Hi! I need some help with these questions. I have included the cost information

Question

Hi! I need some help with these questions. I have included the cost information below, that you for your help.

Questions:

a. Continue to assume that 7,800 t-shirts will be made and sold in the first year. What is your product cost per unit under absorption costing? What is your product cost per unit under variable costing?

b. Based on the estimated sales level of 7,800 t-shirts for the first year, prepare your company’s (forecasted) income statement for the year ended on 12/31/2014 using both (1) the traditional format based on the absorption costing and (2) the contribution format based on the variable costing.

c. Calculate contribution margin per T-shirt and contribution margin ratio.

Cost information:

1) Stoneridge charges you $2,500 rent per month, which includes utilities, telephone, cleaning, and maintenance. You estimated that 90% of the rent was related to factory operations and 10% was related to selling and administrative activities.

2) You will order white, cotton t-shirts from a T-shirt wholesaler. Each T-shirt costs (including taxes, shipping, and handling) $3.75 to purchase.

3) To store T-shirts that were bought, but not yet imprinted, you will rent a storage unit. The storage unit costs you $125 per month.

4) You agreed to pay your artist friend a $10,000 annual contract fee plus a $300 design fee for each of the 12 T-shirt pictures designed. This same term is renewable for the next 3 years. Each T-shirt picture will only be used for one year. Therefore, in the second year, 12 new pictures will be designed at $300 each and another $10,000 annual contract fee will be charged.

5) You will buy several items before that start of your business:

[a] A computer and a printer: You will pay $6,000 (including taxes, shipping and handling) to buy a computer and a printer. You expect both to last about 3 years without salvage value. You will use the straight-line method for depreciation. You estimate that about 90% of the computer and printer will be used for factory operations and 10% will be for selling and administrative activities.

[b] A heat press machine: You will pay $4,500 (including taxes, shipping and handling) for a heat press machine. The machine is used for imprinting t-shirts only and is expected to last 3 years without salvage value.

[c] Transfer paper: Each case of transfer paper costs $400 and contains 1,000 sheets of 8.5×11 transfer paper. You expect to use one transfer paper to print one T-shirt.

[d] Ink-jet cartridges: On average, each cartridge costs $50 and can make 500 prints. Each Tshirt requires one print. You also need to print flyers, etc. for selling and administrative purposes. For this non-manufacturing printing, you will print about one page for every 5 T-shirts sold.

[e] Laser paper: You will buy several reams of laser paper to print promotion flyers, etc. Each ream costs $20 and contains 200 sheets of 8.5×11 laser paper.

6) Wrapping paper and box: Each T-shirt costs about $0.20 to wrap and box. Wrapping and boxing are not considered as manufacturing.

7) You will hire three fellow students as part-time workers. They not only help you operate the machine, but also help fold, wrap and box T-shirts. Sometimes, three of them work at the same time. But, sometimes they don’t because of their different class schedules. On average, printing 10 shirts will take one labor hour. Folding and packaging 20 shirts also will take about one labor hour. You will pay each of your workers $8 per hour. Folding and wrapping are not considered as manufacturing.

8) You (the owners) do all the selling and administrative work by yourselves. You will pay yourselves a total of $12,000 per year (to be divided among all owners).

9) To protect your business from legal obligation, you will purchase a liability insurance that will cost you $3,600 per year.

10) You will hold four end-of-quarter parties to promote sales of your t-shirts. Each party costs you about $1,000

Explanation / Answer

31800

Factory exp Selling & Distribution Rent 27000 3000 Cost of T-Shirt 28125 Storage Cost 1500 designing Charges 197500 Depreciation on computer 1800 200 Depreciation on heat machine 1500 transfer paper cost 3000 laser paper ost 750 cartriges cost 750 cartriges cost 150 rapping paper cost 1500 Printing labour hour 6000 Folding and packing labour hour 3000 selling and administration 12000 liability insurance 3600 sales promotion 4000 calculation of fixed cost: rent 27000 storage cost 1500 depreciation on computer 1800 depreciation on heat machine 1500 Total fixed cost

31800

Product cost per unit under Absorption costing : FOH 31800/7800 4.076923 VOH 262825/7800 33.69551 37.77244 product cost per unit under Variable costing: VOH 262825/7800 33.69551 33.69551

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