Reference no: EM13841055

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	5,000
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	$1.00 per machine hour
Variable Selling Expense	$0.20 per unit	$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		100000
Paid for dividends	100000
Cash used in financing activities		100000
Overall change in cash flows		-20000
Opening Balance of cash		70000
Ending balance of cash		50000