Question

Anand Limited manufactures drones for industrial use. Most of their costs are either true variable or fixed costs. However, an account analysis shows that the following items are mixed costs.

Account	Analysis	2016 Total Cost
Product supervision	80% fixed	$150,000
Utilities	20% fixed	$60,000
Sales staff wages	70% fixed	$200,000
Quality control inspections	90% fixed	$40,000

The 30% variable portion relates to sales commissions based on total sales. 50% of manufactured units are inspected each year.

In 2016, Anand Limited produced and sold 500 drones at $2,000 each.

Required:

1. Management expects to sell 700 drones in 2017, does not anticipate any cost increase due to inflation, and plans to maintain the sales price at $2,000 per drone. Estimate total costs for each of the mixed cost items above. Be sure to show how the variable and fixed components of the total cost.

2. Assuming direct materials costs are $500 per unit and direct labor costs are $250 per unit, calculate the expected contribution margin for 2017 based on sales of 700 drones.

Answer 1

Answer for 1)

Account	fixed portion	Fixed	Variable	Total
Product Supervision	80%	$120000 ($150000×80%)	$42000 ($150000×20%×700units/500units)	$162000
Utilities	20%	$12000 ($60000×20%)	$67200 ($60000×80%×700 units/500 units)	$79200
Sales staff salaries	70%	$140000 ($200000×70%)	$84000* ($200000×30%×700units/500units)	$224000
Quality control inspection	90%	$36000 ($40000×90%)	$5600 ($40000×10%×(700units×50%)/(500units×50%)	$41600
Total		$308000	$198800	$506800

* At sales price remaining constant, the sales commission will be proportion of no. Of units

Answer for 2)

Contribution margin:

Particulars	$
Sales (700 units×$2000)	$1400000
(Less) direct material (700 units×$500)	$350000
(Less) direct labour (700 units×$250)	$175000
(Less) variables costs (given above)	$198800
Contribution margin	$676200