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Product cost: ABC Company believes that it has an additional 5,000 machine hours available in the current facility before it would need to expand. ABC Company uses machine hours to allocate the fixed factory overhead, and units sold to allocate the fixed sales expenses. Based on current research, ABC Company expects that it will take twice as long to produce the expansion product as it currently takes to produce its existing product.
ABC Product Information
Current Product
Expansion Product
Selling price
$14.50
?
Units produced and expected to be sold
80,000
5,000
Machine Hours
40,000
Direct Materials
$1.30 per unit
$5.60 per unit
Direct labor dollars needed per product
$2.80 per unit
$4.00 per unit
Variable Factory Overhead
$1.00 per machine hour
Variable Selling Expense
$0.20 per unit
Total Fixed Costs:
Fixed Factory Overhead
198,000
Fixed Selling expenses
191,250
a. What is the product cost for the expansion product under absorption and variable costing?
b. By adding this new expansion product, it helps to absorb the fixed factory and sales expenses. How much cheaper does this expansion make the existing product?
c. Assuming ABC Company wants a 40% gross margin for the new product, what selling price should it set for the expansion product?
d. Assuming the same sales mix of these two products, what are the contribution margins and break-even points by product?
ABC Company
Cash Flow statement (Direct Method)
Dec 31,2002
Cash Flows from operating Activities
Received From customers
1260000
Paid to suppliers
830000
Paid for expenses
250000
Paid for taxes
0
Cash flow from operating activities
180000
Purchase of fixed Assets
100000
Cash used in investing activities
Paid for dividends
Cash used in financing activities
Overall change in cash flows
-20000
Opening Balance of cash
70000
Ending balance of cash
50000
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