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: 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

Prime Costs=Cost of raw material+ Cost of labor

Labor is 70 per cent of prime cost

Let us assume prime cost be X.

X * 70/100=25000

.7X=25000

X=35714

35714=X+25000

Cost of raw material will be =35714-25000=$10714

Conversion Costs= Direct labor + Manufacturing overhead.

Let us assume conversion costs be X

X*50/100=25000

.5X=25000

X=25000/.5=$50000

Manufacturing overhead=$50000-$25000=$25000

Fixed=$25000*75/100=18750

Variable=$25000*25/100=12500

Total manufacturing costs= Raw material cost + Manufacturing overhead

=$10714+$25000=$35714

Variable Selling and Administrative Costs=8 per cent of sales

=$130000*8/100=$10400

Fixed=$40000-$10400

Sales = $130000

Less: Variable expenses

Variable overhead=$12500

Variable selling=        $10400

Contribution=           $107100

Less: Fixed expenses

Fixed overhead= $18750

Fixed selling=        $29600

Net Income           $58750

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