Local investors are considering opening a pizza shop near campus. The shop will

Question

Local investors are considering opening a pizza shop near campus. The shop will offer pizza, pasta dishes, and soft drinks at affordable prices to college students. Estimated total sales for next year are $130,000. While the investors are confident that there will be sufficient customer demand for this business, they are unsure of the cost structure and margin. The company's direct labor cost is estimated to be $ 25,000, which represents 50% of its total conversion costs and 70% of total prime costs. Total selling and administration expenses are $40,000, which included the only variable selling and administrative cost of 8% of sales. The company anticipates a Just-In-Time inventory system and therefore will not carry any raw materal inventory. In addition, overhead 75% fixed and 25% variable costs Required: I. What is the total manufacturing overhead cost? 2. What is the total direct materials cost? (Rounded to the neurest dollar) 3. What is the total manufacturing cost? 4. What is the total variable selling and administrative cost? 5. What is the total variable cost, contribution margin, and estimated net income?

Explanation / Answer

1. Total manufacturing overhead costs = Total conversion costs - direct labour costs = (25,000 x 2) - 25,000 = $25,000

2. Total direct materials cost = Total prime costs - Total direct labour = (25,000/0.7) - 25,000 = $10,714

3. Total manufacturing cost = Total prime cost + Total manufacturing overhead = 35,714 + 25,000 = $60,714

4. Total variable selling and admin cost = 8% of Sales (130,000) = 10,400

5. Total variable cost = Total prime cost + Variable manufacturing overhead + Variable selling expenses = 35,714 + 6,250 (25,000*25%) + 10,400 = $52,364

Contribution Margin = Sales - Variable Cost = 130,000 - 52,364 = $77,636

Estimated Net Income = Contribution margin - Fixed Costs = 77,636 - 48,350 = $29,286

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