Question

Problems 1 and 2 relate to this information: The current monthly income statement for LLT, Inc., represents the results of selling 12,000 coffee mugs: Sales (revenue) $84,000 Cost of goods sold (45,000) Gross margin $ 39,000 S & A expenses (30,000) Income before taxes $ 9,000 Income taxes (@ 30%) (2,700) Net income $ 6,300 Cost of goods sold included fixed manufacturing costs of $9,000 and selling and administrative expenses (S & A) included $12,000 of fixed costs. Sales commissions amounting to $.50 per coffee mug were also included in S & A expenses. Hint: "Net income" is after income taxes.

Answer 1

Calculation of Variable Costs
	Amount in $
Cost of Goods Sold	45000
Less: Fixed Manufacturing Cost	9000
(a)	36000
S & A Expenses	30000
Less: Fixed Selling & Adm. Expenses	12000
Less: Sales Commission($.50 * 12000)	6000
(b)	12000
Total Variable Cost ((c) = (a)+(b)	48000
No. of Coffee Mugs sold	12000
Variable Cost per unit	4
Additional cost for placing a special 'Lyric Design'	0.6
Total Variable cost per unit for special order (d)	4.6
Fixed Cost
Additional Fixed Cost for Special Order	1350
No. of Coffee Mugs in Special Order	1500
Fixed cost per unit in special order (e)	0.9
Total Cost (d)+ (e)	5.5
LLT should charge $ 5.5 each mug from Lyric, as at this point there will be no gain or loss.