2. All of the costs you have listed above, except one, would be differential costs between the alternatives

of Staci producing pottery or staying with the aerospace company. Which cost is not

differential? Explain.

PROBLEM 2–21 Schedule of Cost of Goods Manufactured; Income Statement; Cost Behavior

$20,000.00

$10,000.00

2. All of the costs you have listed above, except one, would be differential costs between the alternatives 1 Superior Company

Schedule of Cost of Goods Manufactured

For the Year Ended December 31

Direct materials:

$ 40,000

330,000

$45,000.00 Direct labor

The cost of goods sold section of the income statement follows:

Cost of goods sold (given)

* These items must be computed by working backwards up through the statements.

2 Direct materials: $320,000 ÷ 40,000 units = $8.00 per unit.

Raw materials inventory, beginning (given)

Add: Purchases of raw materials (given)

 290,000

Raw materials available for use

Deduct: Raw materials inventory, ending (given)

   10,000

Raw materials used in production

Manufacturing overhead (given)

Total manufacturing costs (given)

Add: Work in process inventory, beginning

Deduct: Work in process inventory, ending (given)

Cost of goods manufactured

Finished goods inventory, beginning (given)

Add: Cost of goods manufactured

Goods available for sale (given)

Deduct: Finished goods inventory, ending

Manufacturing overhead: $270,000 ÷ 40,000 units = $6.75 per unit.

3 Direct materials: $8.00 per unit.Manufacturing overhead: $270,000 ÷ 50,000 units = $5.40 per unit.

4 The average cost per unit for manufacturing overhead dropped from $6.75 to $5.40 because of the increase in production between the two years. Because fixed costs do not change

Superior Company

Schedule of Cost of Goods Manufactured

For the Year Ended December 31

$320,000

93,000 *

683,000

*

725,000

$690,000

The cost of goods sold section of the income statement follows:

$ 50,000

*

740,000

*

$660,000

These items must be computed by working backwards up through the statements.

Direct materials: $320,000 ÷ 40,000 units = $8.00 per unit.

 270,000

   42,000

   35,000

 690,000

   80,000

Manufacturing overhead: $270,000 ÷ 40,000 units = $6.75 per unit.

Direct materials: $8.00 per unit.Manufacturing overhead: $270,000 ÷ 50,000 units = $5.40 per unit.

The average cost per unit for manufacturing overhead dropped from $6.75 to $5.40 because of the increase in production between the two years. Because fixed costs do not change

The average cost per unit for manufacturing overhead dropped from $6.75 to $5.40 because of the increase in production between the two years. Because fixed costs do not change in total as the activity level changes, the average cost per unit will decrease as the activity level rises.

as the activity level changes, the average cost per unit will decrease as the activity level rises.

CASE 5–18 Analysis of Mixed Costs in a Pricing Decision [ LO1 , LO2 or LO3 or LO5 ]Maria Chavez owns a catering company that serves food and beverages at parties and businessfunctions. Chavez’s business is seasonal, with a heavy schedule during the summer months andholidays and a lighter schedule at other times.One of the major events Chavez’s customers request is a cocktail party. She offers a standardcocktail party and has estimated the cost per guest as follows:

The standard cocktail party lasts three hours and Chavez hires one worker for every six guests,so that works out to one-half hour of labor per guest. These workers are hired only as needed andare paid only for the hours they actually work.When bidding on cocktail parties, Chavez adds a 15% markup to yield a price of about $31per guest. She is confi dent about her estimates of the costs of food and beverages and labor but isnot as comfortable with the estimate of overhead cost. The $13.98 overhead cost per labor-hourwas determined by dividing total overhead expenses for the last 12 months by total labor-hours forthe same period. Monthly data concerning overhead costs and labor-hours follow:

1. Estimate the contribution to profit of a standard 180-guest cocktail party if Chavez charges herusual price of $31 per guest. (In other words, by how much would her overall profit increase?)

In order to give a proper estimate of contributions to profit of the charity event, here are the estimates of the variable for the cost of catering for the event. The costs of food, beverages, and labor are all apparently variable with respect to the number of guests. However, the situation with respect to overhead expenses is less clear. A good first step is to plot the labor hour and

overhead expense data in a scattergraph as shown below.

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

0 2,000 4,000 6,000 8,000

Labor Hours

Overhead E

xpenses

X

Y

Labor Overhead

Hours Expense

7,500 $77,000

2,500Change 5,000 $22,000

Variable cost = Change in cost = $22,000

Change in activity 5,000 labor hours = $4.40 per labor-hour

Fixed cost element = Total cost – Variable cost element= $77,000 – $4.40 per labor-hour × 7,500 labor-hours= $44,000

The total variable cost per guest is computed as follows:

$15.00

5

$21.98

And the total contribution from 180 guests paying $31 each is computed as follows:

$5,580.00

Contribution profits $1,623.60

2 Assuming that no additional fixed costs are incurred as a result of catering the charity event, any price greater than the variable cost per guest of roughly $22 would contribute to profits.

High level of activity

Low level of activity  55,000

Food and beverages

Labor (0.5 hour × $10.00 per hour)

Overhead (0.5 hour × $3.95 per hour)    1.98

Total variable cost per guest

Sales (180 guests × $31.00 per guest)

Variable cost (180 guests × $21.98 per guest)  3,956.40

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

0 2,000 4,000 6,000 8,000

Labor Hours

Overhead E

xpenses

X

Y

3

I would lean towards bidding slightly less than $30 to get the contract. Any bid above $22 would contribute to profits and a bid at the normal price of $31 is unlikely to land the contract. And apart from the contribution to profit, catering the event would show off the company’s capabilities to potential clients. The danger is that a price lower than the normal bid of $31 might set a precedent for the future or it might embroil the company in a price war among caterers. However, the price need not be publicized and the lower price could be justified to future clients because this is a charity event. Another possibility would be for Maria to maintain her normal price but throw in additional services at no cost to the customer. Whether to compete based on price or service is a

delicate issue that Maria will have to decide after getting to know the personality and preferences of her customers.

In order to give a proper estimate of contributions to profit of the charity event, here are the estimates of the variable for the cost of catering for the event. The costs of food, beverages, and labor are all apparently variable with respect to the number of guests. However, the situation with respect to overhead expenses is less clear. A good first step is to plot the labor hour and

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

0 2,000 4,000 6,000 8,000

Labor Hours

Overhead E

xpenses

X

Y

Assuming that no additional fixed costs are incurred as a result of catering the charity event, any price greater than the variable cost per guest of roughly $22 would contribute to profits.

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

0 2,000 4,000 6,000 8,000

Labor Hours

Overhead E

xpenses

X

Y

I would lean towards bidding slightly less than $30 to get the contract. Any bid above $22 would contribute to profits and a bid at the normal price of $31 is unlikely to land the contract. And apart from the contribution to profit, catering the event would show off the company’s capabilities to potential clients. The danger is that a price lower than the normal bid of $31 might set a precedent for the future or it might embroil the company in a price war among caterers. However, the price need not be publicized and the lower price could be justified to future clients because this is a charity event. Another possibility would be for Maria to maintain her normal price but throw in additional services at no cost to the customer. Whether to compete based on price or service is a

delicate issue that Maria will have to decide after getting to know the personality and preferences of her customers.