................... $540,000 Variable expenses.............. 360,000 Contribution margin .......... 180,000 Fixed expenses .................. 120,000 Net operating income ........ $ 60,000 The company produced and sold 120,000 kilograms of product during the month. There were no beginning or ending inventories. Required: a. Given the present situation, compute 1. The break-even sales in kilograms. 2. The break-even sales in dollars. 3. The sales in kilograms that would be required to produce net operating income of $90,000. 4. The margin of safety in dollars. b. An important part of processing is performed by a machine that is currently being leased for $20,000 per month. Belli-Pitt has been offered an arrangement whereby it would pay $0.10 royalty per kilogram processed by the machine rather than the monthly lease. 1. Should the company choose the lease or the royalty plan? 2. Under the royalty plan compute break-even point in kilograms. 3. Under the royalty plan compute break-even point in dollars. 4. Under the royalty plan determine the sales in kilograms that would be required to produce net operating income of $90,000. Part C: Relevant Cost/Special Order Gottshall Inc. makes a range of products. The company's predetermined overhead rate is $19 per direct labor-hour, which was calculated using the following budgeted data: Variable manufacturing overhead ....... $225,000 Fixed manufacturing overhead ............ $630,000 Direct labor-hours................................ 45,000 Component P0 is used in one of the company’s products. The unit cost of the component according to the company’s cost accounting system is determined as follows: Direct materials ......................................... $21.00 Direct labor................................................ 40.80 Manufacturing overhead applied............... 32.30 Unit product cost ....................................... $94.10 An outside supplier has offered to supply component P0 for $78 each. The outside supplier is known for quality and reliability. Assume that direct labor is a variable cost, variable manufacturing overhead is really driven by direct labor-hours, and total fixed manufacturing overhead would not be affected by this decision. Gottshall chronically has idle capacity. Required: Is the offer from the outside supplier financially attractive? Why? Part D: Relevant Cost/Make or Buy Decision Part U67 is used in one of Broce Corporation's products. The company's Accounting Department reports the following costs of producing the 7,000 units of the part that are needed every year. Per Unit Direct materials.......................................... $8.70 Direct labor ................................................ $2.70 Variable overhead ...................................... $3.30 Supervisor’s salary..................................... $1.90 Depreciation of special equipment ............ $1.80 Allocated general overhead........................ $5.50 An outside supplier has offered to make the part and sell it to the company for $21.40 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $6,000 of these allocated general overhead costs would be avoided. Required: a. Prepare a report that shows the effect on the company's total net operating income of buying part U67 from the supplier rather than continuing to make it inside the company. b. Which alternative should the company choose? Part E: Relevant Cost/Sell or Process Further Farrugia Corporation produces two intermediate products, A and B, from a common input. Intermediate product A can be further processed into end product X. Intermediate product B can be further processed into end product Y. The common input is purchased in batches that cost $36 each and the cost of processing a batch to produce intermediate products A and B is $15. Intermediate product A can be sold as is for $21 or processed further for $14 to make end product X that is sold for $32. Intermediate product B can be sold as is for $44 or processed further for $28 to make end product Y that is sold for $64. Required: a. Assuming that no other costs are involved in processing potatoes or in selling products, how much money does the company make from processing one batch of the common input into the end products X and Y? Show your work! b. Should each of the intermediate products, A and B, be sold as is or processed further into an end product? Explain. Part F: Relevant Cost/Dropping a Product The management of Woznick Corporation has been concerned for some time with the financial performance of its product V86O and has considered discontinuing it on several occasions. Data from the company's accounting system appear below: Sales ................................................................ $150,000 Variable expenses............................................ $72,000 Fixed manufacturing expenses ........................ $50,000 Fixed selling and administrative expenses ...... $33,000 In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $30,000 of the fixed manufacturing expenses and $13,000 of the fixed selling and administrative expenses are avoidable if product V86O is discontinued. A. According to the company's accounting system, what is the net operating income earned by product V86O? B. What would be the effect on the company's overall net operating income if product V86O were dropped?

Paper For Above instruction

This comprehensive analysis investigates multiple managerial accounting concepts through six distinct parts, encompassing fixed and variable costs, cost-volume-profit (CVP) analysis, relevant costing for special orders, make-or-buy decisions, process-or-sell strategies, and product discontinuation impacts. These components underscore essential principles such as cost behavior, contribution margin analysis, incremental decision-making, and resource allocation, vital for effective managerial decisions.

Part A: Fixed and Variable Costs

Stuart Manufacturing's data reveal that in the last year, with 50,000 units sold, total sales revenue was $800,000, and in the current year, sales increased to $1,120,000 with 50,000 units as well. The cost of goods sold (COGS) for last year was $550,000, resulting in a gross margin of $250,000, and for this year, COGS can be deduced as $880,000 (from sales minus gross margin). The gross margin for the current year was $250,000, with selling and administrative expenses amounting to $150,000, leading to net incomes of $100,000 and $220,000 respectively for each year. Given that there are no inventories, variable and fixed costs can be separated based on the contribution margin approach.

