Part A Fixed And Variable Costs Stuart Manufacturing Produce

Part A Fixed And Variable Coststuart Manufacturing Produces Metal Pic

Part A: Fixed and Variable Costs 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 70,000 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?

Paper For Above instruction

The decision-making process in manufacturing and production is deeply rooted in understanding the interplay between fixed and variable costs. Accurate estimation of these costs informs pricing strategies, beyond break-even analysis, and guides managerial choices regarding outsourcing and capital investments. This paper will analyze four scenarios—cost estimation, CVP analysis, and make-or-buy decisions—with the aim not only to evaluate financial implications but also to illustrate prudent managerial decision-making based on relevant costs and costs control.

Part A: Fixed and Variable Costs of Stuart Manufacturing

Stuart Manufacturing produces metal picture frames with no inventory beginning or ending periods, making cost estimation somewhat simplified due to the direct relationship between sales and costs. First, we determine the variable cost per unit by examining the change in total costs over the change in units sold between the two years. The fixed costs are derived from subtracting the total variable costs from total costs at either year’s sales level.

Last year, the company sold 50,000 units with sales of $800,000 and a cost of goods sold of $550,000. Similarly, this year, 70,000 units sold with sales of $1,120,000 and a COGS of unknown, but we can derive it via the gross margin. The gross margin was $250,000 in the previous year, indicating total production costs and sales figures are proportionally affecting margins. Given the absence of inventories, total costs are composed solely of manufacturing costs and selling expenses.

The variable cost per unit is estimated by analyzing the change in total costs over the change in units sold. From the income statements, gross margin is sales minus cost of goods sold; hence, total costs are the sales minus the gross margin. For last year, total costs amount to $800,000 - $250,000 = $550,000, coinciding with cost of goods sold since no inventories exist. For this year, total costs equal $1,120,000 - $250,000 + increase in other expenses. Calculations reveal that the total fixed costs can be separated out by subtracting the total variable costs based on units sold. The variable cost per unit thus approximates to $11, derived from the changes observed across the two years, and the fixed costs are estimated by subtracting total variable costs from total costs.

Further, contribution margin is calculated as sales minus variable costs, resulting in a higher estimate aligning with the increased sales volume in the current year. The increase in contribution margin underscores the company's scalability and the importance of understanding fixed costs for profitability analysis.

Part B: Cost-Volume-Profit (CVP) Analysis for Belli-Pitt, Inc.

Belli-Pitt's monthly operational data highlight the importance of contribution margin and fixed expenses analysis in determining break-even points and target profit sales. The contribution margin ratio, computed as contribution margin divided by sales, is fundamental. Here, a contribution of $180,000 over sales of $540,000 gives a 33.33% contribution margin ratio. Using this ratio, the break-even point in dollars is obtained by dividing fixed expenses by the contribution margin ratio, resulting in $360,000.

Next, the break-even sales in kilograms depend on the per-kilogram contribution margin, which is derived by dividing contribution margin ($180,000) by units sold (120,000 kg), yielding $1.50 per kg. The break-even in kilograms is fixed expenses divided by contribution margin per kg, equaling 80,000 kg. To achieve a net operating income of $90,000, contribution margin must cover fixed expenses plus the additional desired income, which increases the required contribution margin to $210,000. This translates into higher sales in kilograms, calculated via the per-unit contribution margin.

The margin of safety in dollars illustrates how much sales can decline before the company incurs a loss, equal to actual sales minus break-even sales, and is a measure of risk cushion. Given the sales of $540,000, and the break-even sales in dollars of $360,000, the margin of safety is $180,000.

Regarding leasing versus royalty arrangements, the leasing cost of $20,000 per month is compared with the royalty payment based on processed kilograms at $0.10 per kg. The alternative is evaluated based on variable costs and the impact on profitability. The break-even and profit scenarios under the royalty plan are calculated similarly, emphasizing the importance of analyzing the contribution margin from the royalty payments versus leasing costs.

Part C: Relevant Cost Analysis for Gottshall Inc.

Gottshall's outsourcing decision hinges on the comparison between internal production costs and external purchase costs. The unit cost internally, $94.10, includes direct materials, direct labor, and applied manufacturing overhead. The owner must consider that outside supply costs are $78 per unit, which is significantly lower than the internal cost. Given the company’s idle capacity, variable costs such as direct materials, direct labor, and variable manufacturing overhead are avoidable, making outsourcing a financially advantageous decision.

Calculating total cost per unit excluding fixed overhead components that do not change with production volume, the variable costs sum to $21.00 + $40.80 + $32.30 = $94.10, matching the internal cost, indicating that external costs are competitive. Since the fixed overhead is unavoidable and allocated, outsourcing yields potential savings, especially considering the capacity is underutilized.

Thus, it is financially attractive to outsource component P0, provided quality remains consistent, and there are no hidden costs. The decision thereby reduces internal manufacturing burden and potentially boosts profitability without affecting the company's fixed costs.

Part D: Make-or-Buy Decision for Broce Corporation

The detailed cost breakdown for producing Part U67 reveals significant variable costs, including direct materials, direct labor, and variable overhead, totaling $14.70 per unit. Fixed costs, such as supervisor’s salary and depreciation, total to $9.20 per unit, but since they are unaffected by outsourcing, they do not influence the decision. The company's offer at $21.40 per unit becomes the focal point.

By comparing internal costs with the outside purchase price, the variable cost per unit of $14.70 versus the $21.40 offer indicates that producing internally is more cost-effective for each unit, especially since the supervisor’s salary and variable costs are avoidable if purchasing externally. The change in net operating income, should the purchase be made, improves as variable costs are eliminated while fixed costs remain unchanged, apart from minor savings related to avoided supervisor salaries.

In conclusion, the firm should purchase Part U67 externally if the purchase price remains below the total relevant costs of internal production, which in this case includes only avoidable costs. The analysis suggests it is advantageous to buy externally, freeing resources and reducing expenses, thereby increasing overall profitability.

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