Question

Peter Kanakarian has decided to open a printing shop. He has secured two contracts: (1) a five-year contract to print a popular regional magazine (5,000 copies each month), and (2) a three-year agreement to print tourist brochures for the province (10,000 brochures per month).

Peter has rented a building for $1,400 per month. His printing equipment was purchased for $40,000 and has a life expectancy of 20,000 hours with no salvage value. Depreciation is assigned to a period based on the hours of usage. Peter has scheduled the delivery of the products so that two production runs are needed. In the first run, the equipment is prepared for the magazine printing. In the second run, the equipment is reconfigured for brochure printing. It takes twice as long to configure the equipment for the magazine setup as it does for the brochure setup. The total setup costs per month are $600.

Insurance costs for the building and equipment are $140 per month. Power to operate the printing equipment is strongly related to machine usage. The printing equipment causes virtually all the power costs. Power costs will run $350 per month. Printing materials will cost $0.40 per copy for the magazine and $0.08 per copy for the brochure. Peter will hire workers to run the presses as needed (part-time workers are easy to hire). He must pay $10 per hour. Each worker can produce 20 copies of the magazine per printing hour or 100 copies of the brochure. Distribution costs are $500 per month. Peter will receive a salary of $1,500 per month. He is responsible for personnel, accounting, sales, and production—in effect, he is responsible for administering all aspects of the business.

1.  What are the total monthly manufacturing costs?
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2.  What are the total monthly prime costs?
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What are the total monthly prime costs for the regional magazine?
$fill in the blank 00de6303ffbd061_3

For the brochure?
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3.  What are the total monthly conversion costs? Suppose Peter wants to determine monthly conversion costs for each product. Assign monthly conversion costs to each product using direct tracing and relationship tracing whenever possible. For those costs that cannot be assigned using a tracing approach, you may assign them using direct labour hours. Enter amounts as positive numbers. Do not round any divisions.

4.  Peter receives $1.80 per copy of the magazine and $0.45 per brochure. Prepare an income statement for the first month of operations.

Answer 1

other Cost
Distribution Cost	500
Peter Salary	1500
Total	2000
Direct cost	Magazine	Brochure	Total
Units produce	5000	10000
Set up cost	400	200	600
Printing Material cost	2000	800	2800
	(0.40*5000)	(0.08*10000)
Labor cost (working note)	2500	1000	3500
Power cost (Working Note)	250	100	350
Prime Cost	5150	2100	7250
Building Rent	1000	400	1400
Depreciation (working note)	500	200	700
Building Insurance	100	40	140
Total Manufacturing Cost	6750	2740	9490
Calculation of direct labour cost
Labour cost	10 per hour
	Magazine	Brochure	Total
unit produced	5000	10000
unit produced per hour	20	100
Hours worked	250	100	350
Cost of labour	2500	1000	3500
Allocation of other costs
Particulars	Magazine	brochure	Total
Machine hours	250	100	350
power cost	250	100	350
	(350*250/350)	(350*100/350)
Building Rent	1000	400	1400
	(1400*250/350)	(1400*100/350)
Insurance	100	40	140
	(140*250/350)	(140*100/350)
Calculation of Depreciation of Equipment
Equipment purchased	40000
Hours of usage	20000
Depreciation per hour	2
Magazine	500	(2*250)
Brochure	200	(2*100)
Total Monthly Manufacturing Cost		9490
Total monthly Prime Cost		7250
prime cost of Magazine		5150
Prime Cost of Brochure		2100
Total Monthly Conversion Cost	(Total Manufacturing Cost -Material Cost)	6690
Conversion Cost of Magazine		4750
Conversion Cost of Brochure		1940
Income statement
Peter Kankarian Printing Shop
Income statement
Particulars		Amount
Revenue
Magazine	18000
Brochure	2250	20250
less : expenses
Direct Material	2800
Direct labour	3500
setup Cost	600
depreciation on equipement	700
Power Cost	350
Building rent	1400
Building Insurance	140
Distribution Cost	500
salary to peter	1500	11490
Net income		8760