Question

Alexander Co. produces a plastic courtroom set that includes a judge’s bench, witness stand, jury box, and 25 people. The set is sold to exclusive children’s toy stores for $200. The company has the capacity to produce 20,000 sets per year. Per unit costs to produce and sell one set at that activity level follows:

Direct material cost per set                               $20

Direct labor cost per set                                    30

Variable manufacturing overhead per set                  40

Variable selling cost per set                              10

Fixed manufacturing overhead                         55                        ($1,100,000 per year)

Variable unit costs and total fixed manufacturing overhead costs are constant within the relevant range of 10,000 to 20,000 sets per year.

1. A prominent Washington D.C. store, which has not previously purchased from Alexander Co., has approached the marketing manager about buying 5,000 sets for $170 each. No selling expenses would be incurred on this offer, but the Washington D.C. store wants the set to include five plastic briefcases. This request means that Alexander Co. will incur an additional $2 variable manufacturing cost per unit, and an additional $5,000 fixed costs. The company is currently producing and selling 13,000 courtroom sets per year. What is the minimum amount per set that Alexander Co. should accept to produce the 5,000 sets?

$93? Please show work if this is correct

2. Alexander Co. has an ending finished goods inventory of 100 sets. The appropriate unit cost to use when presenting this inventory on Alexander Co's external balance sheet is: (Assume that these sets were produced in a period when the company operated at its 20,000 set capacity)

$145? Please show work if this is correct

3. Alexander Co. has 1,000 sets on hand that have some irregularities and therefore considered to be “seconds”. Due to the irregularities, it will be impossible to sell these units at normal selling price. What unit cost figure is relevant for setting a minimum selling price? (Assume that these sets were produced in a period when the company operated at its 20,000 set capacity).

$10? Please show work if this is correct

Answer 1

Answer 1: - Calculating Minimum Amount to be charged for special offer.

The Company is currently operating at 13000 sets instead of capacity of 20000 sets, hence it has ideal capacity of 7000 set.

Particulars	Cost per Set	Total Cost for 5000 Sets
Direct material cost per set	20	100000
Direct labor cost per set	30	150000
Variable manufacturing overhead per set	42	210000
Variable selling cost per set	0	0
Additional Fixed manufacturing overhead	1	5000
Minimum Amount per set	93	465000

Minimum Amount to be charged by Alexander Co. for the special Offer is $93 per set.

.

Answer 2: - Cost of Inventory in the Balance sheet

Value of inventory in the Balance sheet will be Lower of Cost or Net realizable Value.

Here Cost of inventory will be calculated as per Absorption costing Method. Further Cost of inventory does not include Administration cost and selling costs

Cost of Inventory using Absorption Costing

Particulars	Cost per Set	Total Cost of Producing 100 Sets
Direct material cost per set	20	2000
Direct labor cost per set	30	3000
Variable manufacturing overhead per set	40	4000
Fixed manufacturing overhead (Using Absorption Rate per Set)	55	5500
Variable selling cost per set	0	0
Cost Of Inventory	$145	$14,500

.

Calculating Net Realizable Value

Particulars	Cost per Set	Total Cost of Producing 100 Sets
Selling Price per Set	200	20000
Less:- Selling Cost per Set	(10)	(1000)
Net Realizable Value of Inventory	$190	$19,000

Therefore, The Value of Inventory in the Balance sheet will be @$ 145 per Set and Total Value of Inventory being $14500.

Answer 3: -

This Situation refers to waste units, here it is specified that Variable Selling cost of $10 will be incurred to sell the Set. Therefore, this selling cost will be relevant cost hence this cost needs to be recovered

Therefore, Minimum price to of selling the irregular units will be $ 10 per Set.