Reference no: EM13346418

Maxwell Company manufactures and sells a single product.

The following costs were incurred during the company's first year of operations: Variable costs per unit: 

Manufacturing: Direct materials  . . . . . . . . . . . . . . . . . . . . . . . . . . $18

Direct labor  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7

Variable manufacturing overhead  . . . . . . . . . . . . $2

Variable selling and administrative  . . . . . . . . . . . . . . $2

Fixed costs per year: Fixed manufacturing overhead  . . . . . . . . . . . . . . . . $200,000

Fixed selling and administrative expenses  . . . . . . . $110,000

During the year, the company produced 20,000 units and sold 16,000 units. The selling price of the company's product is $50 per unit.

Required:

1. Assume that the company uses absorption costing:    

a . Compute the unit product cost.  

b.  Prepare an income statement for the year.    

2. Assume that the company uses variable costing:    

a.  Compute the unit product cost.    

b. Prepare an income statement for the year.    

3. The company's controller believes that the company should have set last year's selling price at $51 instead of $50 per unit. She estimates the company could have sold 15,000 units at a price of $51 per unit, thereby increasing the company's gross margin by $2,000 and its net operating income by $4,000. Assuming the controller's estimates are accurate, do you think the price increase would have been a good idea?

Exercises

1

Midwest Products is a wholesale distributor of leaf rakes. Thus, peak sales occur in August of each year as shown in the company's sales budget for the third quarter, given below:

July Budgeted sales (all on account). . . . . . . $900,000

August $600,000

September $500,000

Total $2,000,000

From past experience, the company has learned that 20% of a month's sales are collected in the month of sale, another 70% are collected in the month following sale, and the remaining 10% are collected in the second month following sale. Bad debts are negligible and can be ignored. May sales totaled $430,000, and June sales totaled $540,000.

Required:

1. Prepare a schedule of expected cash collections from sales, by month and in total, for the third quarter. 

2. Assume that the company will prepare a budgeted balance sheet as of September

Compute the accounts receivable as of that date.

2

Crystal Telecom has budgeted the sales of its innovative mobile phone over the next four months as follows: J

uly . . . . . . . . . . . . . . . . . . . . . . . . 30,000

August . . . . . . . . . . . . . . . . . . . . . . 45,000

September . . . . . . . . . . . . . . . . . . . 60,000

October . . . . . . . . . . . . . . . . . . . . . 50,000

Sales in Units. The company is now in the process of preparing a production budget for the third quarter. Past experience has shown that end-of-month finished goods inventories must equal 10% of the next month's sales. The inventory at the end of June was 3,000 units.

Required: Prepare a production budget for the third quarter showing the number of units to be produced each month and for the quarter in total.

3

Micro Products, Inc.,  has developed a very powerful electronic calculator. Each calculator requires three small "chips" that cost $2 each and are purchased from an overseas supplier. Micro Products has prepared a production budget for the calculator by quarters for Year 2 and for the first quarter of Year 3, as shown below: Year 2 First Budgeted production, in calculators  . . . . 60,000 Second 90,000 Third Year 3 Fourth First 150,000 100,000 80,000

The chip used in production of the calculator is sometimes hard to get, so it is necessary to carry large inventories as a precaution against stockouts. For this reason, the inventory of chips at the end of a quarter must equal 20% of the following quarter's production needs. A total of 36,000 chips will be on hand to start the first quarter of Year 2. Required:

Prepare a direct materials budget for chips, by quarter and in total, for Year 2. At the bottom of your budget, show the dollar amount of purchases for each quarter and for the year in total.

4

The production manager of Junnen Corporation has submitted the following forecast of units to be produced for each quarter of the upcoming fiscal year. 1st Quarter Units to be produced . . . . . . 5,000 2nd Quarter 4,400 3rd Quarter 4,500 4th Quarter 4,900 Each unit requires 0.40 direct labor-hours and direct labor-hour workers are paid $11 per hour.

Required:

1. Construct the company's direct labor budget for the upcoming fiscal year, assuming that the direct labor workforce is adjusted each quarter to match the number of hours required to produce the forecasted number of units.