Question

Must be completed using Excel.

The Bertrand company manufactures radiators for the automotive industry. It sells its entire annual production of 80,000 units at a price of $ 80 per unit. The company wishes to assess the possibility of modifying its manufacturing process. This modification would reduce direct labor time by 30 minutes, which represents 25% of the time required in Direct Labour per unit. Currently, the time required to make a radiator is 2 hours and the hourly rate is $ 12 / hour. In addition, this would influence variable manufacturing overheads, as it has been established that these vary according to direct labor time. In return, fixed manufacturing overhead costs would increase by $ 240,000 per year.

Additional data:

Raw materials: $ 10 per unit

Direct Labour rate: $ 12 per hour

General manufacturing costs: Variable: $ 8 an hour & Fixed: $ 720,000

Selling fees: Variable: 10% of the sale price & Fixed: $ 640,000

As the company sells all of its production, there is no inventory of the start and end.

We ask :

A) Prepare a global analysis by presenting it using the full cost method

B) Prepare a global analysis by presenting it using the variable cost method

C) Prepare a differential analysis of the effects of this change

D) If the inventory at the start was 5,000 units and the inventory at 8,500 units, what would have been the difference in profit between the full cost method and the variable cost method? Use the current situation figures to do your calculations.

Answer 1

Part -A

Global analysis by full cost method (present )
Particulars	Computation	Amount
Sales	80000 units*$80	$ 6400000
Less: Cost of goods sold
1. Direct material $ 10
2. Direct Labour ( 2 hours*12)= $ 24
3. manufacturing variable cos $8 /hour= $ 16
Total     $ 50	80000 units *$50	$ 4000000
Less: Fixed manufacturing cost ($ 720000 given)		$ 720000
Gross Profit		$1680000
Less: Variable selling expense(10% of selling price 80)	80000 units *$8	$640000
Fixed selling expense ( $640000 given )		$640000
Net profit		$400000

Part -B

Global analysis by Variable cost method (proposed change)
Particulars	Computation	Amount
Sales	80000 units*$80	$ 6400000
less : variable cost goods sold
1. direct material                                                       $10
2. Direct Labour ( 1.5 hours*12)=                         $ 18
3. manufacturing variable cos $8 /hour              $ 12
Total           $ 40	80000 units *$40	$ 3200000
Contribution		$3200000
Less :Variable selling cost (80000*8)		$640000
Fixed manufacturing cost ($ 720000 given)		$ 720000
Fixed selling expense ( $640000 given )		$640000
Profit		$1200000

Part -C

Differential analysis of the effects of this change

Present		After change
full cost method	$400000	full cost method	$1040000
variable cost method	$960000	variable cost method	$1600000

Part -D

If the inventory at the start was 5,000 units and the inventory at 8,500 units, The difference in profit between the full cost method and the variable cost method?

Full cost method
Sales (80000*80)	$6400000
Less:
Cost of goods sold
Opening stock (5000*59)                                                         $295000
Add:Cost of production (80000+8500)-5000*59                $4926500
$5221500
Less: Closing stock 8500*59                                                   $501500
Cost of goods sold               $4720000	$4720000
Gross Profit	$1680000
Less :Variable selling expense(10% of selling price 80)	$640000
Fixed selling expense ( $640000 given )	$640000
	$400000
Add:Over absorbtion 83500*9-720000	$31500
Net profit	431500

Variable cost method
Sales (80000*80)	$6400000
Less:
Cost of goods sold
Opening stock (5000*50)                                                 $250000
Add:Cost of production (80000+8500)-5000*50        $4175000
$4425000
Less: Closing stock 8500*50                                         $425000
Cost of goods sold         $4000000	$4000000
Contribution	$2400000
Less :Variable selling cost (80000*8)	$640000
Fixed manufacturing cost ($ 720000 given)	$ 720000
Fixed selling expense ( $640000 given )	$640000
Profit	$1200000
Units manufactured dyruing the year 80000+8500(closing)-5000(opening)=83500

Breakup of Cost 59

1. Direct material $ 10

2. Direct Labour ( 2 hours*12)= $ 24

3. manufacturing variable cos $8 /hour= $ 16

Total       $ 50

Add:720000/80000*2(Fixed manufacturing expense)