Question

Question 1a, 1b, 1c, 1d
Closet Links Clothing Company provided the following manufacturing costs for the month of June. Direct labor cost $ 138,000 Direct materials cost 87,000 Equipment depreciation (straight-line) 22,000 Factory insurance 16,000 Factory manager's salary 10,800 Janitor's salary 5,000 Packaging costs 19,600 Property taxes 16.000 From the above information, calculate Closet Link's total variable costs. O A. $244,600 O B. $314,400 O C. $69,800 O D. $225,000

Answer 1

Ans to Que 1
Values given in problem:
Direct labour Cost	138000
Direct Material Cost	87000
Equipment Depreciation (Straight Line)	22000
Factory Insurance	16000
Factory Manager's Salary	10800
Janitor's Salary	5000
Packaging Costs	19600
Property Taxes	16000
Computation of Closet Link's Total Variable Cost	Amount in $
Direct labour Cost	138000
Direct Material Cost	87000
Packaging Costs	19600
Total Variable Costs	244600
(A) $ 244600
Note:
1. Variable Cost vs. Fixed Cost: Variable Cost do not remain constant when sales/ production level change, on the other hand, fixed costs are costs that remain constant regardless of the sales/ production such as equipment depreciation, factory insurance, factory manager's salary, janitor's salary and property taxes. Therefore, theses expenses shall not be considered while calculating variable cost, as these are fixed & do not change with sales level.
Ans to Que 2
Assumptions of Cost-Volume-Profit(CVP) analysis.
There are several assumptions which are made for doing CVP analysis, some of them are as follows:
1. Total Fixed Costs are constant
2. Variable Cost per unit is constant
3. Sales Price per unit is constant
4. Everything produced is sold
5. Costs are only affected because activity changes
6. If a company sells more than one product, they are sold in the same mix
As per the assumptions given above only one assumption given in the problem is not the assumption of CVP analysis:
(D) The price per unit does not change as volume changes
As the fixed cost per unit vary as per the volume, however, the variable cost per unit remain constant, therefore, when the volume changes variable cost per unit will remain same but the fixed cost per unit will change as per the volume accordingly price will get affected with the change in fixed cost per unit as the volume change as the price is the composition of variable cost, fixed cost & profit/ loss.
Ans to Que 3
(B) Senstivity Analysis
is a 'What if' technique that estimates profit or loss results if sales price , cost, volume or underlying assumptions change.
Ans to Que 4	Amount in $
Sale price per unit	40
Variable cost per unit	15
Contribution per unit	25
No. of units sold	5000
Total Contribution	125000
Less Fixed Cost	10000
(B) Operating Profit	115000