5. Manufacturing statements and cost behavior Tampa Foundry began operations dur

Question

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    $ —
Direct labor    6.5   —
Factory overhead    9   50,000
Selling    —    70,000
Administrative    —    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)Calculation of cost of the finished goods inventory:

Cost per unit:

Direct Material =$4.50

Direct Labour =$6.50

Factory Overhead

-Fixed (50000/20000) =$2.5

-Variable =$9

Total cost per unit =$22.5

Units of Finished Goods =20000-17000=3000 units

Cost of finished goods =3000*22.5 = $67,500

b)Income Statment

Sales revenue (17000*36)   $612,000

Less: Cost of goods sold (17000*22.5) $382,500

Gross margin   $229,500

Less: Selling and administrative expenses (70000+135000) $205,000

Net income $24,500

c)

1} Yes it appears that the company pays commissions to it sales staff because selling & administration expenses are much higher than factory overheads,so the company is spending much on promotion & sales.

2} The unit cost of direct material is independent of the level of production.However it is possible that company may get discount offers on purchase of direct materials if they buy more quantity of raw material in next year.This will reduce per unit cost of direct materials

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