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2.

All of the costs you have listed above, except one, would be differential costs between the alternatives of Staci producing pottery or staying with the aerospace company. Which cost is not differential? Explain. PROBLEM 221 Schedule of Cost of Goods Manufactured; Income Statement; Cost Behavior

$20,000.00

$10,000.00 $45,000.00

Superior Company Schedule of Cost of Goods Manufactured For the Year Ended December 31 Direct materials: Raw materials inventory, beginning (given) $40,000

Add: Purchases of raw materials (given) Raw materials available for use Deduct: Raw materials inventory, ending (given)

290,000 330,000 10,000

Raw materials used in production Direct labor Manufacturing overhead (given) Total manufacturing costs (given) Add: Work in process inventory, beginning Deduct: Work in process inventory, ending (given) Cost of goods manufactured

The cost of goods sold section of the income statement follow Finished goods inventory, beginning (given) Add: Cost of goods manufactured Goods available for sale (given) Deduct: Finished goods inventory, ending Cost of goods sold (given)

These items must be computed by working backwards up thro

2 Direct materials: $320,000 40,000 units = $8.00 per unit. Manufacturing overhead: $270,000 40,000 units = $6.75 per unit. 3 Direct materials: $8.00 per unit. Manufacturing overhead: $270,000 50,000 units = $5.40 per unit. 4

The average cost per unit for manufacturing overhead droppe

Superior Company

e of Cost of Goods Manufactured

he Year Ended December 31

$320,000 93,000 * 270,000 683,000 42,000 * 725,000 35,000

$690,000

ds sold section of the income statement follows: $50,000

690,000 * 740,000 80,000 * $660,000

ust be computed by working backwards up through the statements.

: $320,000 40,000 units = $8.00 per unit. nits = $6.75 per unit.

: $8.00 per unit. nits = $5.40 per unit.

st per unit for manufacturing overhead dropped from $6.75 to $5.40 because of the increase in production between the two years. Because

etween the two years. Because fixed costs do not change in total as the activity level changes, the average cost per unit will decrease as the

er unit will decrease as the activity level rises.

CASE 518 Analysis of Mixed Costs in a Pricing Decision [ LO1 , LO2 or LO3 or LO5 ] Maria Chavez owns a catering company that serves food and beverages at parties and business functions. Chavezs business is seasonal, with a heavy schedule during the summer months and holidays and a lighter schedule at other times. One of the major events Chavezs customers request is a cocktail party. She offers a standard cocktail party and has estimated the cost per guest as follows:

The standard cocktail party lasts three hours and Chavez hires one worker for every six guests, so that works out to one-half hour of labor per guest. These workers are hired only as needed and are paid only for the hours they actually work. When bidding on cocktail parties, Chavez adds a 15% markup to yield a price of about $31 per guest. She is confi dent about her estimates of the costs of food and beverages and labor but is not as comfortable with the estimate of overhead cost. The $13.98 overhead cost per labor-hour was determined by dividing total overhead expenses for the last 12 months by total labor-hours for the same period. Monthly data concerning overhead costs and labor-hours follow:

1. Estimate the contribution to profit of a standard 180-guest cocktail party if Chavez charges her usual price of $31 per guest. (In other words, by how much would her overall profit increase?)

In order to give a proper estimate of contributions to profit of the charity event, here are the estimates of the variable for the cos of catering for the event. The costs of food, beverages, and labor are all apparently variable with respect to the number of guest However, the situation with respect to overhead expenses is less clear. A good first step is to plot the labor hour and overhead expense data in a scattergraph as shown below.

$90,000 $80,000

ad Expenses

$70,000 $60,000 $50,000 $40,000

$80,000

Overhead Expenses

$70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 0 2,000 4,000 Labor Hours 6,000 X 8,000

Labor Hours High level of activity Low level of activity Change Variable cost = 7,500 2,500 5,000 Change in cost

Overhead Expense $77,000 55,000 $22,000 = $22,000 5,000 labor hours

Change in activity = $4.40 per labor-hour

Fixed cost element = Total cost Variable cost element = $77,000 $4.40 per labor-hour 7,500 labor-hours = $44,000 The total variable cost per guest is computed as follows: Food and beverages Labor (0.5 hour $10.00 per hour) Overhead (0.5 hour $3.95 per hour) Total variable cost per guest

$15.00 5

1.98 $21.98

And the total contribution from 180 guests paying $31 each is computed as follows:

Sales (180 guests $31.00 per guest) Variable cost (180 guests $21.98 per guest)

$5,580.00

3,956.40

Contribution profits 2

$1,623.60

Assuming that no additional fixed costs are incurred as a result of catering the charity event, any price

I would lean towards bidding slightly less than $30 to get the contract. Any bid above $22 would contribute the contribution to profit, catering the event would show off the companys capabilities to potential clien future or it might embroil the company in a price war among caterers. However, the price need not be pu Another possibility would be for Maria to maintain her normal price but throw in additional services at no Maria will have to decide after getting to know the pers

X 8,000

ering the charity event, any price greater than the variable cost per guest of roughly $22 would contribute to profits.

Any bid above $22 would contribute to ct. And apart from the contribution to ential clients. The danger is that a price t might embroil the company in a price lower price could be justified to future

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