Question

1.Alameda Instruments (AI) has offered to supply the Air Force with computer monitors at "cost plus 20 percent." AI operates a manufacturing plant that can produce 22,000 monitors per year, but it normally produces 20,000. The costs to produce 20,000 monitors follow:

	Total Cost			Cost per Monitor
Production costs:
Materials	$	1,340,000		$	67
Labor		1,600,000			80
Supplies and other costs that will vary with production		880,000			44
Indirect cost that will not vary with production		680,000			34
Variable marketing costs		1,600,000			80
Administrative costs (all fixed)		1,180,000			59
Totals	$	7,280,000		$	364

Based on these data, company management expects to receive $436.8 (= $364 × 120 percent) per monitor for those sold on this contract. After completing 2,000 monitors, the company sent a bill (invoice) to the government for $873,600 (= 2,000 monitors × $436.8 per monitor).

     The president of the company received a call from an Air Force auditor, who stated that the per monitor cost should be

Materials	$	67
Labor		80
Supplies and other costs that will vary with production		44
	$	191

    
Therefore, the price per monitor should be $229.2 (= $191 × 120 percent). The Air Force ignored marketing costs because the contract bypassed the usual selling channels.

Required:

What is the price per computer monitor that should be charged by Alameda Instruments under the following options for considering the cost basis of the monitors? (Round your intermediate calculations to 2 decimal places and your final answers to 2 decimal places.)

Options:

A.

Only the differential production costs are used as the cost basis.

B.

The total cost per monitor for normal production of 20,000 monitors are used as the cost basis.

C.

The total cost per monitor for production of 22,000 monitors, excluding marketing costs, are used as the cost basis.

D.

The total cost per monitor for production of 22,000 monitors, including marketing costs, are used as the cost basis.

2.

T-Comm makes a variety of products. It is organized in two divisions, North and South. South Division normally sells to outside customers but, on occasion, also sells to the North Division. When it does, corporate policy states that the price must be cost plus 20 percent to ensure a “fair” return to the selling division. South received an order from North Division for 300 units. South’s planned output for the year had been 1,200 units before North’s order. South’s capacity is 1,500 units per year. The costs for producing those 1,200 units follow:

	Total			Per Unit
Materials	$	116,400		$	97
Direct labor		56,400			47
Other costs varying with output		33,600			28
Fixed costs		540,000			450
Total costs	$	746,400		$	622

     Based on these data, South's controller calculated that the unit price for North's order should be $746.4 (= $622 × 120 percent). After producing and shipping the 300 units, South's sent an invoice for $223,920. Shortly thereafter, West received a note from the buyer at North's stating that this invoice was not in accordance with company policy. The unit cost should have been

Materials	$	97
Direct labor		47
Other costs varying with output		28
Total	$	172

The price per unit would be $206.4 (= $172 × 120 percent).

Required:

What is the total price for 300 units of products that should be charged by South Division under the following options for considering the cost basis of units? (Do not round intermediate calculations.)

Options:

A.	Use the full per unit cost for normal production of 1,200 units
B.	Use only differential costs as the cost basis.
C.	Use differential costs plus a share of fixed costs, based on actual production volume (with North's order) of 1,500 units.

Answer 1

1.AI Problem

A. If only Differential Produciton cost are Used:

	Per Unit($)	Total ($)
Materials	67	134,000
Labor	80	160,000
Supplies and Other variable cost	44	88,000
Total Cost	191	382,000
Profit(20%)	38.20	76,400
Price	229.20	458,400

B. The Total Cost Per Monitor for Normal Production of 20,000 Units are Used as Cost Basis:

	Per Unit($)
Total Cost	364
Add: Profit(20% of 379)	72.80
Sale Price	436.80

C. The Total Cost per Monitor For Production of 22,000 Units, excluding marketing cost are taken as basis:

	Per Unit($)	Total ($)
Materials	67	1,474,000
Labor	80	1,760,000
Supplies and Other variable cost	44	968,000
Total Variable Cost	191	4,202,000
Add: Fixed Indirect Cost	30.91	680,000
Add: Fixed Admin. Cost	53.63	1,180,000
Total Cost	275.54	6,062,000
Profit(20%)	55.11	1,212,400
Price	330.65	7,274400

  

D. The Total Cost per Monitor For Production of 22,000 Units, including marketing cost are taken as basis:  

364
Add: Profit(20% of 379)	72.80
Sale Price	436.80

C. The Total Cost per Monitor For Production of 22,000 Units, excluding marketing cost are taken as basis:

	Per Unit($)	Total ($)
Materials	67	1,474,000
Labor	80	1,760,000
Supplies and Other variable cost	44	968,000
Variable amrketing Cost	80	1,760,000
Total Variable Cost	271	5,962,000
Add: Fixed Indirect Cost	30.91	680,000
Add: Fixed Admin. Cost	53.63	1,180,000
Total Cost	355.54	7,822,000
Profit(20%)	71.11	1,,400
Price	426.65	9,386,400

2.T- Comm Problem

A. the full per unit cost for normal production of 1,200 units:

=300 X 622=186,600

B.Use only differential costs as the cost basis

	Per Unit($)	Total ($)
Materials	97	29,100
Labor	47	14,100
Supplies and Other variable cost	28	8,400
Total Cost	172	51,600
Profit(20%)	34.40	10,320
Price	206.4	61,920

C. Use differential costs plus a share of fixed costs, based on actual production volume (with North's order) of 1,500 units.

	Per Unit($)	Total ($)
Materials	97	145,500
Labor	47	70,500
Supplies and Other variable cost	28	42,000
Total Variable Cost	172	258,000
Add: Fixed Cost	360	540,000
Total Cost	532	798,000
Profit(20%)	106.4	159,600
Price	638.4	957,600

  

D. The Total Cost per Monitor For Production of 22,000 Units, including marketing cost are taken as basis:  

364
Add: Profit(20% of 379)	72.80
Sale Price	436.80

C. The Total Cost per Monitor For Production of 22,000 Units, excluding marketing cost are taken as basis:

	Per Unit($)	Total ($)
Materials	67	1,474,000
Labor	80	1,760,000
Supplies and Other variable cost	44	968,000
Variable amrketing Cost	80	1,760,000
Total Variable Cost	271	5,962,000
Add: Fixed Indirect Cost	30.91	680,000
Add: Fixed Admin. Cost	53.63	1,180,000
Total Cost	355.54	7,822,000
Profit(20%)	71.11	1,,400
Price	426.65	9,386,400