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 material inventory. In addition, overhead 75% fixed and 25% variable costs. Required: 1. What is the total manufacturing overhead cost? 2. What is the total direct materials cost? (Rounded to the nearest 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 cost: $25000

Conversion cost = Direct labor + Manufacturing overheads

Direct labor is $25000 which is 50% of total conversion cost hence, manufacturing overhead is the remaining 50% which is $25000.

2. Total direct materials cost: $10714

Prime cost = Direct material + Direct labor

Direct labor is $25000 which is 70% of total prime cost hence total prime cost = $25000/70% = $35714

Direct material = $35714 - $25000 = $10714

3. Total manufacturing cost: $60714

Total manufacturing cost = Direct materials + Direct labor + Manufacturing overheads = 10714 + 25000 + 25000 = $60714

4. Total variable selling and administrative cost: $10400

Variable selling and administrative cost = 8% of sales = 8% x $130000 = $10400

5. Total variable cost: $52364

Total variable cost = Direct material $10714 + Direct labor $25000 + Variable manufacturing overheads $6250 (25% x $25000) + Variable selling and administrative cost $10400 = $52364

Contribution margin: $77636

Contribution margin = Sales – Variable costs = $130000 - $52364 = $77636

Estimated net income: $29286

Net income = Contribution margin – Fixed costs = $77636 - $48350 = $29286

Fixed costs = Fixed manufacturing overheads + Fixed selling and administrative cost = (75% x $25000) + ($40000 - $10400) = $18750 + $29600 = $48350

Related Questions

Navigate

• Browse (All)
• Browse L
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.