Question

1. Billy paves driveways for residential homes. The average driveway costs about $900 to pave as determined below: Direct Materials $500 Direct Labor $200 Overhead $200 $900 Overhead cost includes both fixed and variable costs and it is allocated to each individual job at a rate of $1 of overhead per $1 of direct labor. Total overhead for the year is $5,000, of which $2,000 is fixed. The remainder is variable and is directly proportional to direct labor. Billy has extra time and the capacity to do more jobs than he currently gets orders for. Currently, a customer has offered to pay $750 to have her driveway paved. This driveway is one which Billy defines as an “average” driveway. Required: The minimum selling price which Billy would charge if he wishes to at least break even is $Answer

2. The following information was made available concerning the four departments of the Patriot Company.

	Dept. A	Dept. B	Dept. C	Dept. D
Sales	$100	$20	$50	$70
Variable Cost of goods sold	70	10	30	45
Contribution Margin from	$30	$10	$20	$25
Manufacturing
Operating expenses:
Fixed Expenses	$20	$4	$10	$15
Variable selling Expenses	10	3	6	8
Net Income
(Loss)	$0	$3	$4	$2

It has been decided that one department must be eliminated. Fixed expenses have been arbitrarily assigned based on the sales made by each department. No matter which department is eliminated, the company’s fixed expenses will be reduced by 40%.


Required:

The department should be eliminated in order to give the greatest benefit to the company is AnswerDept. ADept. BDept. CDept. D

The company’s income (after eliminating this department) will be $Answer

Answer 1

1) Total overhead cost = Fixed + variable

5000 = 2000 + 3000

3000$ of variable OH means 3000 hours of direct labour hour as 1 labour hour means 1 $ of variable OH.

For 3000 direct labour hours and 200$ labour cost for 1 paved way , Therefore 1 dollar of direct labour = 15 hours

For an additonal average driveway total cost = material cost + labour cost + variable OH

= 500 + 200 + (15* 1) = 715 $

As fixed expenses are fixed in nature , we will ignore it . 715$ would be the minimum charge for breakeven .