Sunshine Valley Meat Company produces one of the best sausage products in Pennsy

Question

Sunshine Valley Meat Company produces one of the best sausage products in Pennsylvania. The company's controller compiled the following information by analyzing the accounting records:
1. Meat costs the company $3.25 per pound of sausage produced.
2. Compensation of production employees is $2.25 per pound of sausage produced.
3. Supervisory salaries total $23,000 per month.
4. The company incurs utility costs for the plant of $9,000 per month

5. There is an administrative cost of $0.35 per pound of sausage produced.
6. Insurance and property taxes of the plant average $6,400 per month.

Required:

1. Classify each cost as variable or fixed. Also state if each expenses is a manufacturing cost (product cost) or period cost.

2. Write a formula to express the behavior of the firm's production costs. (Use the form Y = a + bX, where X denotes the quantity of sausage produced.)

3. Assume that you make and sell 800 units of sausage products in the first year. Use your cost formula to calculate your first year’s total cost.

4. If you sell each product at $65 each (still assuming 800 units sold). how much would net profit be in the first year?

5. What is your product cost per unit under variable costing if 800 units of sausage products were sold?

6. What is your product cost per unit under absorption costing if 800 units of sausage products were planned and sold?

7. Is there a difference between net income in variable costing when compared to net income in absorption costing. Why or why not?

Explanation / Answer

1.

Classification of Cost as variable and fixed is shown as below:

2.

Formula to express the behavior of the firm's production costs is shown as below:

Y= a+bX

where a= Fixed Costs

and b= Variable Costs

Now fixed Costs is $23,000 +$9,000+ $6,400 = $38,400

Variable Costs is $3.25 + $2.25+$.35 = $5.85

So the equation is Y= $38,400 + $5.85X

3.

Cost formula to calculate your first year’s total cost is as shown below for 800 units

Y = 38,400 + $5.85 *800

Y = $43,080

4.

Sales for 800 units at $65 is $52,000

Cost for 800 units is $43,080

So the Net profit is Sales- Cost of goods sold which is $52,000- $43,080 = $8,920

1. Meat costs the company $3.25 per pound of sausage produced. Variable Product Cost 2. Compensation of production employees is $2.25 per pound of sausage produced. Variable Product Cost 3. Supervisory salaries total $23,000 per month. Fixed Period Cost 4. The company incurs utility costs for the plant of $9,000 per month Fixed Period Cost 5. There is an administrative cost of $0.35 per pound of sausage produced. Variable Period Cost 6. Insurance and property taxes of the plant average $6,400 per month. Fixed Period Cost

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