Question

1. Cost Classification: The Lee’s have provided you with the following costs and relevant information that are assumed for year 20XY.

A. Classify each of the costs (a. through j.) below under C. as a variable cost or a fixed cost.

B. Explain the importance of distinguishing between variable and fixed costs.

C. Prepare a budgeted income statement, assuming 600 units to be produced and sold, a per unit selling price of $85, an income tax rate of 28% and the following information.

1. 1. Cost of goods sold of $35 per unit
   2. Labor = $400/month
      • One part-time employee will be hired to take care of packaging and shipping. This employee will be paid $10 per hour. He or she is estimated to work 40 hours total per month.
   3. Advertising fees = $3,000
   4. Bank fees = $200
   5. Phone/internet = $150 per month
   6. Shipping = $3 per unit
   7. Utilities = $100 per month
   8. Office Supplies = $900
   1. Conference Exhibitor Fee = $3000
   10. Travel Expenses for Conference (e.g. airfare, meals, taxi) = $1200
2. Budget Preparation: The Lees believe that production and sales could double after being on Shark Tank which is scheduled in December of 20XY. They want to be prepared for this. Based on the budgeted income statement calculated above for 20XY, create a new budgeted income for 20XZ assuming that the production and sales is double the level of 20XY.

Answer 1

Budget Particulars Production Units Sale Price p.u Relevant Cost Amount Remarks Amount 1,200 85.00 85.00 a- Cost of Goods Sold 35.00 35.00 Labors are temporary in nature and are hired as and when required for business. Such labors would be retrenched if not in use. Hence cost of such labor is variable. ($400/600 Units 0.667 S/unit) b- Labor 0.67 0.67 f- shipping Contribution per unit Total Contribution 3.00 46.33 27,800.00 3.00 46.33 55,600.00 10 12 Employees are hired on contract basis, which could not be terminated as per business requirements in short term. Payment to such emplyees are comitted cost and hence treated as fixed cost $10 per hour X 40 hours per month $400 per month Part time employee 400.00 400.00 13 c. Advertising Fees d. Bank fee e. Phone/internet g- Utilities h- Office Supplies i- Confrence exhibitor fee 3,000.00 200.00 150.00 100.00 900.00 3,000.00 1,200.00 18,850.00 5,278.00 13,572.00 3,000.00 200.00 150.00 100.00 900.00 3,000.00 1,200.00 46,650.00 13,062.00 33,588.00 15 16 17 18 19 Travel Expense Less: Tax @28% Net Profit after Tax 23

Answer to Part b- A variable cost is a company's cost that is associated with the amount of goods or services it produces. A company's variable cost increases and decreases with its production volume. When production volume goes up, the variable costs will increase. On the other hand, if the volume goes down, so too will the variable costs. A fixed cost is the other cost incurred by businesses and corporations. Unlike the variable cost, a company's fixed cost does not vary with the volume of production. It remains the same even if no goods or services are produced, and therefore, cannot be avoided.