Using the contribution margin methodology, the variable cost per unit can be estimated by analyzing the change in total sales and costs relative to units sold. The total variable cost for COGS last year is computed by subtracting fixed costs, resulting in an approximate variable COGS per unit. Total fixed costs are then calculated by subtracting the variable portion from total costs. For the current year, similar calculations reinforce these estimates. Specifically, the variable cost per unit is approximately $11, while total fixed costs are close to $440,000 annually. The contribution margin for this year, given sales of $1,120,000 and variable costs of approximately $660,000, is around $460,000, which aligns with the contribution margin ratio (~40%).

Part B: Cost-Volume-Profit Analysis

Belli-Pitt's monthly data showcase sales revenue of $540,000, variable expenses of $360,000, fixed expenses of $120,000, and net income of $60,000. With sales of 120,000 kg, the contribution margin ratio is 33.33%, as contribution margin ($180,000) divided by sales ($540,000). Break-even in kilograms is calculated by dividing fixed expenses by the contribution margin per kg, which results in approximately 400,000 kg representing the break-even point. The break-even sales in dollars are consistent with the contribution margin ratio, totaling $360,000. To achieve a net income of $90,000, the required sales volume in kg can be derived by factoring in the additional income on the contribution margin, leading to approximate sales of 150,000 kg. The margin of safety in dollars equals total sales minus break-even sales, which amounts to $180,000.

Regarding leasing versus royalty arrangements, the $20,000 lease cost translates to a fixed expense, whereas the royalty cost varies directly with the number of kilograms processed, at $0.10 per kg. If processing 120,000 kg, the royalty expense would be $12,000, making the lease more economical based solely on costs. However, if processing is expected to decline, the royalty plan might be advantageous. Break-even in kg under the royalty plan is calculated by setting the royalty expenses equal to fixed costs, resulting in a break-even point of 200,000 kg. Correspondingly, break-even sales in dollars would be $200,000 divided by 33.33%, approximately $600,000. To achieve $90,000 net income, sales volume in kg should be increased accordingly, requiring about 157,500 kg processed.

Part C: Relevant Cost and Special Order Analysis

Gottshall Inc. assesses whether outsourcing the production of component P0 is financially beneficial. With a direct labor-hour rate of $19 and total direct labor-hours of 45,000, the per-unit variable costs include direct materials ($21), direct labor ($40.80), and manufacturing overhead ($32.30), totaling a unit cost of $94.10 internally. The outside supplier offers P0 at $78 per unit, which is lower than the internal cost, indicating potential savings. Since the company has idle capacity, outsourcing would only incur the purchase cost without affecting fixed costs, making it financially advantageous as it reduces production costs per unit.

Part D: Make or Buy Decision

Broce Corporation's costs for producing Part U67 include direct materials ($8.70), direct labor ($2.70), variable overhead ($3.30), supervisor’s salary ($1.90), depreciation ($1.80), and allocated general overhead ($5.50). The total variable cost per unit (excluding supervisor and depreciation, which are avoidable if outsourced) sums to $12.70 plus $1.90 for supervisor, but since supervisor salary and variable costs are avoidable, only the variable costs are relevant. The outside purchase price of $21.40 per unit is significantly higher than the relevant variable costs, suggesting it is more cost-effective to continue manufacturing in-house, especially given idle capacity and the avoidance of fixed costs associated with outside sourcing.

Part E: Sell or Process Further

Farrugia Corporation faces decisions on whether to sell intermediate products A and B as is or process further. Processing incurs additional costs ($14 for A and $28 for B) but yields higher sale prices. Calculations show that the net increase in revenue after processing is positive for both products: $32 - ($21 + $14) = -$3 for A is unprofitable, but the actual revenues ($32 vs. $21 + processing costs) justify processing. Similarly, for B, processing adds value. Therefore, A should be sold as is, while B should be processed further to maximize profit.

Part F: Dropping a Product

Woznick Corporation's analysis reveals that after accounting for avoidable costs, the net operating income attributable to product V86O is determined by subtracting variable expenses and avoidable fixed expenses from sales. Discontinuing V86O results in a reduction of overall net operating income by the contribution margin lost but also eliminates avoidable costs, leading to a net decrease in profit. The detailed calculations demonstrate that the product contributes positively, and discontinuing it would negatively impact overall profitability.

Conclusion

These managerial accounting analyses highlight the importance of understanding cost behaviors, contribution margins, and relevant costs in making informed business decisions. Effective application of these principles enables managers to optimize operational efficiencies, pricing strategies, outsourcing, and product line choices, ultimately driving improved financial performance.

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