Question

The Dial Company specializes in producing a set of wood patio furniture consisting of a table and four chairs. The set enjoys great popularity, and the company has ample orders to keep production going at its full capacity of 2,000 sets per year. Annual cost data at full capacity follow:

Direct labor Advertising Factory supervision. Property taxes, factory building Sales commissions. Insurance, factory Depreciation, administrative office equipment Lease cost, factory equipment Indirect materials, factory ... Depreciation, factory building Administrative office supplies (billing) Administrative office salaries ... Direct materials used (wood, bolts, etc.) Utilities, factory .. $118,000 $50,000 $40,000 $3,500 $80,000 $2,500 $4,000 $12,000 $6,000 $10,000 $3,000 $60,000 $94,000 $20,000

The patio sets are normally sold for $400 per set. Dial can increase capacity by 1,000 units to 3,000 units but must pay $50,000 to do so.

Annual cost data for the production of 2,000 sets are classified as follows:

1. Please prepare a contribution margin income statement at normal capacity and label the income statement as Figure 1. Please show the following format and show columns for totals and per unit. Assume that sales are priced at the normal price.

2. Do total fixed costs change for a relevant range of zero to 2,000 units? Why or why not?

What is the variable cost per unit and what are the total variable costs for 2,000 units?

Please explain your calculations and reference to the chart in Figure 1.

Answer 1

Answer:-. Contribution margin. IN.($)

Total at 2000 Units per unit

Sales 800000. 400

Less:- variable cost.

Direct labour 118000

Direct material 94000

Sales commission. 80000

Indirect materials 6000

Admin office supplies. 3000

Utility factory 20000. 321000. 160.5

Contribution. 479000. 239.5

Less:- Fixed cost

Advertising 50000

Factory supervision. 40000

Property and taxes 3500

Insurance, Factory. 2500

Depreciation,administrative

Office equipment. 4000

Lease cost and Factory

Equipment. 12000

Depreciation Factory

Building. 10000

Administration office

Salary. 60000. 182000. 91

Operating Income. 297000. 148.5

Assuming the sales and demand for the product is 2000 units, then the company should follow cost plus method. As per the chart given above the Total Fixed cost per unit is $91 where as the Total variable cost per unit is $239.5 which totals to $330.5 ,Therefore the minimum price to cover all the costs are $330.5 The company can set any price other higher than this to cover a profit.

Minimum price = Total cost / Total number of units

= 321000 + 182000/2000

= 503000/2000

= 251.5

The company has an offer to increase the capacity by 1000 units by incurring extra cost of 50000 which equals to $50 per unit and the contribution stand at $239.5 which is enough to cover for additional cost. Hence the company should consider increasing the capacity by incurring extra cost of $50000.