Chapter 3 Problem 3 5. Manufacturing statements and cost behavior Tampa Foundry

Question

Chapter 3 Problem 3

5. Manufacturing statements and cost behavior

Tampa Foundry began operations during the current year, manufacturing various products for industrial use. One such product is light-gauge aluminum, which the company sells for $36 per roll. Cost information for the year just ended follows.

Per Unit Variable Cost Fixed Cost

Direct materials $4.50 $ %u2014

Direct labor 6.5 %u2014

Factory overhead 9 50,000

Selling %u2014 70,000

Administrative %u2014 135,000

Production and sales totaled 20,000 rolls and 17,000 rolls, respectively There is no work in process. Tampa carries its finished goods inventory at the average unit cost of production.

Instructions:

a. Determine the cost of the finished goods inventory of light-gauge aluminum.

b. Prepare an income statement for the current year ended December 31

c. On the basis of the information presented:

1. Does it appear that the company pays commissions to its sales staff? Explain.

2. What is the likely effect on the $4.50 unit cost of direct materials if next year's production increases? Why?

Explanation / Answer

a. Determine the cost of the finished goods inventory of light-gauge aluminum. Manufacturing cost Variable 400000 Fixed cost 50000 450000 22.5 Unit cost Finished goods inventory cost 67500 b. Prepare an income statement for the current year ended December 31 Sales 612000 less cost of goods sold Beginning inventory Finished Goods 0 add cost of goods manufactured 450000 Goods available for sales 450000 less ending inventory finsihed goods -67500 Cost of goods sold 382500 Gross profit 229500 less operating expenses Selling expense 70000 Admin expense 135000 Total operating expense -205000 Net income 24500 c. On the basis of the information presented: 1. Does it appear that the company pays commissions to its sales staff? Explain. As there is no variable cost for selling expense therefore the company does not pay the commission to its sales staff, otherwise there would be variable cost as the commission is related to sales, and the cost which varies with any volume of activity is called variable cost. 2. What is the likely effect on the $4.50 unit cost of direct materials if next year's production increases? Why? As the direct material is variable cost therefore there would not be any change in per unit cost, while the total will increase, as the variable cost remain same on per unit basis, but increase in total with the change in volume of activity.

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