Question

Cost Item	Amount
Direct Materials Used	$140,000
Direct Manufacturing Labor Costs (workers are pd hourly)	$22,000
Plant Utility Costs	$5,000
Indirect Manufacturing Labor Costs—Variable	$18,000
Indirect Manufacturing Labor Costs—Fixed	$14,000
Other Indirect Manufacturing Costs—Variable	$8,000
Other Indirect Manufacturing Costs—Fixed	$26,000
Marketing, Distribution & Customer-Service Variable Costs	$120,000
Marketing, Distribution & Customer-Service Fixed Costs	$43,000
Fixed Administrative Costs	$54,000

Inventory Data	Beginning	Ending
Direct Materials	202,300 feet	2300 feet
Work in Process	0 units	0 units
Finished Goods	0 units	? units

Additional Data:

Variable manufacturing costs are variable with respect to units produced.

Variable marketing, distribution & customer-service costs are variable with respect to units sold.

Production for the current year was 100,000 units

Two feet of direct materials are used to make one unit of finished product.

Revenues for the current year were $473,200.

The selling price per unit and the purchase price per foot of direct materials remained stable throughout the year.

Ending inventory of finished goods is carried at the average unit manufacturing cost.

Ending Finished Goods inventory was $20,970.

Required

Comment on the business model. Is this a profitable business with sufficient mark-up to sustain profits in the future?

Think about the company’s cost structure—is it reliant on more fixed costs or more variable costs? How does that structure impact changes in volume in the future? In other words, will the company be more or less sensitive to volume shifts given its cost structure? Explain.

Answer 1

High GP% and and low NP% ratio depicts the high selling expenses incurred. Currently, the business model is viable considering the high GP%.

The company is more reliant on its variable costs, hence it will have to continue to maintain the its gross profit margins and plan to reduc its marketing costs

With an increase in volume of production and sale, the company will blossom, but shift below 42170 (i.e. breakeven) units, the company will start incurring losses. (Breakeven units = Fixed cost / (sales price p.u. - variable p.u))