Reference no: EM133123581
Question - Grip 6, is an emerging company that manufactures and sells belts. Gary is the only employee of Grip 6 and his sole role is to make the belts. The belts include two parts: the belt buckle, and the belt strap. To make a belt, the buckle is machined from metal, and then the belt strap is cut to length out of webbing. A completed belt is packaged in a single-belt box (i.e. the Packaging Boxes are part of the manufacturing costs).
The belts are made in a warehouse that includes the necessary equipment to machine the belt buckles and cut the belt strap for $15,500 per year. That rent includes the utilities and use of the equipment. The warehouse will also store any materials for no additional charge.
Gary did one production run in 2015. The Ending Balance of inventory at the end of the run was as follows:
|
Item
|
Ending Amount
|
Ending Balance ($)
|
|
Metal
|
200 oz.
|
$50
|
|
Webbing
|
400 ft
|
$800
|
|
Packaging Boxes
|
500
|
$250
|
|
Belts in Process
|
150
|
$2,250
|
|
Finished Belts (in boxes)
|
50
|
$1,250
|
In 2016, Gary worked diligently to produce 3,050 additional belts and sold 2,500 belts. The revenue from the sales was $87,500. During 2016, Grip 6 incurred the following expenses:
|
Item
|
Expense ($)
|
|
Wages to Gary for Production
|
$45,000
|
|
Rent for the Warehouse
|
$15,500
|
|
Metal
|
$7,775
|
|
Webbing
|
$12,200
|
|
Packaging Boxes
|
$1,375
|
|
Other General and Administrative Expenses
|
$2500
|
|
Delivery Expenses (Shipping)
|
$1000
|
|
Advertising Expenses
|
$1000
|
The ending balance at the end of 2016 was as follows:
|
Item
|
Ending Amount
|
Ending Balance ($)
|
|
Metal
|
800 oz.
|
$200
|
|
Webbing
|
400 ft
|
$800
|
|
Packaging
|
200
|
$100
|
|
Belts in Process
|
150
|
$3,750
|
|
Finished Belts (in boxes)
|
600
|
$15,678
|
Required - Please answer the following questions ignoring taxes and assuming that Grip 6 uses Full Absorption costing unless specified otherwise:
1. What is the total Cost of Goods Manufactured in 2016?
2. What is the total Cost of Goods Sold in 2016?
3. What is the Net Income for Grip6 in 2016? (Note: ignore taxes)
4. At the end of the year, Grip 6 realized that they had used more of the webbing than they had initially estimated. It turned out that the ending balance of the webbing was only $600 ($200 less than they had estimated). Assuming all else equal, how would this discovered error in the ending balance of webbing change the Cost of Goods Sold?
a: Increase COGS
b: Decrease COGS
c: Have no affect.
d: I have no idea.
5. Gary is considering hiring a production manager while he, Gary, becomes a residual claimant and does not draw a salary. The production manager has agreed to take on the job for a fixed salary of $45,000 a year plus a bonus if the cost of goods manufactured per unit decreases by $1.00 compared with the cost of goods manufactured per unit in 2016. Assuming the cost per oz of metal, the cost per foot of webbing, the cost per box, and the rent remain the same, will the new production manager earn a bonus if she produces 3,050 belts?
Yes
No
6. Gary is considering hiring a production manager while he, Gary, becomes a residual claimant and does not draw a salary. The production manager has agreed to take on the job for a fixed salary of $45,000 a year plus a bonus if cost of goods manufactured per unit decreases by $1.00 compared with the cost of goods manufactured per unit in 2016. Assuming the cost per oz of metal, the cost per foot of webbing, the cost per box, and the rent remain the same, will the new production manager earn a bonus if she produces 3,250 belts?
Yes
No
7. The production manager has agreed to take on the job for a fixed salary of $45,000 a year plus a bonus if the variable cost of goods manufactured per unit decreases by $1.00 compared with the cost of goods manufactured per unit in 2016. Assuming the cost per oz of metal, the cost per foot of webbing, the cost per box, and the rent remain the same, will the new production manager earn a bonus if she produces 3,050 belts?
Yes
No
8. The production manager has agreed to take on the job for a fixed salary of $45,000 a year plus a bonus if the variable cost of goods manufactured per unit decreases by $1.00 compared with the cost of goods manufactured per unit in 2016. Assuming the cost per oz of metal, the cost per foot of webbing, the cost per box, and the rent remain the same, will the new production manager earn a bonus if she produces 3,250 belts?
Yes
No
9. What would happen to the COGM if Gary were to strike a deal with the landlord to reduce the cost of the warehouse rent by $2000. (Note: assume all other costs and production levels are unchanged)
a: Total COGM would increase by $2000.
b: Total COGM would decrease by $2000.
c: Total COGM would increase by $1639 (which is $2000 * 2,500 sold / 3,050 produced)
d: Total COGM would decrease by $1639 (which is $2000 * 2,500 sold / 3,050 produced)