# 1 if 2 pounds of direct materials are used to make

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1.If 2 pounds of direct materials are used to make each unit of finished product, 100,000 units × 2 lbs., or 200,000 lbs. were used at \$0.70 per pound of direct materials (\$140,000 ÷ 200,000 lbs.). (The direct material costs of \$140,000 are direct materials used, not purchased.) Therefore, the ending inventory of direct materials is 2,000 lbs. ×\$0.70 = \$1,400.2.Manufacturing Costs for 100,000 unitsVariableFixedTotalDirect materials costs\$140,000\$ \$140,000Direct manufacturing labor costs30,00030,000Plant energy costs5,0005,000Indirect manufacturing labor costs10,00016,00026,000Other indirect manufacturing costs8,00024,00032,000Cost of goods manufactured\$193,000\$40,000\$233,000Average unit manufacturing cost:\$233,000 ÷ 100,000 units= \$2.33 per unitFinished goods inventory in units:= = 9,000 units3.Units sold in 2007 = Beginning inventory + Production – Ending inventory= 0 + 100,000 – 9,000 = 91,000 unitsSelling price in 2007 = \$436,800 ÷ 91,000=\$4.80 per unit4.Revenues (91,000 units sold × \$4.80)\$436,800Cost of units sold:Beginning finished goods, Jan. 1, 2007\$ 0Cost of goods manufactured233,000Cost of goods available for sale233,000Ending finished goods, Dec. 31, 200720,970212,030Gross margin224,770Operating costs:Marketing, distribution, and customer-service costs162,850Administrative costs50,000212,850Operating income\$ 11,920Note: Although not required, the full set of unit variable costs is:Direct materials cost\$1.40Direct manufacturing labor cost0.30Plant energy cost0.05= \$1.93 per unit manufacturedIndirect manufacturing labor cost0.10Other indirect manufacturing cost0.08Marketing, distribution, and customer-service costs\$1.35per unit sold2-38(30 min.)Cost analysis, litigation risk, ethics. 1.Reasons for Keely not wanting Nash to include the potential litigation costs include the following:2-24
(a)Genuine belief that the product has no risk of future litigation. Note that she asserts “she has total confidence in her medical research team.”(b)Concern that the uncertainties about litigation are sufficiently high to make any numerical estimate “meaningless.”(c)Concern that inclusion of future litigation costs would cause the board of directors to vote against the project. Keely may be “overly committed” to the project and wants to avoid showing information that prompts questions she prefers not to be raised.(d)Avoid “smoking gun” memos being included in the project evaluation file. Keely may believe that if subsequent litigation occurs, the plaintiffs will “inappropriately” use a litigation cost line item as “proof” that FY knew the product had health problems that were known to management at the outset.2.Unit costs excluding litigation costs\$100Add unit litigation costs110Total unit costs210Add 20% markup42Selling price per unit\$252Since each treatment is planned to cost patients \$300, the new selling price of \$252 will drop the doctors’ margin to only \$48 (16%) from the planned margin of \$180 (60%) based on FY’s originally intended selling price of \$120. This would probably result in the doctors not having much incentive to promote the product. In fact, it may be quite possible that the doctors may not attempt to prescribe the treatment at such low margin because of their own exposure to liability.