I just want to make sure that the answers to this question are correct; it seems
ID: 2414978 • Letter: I
Question
I just want to make sure that the answers to this question are correct; it seems like some parts of it are wrong, but I don't know what I'm doing:
GIVEN: Kann Corporation produces industrial robots for high-precision manufacturing. The following information is available:
Per Unit Total
Direct materials $25.00
Direct labor $10.00
Variable manufacturing overhead $6.00
Fixed manufacturing overhead $36,000
Variable selling and administrative costs $4.00
Fixed selling and administrative costs $15,000
(If Chegg alters the formatting here, only Fixed manufacturing overhead ($36k) and Fixed selling and administrative costs ($15k) are under "Total." Hopefully the formatting for everything will remain okay.)
The company has a desired ROI of 20%. It has invested assets of $420,000. It anticipates making and selling 3,000 units per year.
REQUIRED:
Part 1: Using the total (full) cost concept, determine the (a) unit cost amount; (b) markup percentage; and (c) unit target selling price.
Part 2: Using the product (absorption) cost concept, determine the (a) unit cost amount; and (b) markup percentage.
Part 3: Using the variable cost concept, determine the (a) unit cost amount; and (b) markup percentage.
Part 4: What is the target unit selling price under the three cost assumptions?
Part 5: What else should be considered when setting the product's selling price?
Part 6: Which of the three costing concepts would be most appropriate in each of the following situations? 1. External reporting for GAAP 2. Normal (long-run) pricing 3. Evaluating special orders
Part 7: Kann Corporation received a special order for 500 robots at $50 each from a foreign customer. Acceptance of the order would increase variable selling costs by $1.70 per unit because of shipping costs, but would not increase fixed costs or interfere with any current orders. Prepare a differential analysis to determine whether the special order should be accepted or not.
Answers:
Parts 1-4: Full cost Absorption costing Variable costing Units 3000 3000 3000 Issues Cost per unit Amount Cost per unit Amount Cost per unit Amount Direct materials 25 75000 25 75000 25 75000 Direct labor 10 30000 10 30000 10 30000 Variable manufacturing overhead 6 18000 6 18000 6 18000 Fixed manufacturing overhead 12 36000 12 36000 0 Variable selling overhead 4 12000 0 4 12000 Fixed selling overhead 5 15000 0 0 Total cost 62 186000 53 159000 45 135000 Investment 420000 420000 420000 ROI 0.2 0.2 0.2 Desired Profit 28 84000 28 84000 28 84000 Sales (total cost + desired profit) 90 270000 81 243000 73 219000 Markup % 0.4516 0.5283 0.6222 Part 5: Desired profit per unit. Direct labor per unit. Direct material per unit. Fixed manufacturing overhead cost. Fixed selling and administrative cost. Variable manufacturing overhead per unit. Variable selling and administrative cost per unit. Above listed costs are both variable and fixed; desired profit is added. Apart from that, seller has to factor in customer behavior/preference, durability/worth of the product at that price, etc. Part 6: 1. Absorption costing is most appropriate for external reporting. All product costs should be expensed as cost of goods sold, and those need to be matched with revenue of each product sold. 2. In normal situations, average costs are taken into consideration, which are generally apportioned based on the total number of products manufactured during the period. 3. Relevant costing should be used to evaluate special orders . With it, only costs which are suitable for that particular special order would be considered. No fixed cost evaluation performed with special orders. Part 7: Issues Rejecting special order Accepting special order Differential cost Selling price $50.00 $50.00 Direct material $25.00 $25.00 Direct labor $10.00 $10.00 Variable manufacturing overhead $6.00 $6.00 Variable selling and administrative costs $4.00 $4.00 Shipping variable cost $1.70 $1.70 Total variable cost per unit $45.00 $46.70 $1.70 Since the total variable cost of $46.70 is less than the selling price of $50.00, the special order should be accepted. No fixed cost is increased, so total net income of the company would increase if the special order were accepted.Explanation / Answer
Answers to questions 1,2,3 & 4 Activity level = 3000 units per year full cost absorption costing variable costing total cost unit cost total cost unit cost total cost unit cost direct materials 75000 25 75000 25 75000 25 direct labour 30000 10 30000 10 30000 10 variable mfg OH 18000 6 18000 6 18000 6 variable selling & admn 12000 4 fixed mfg 36000 12 36000 12 fixed selling & admn 15000 5 186000 62 159000 53 123000 41 ROI required 84000 28 84000 28 84000 28 Price to be fixed 270000 90 243000 81 207000 69 Mark up % 45.16 52.83 68.29 Question 5 The competitors' selling price, the supply and demand curves for the product, the break even level for each possible price situation etc. Question 6 (suitability) External reporting for GAAP - Absorption costing method Normal (long run) pricing - Full cost method Evaluating special orders = variable cost method Question 7 Without With Differential special special Costs & order order Revenues Units produced & sold 3000 3500 Costs: direct materials 75000 87500 12500 direct labour 30000 35000 5000 variable mfg OH 18000 21000 3000 variable selling & admn 12000 14850 2850 fixed mfg 36000 36000 0 fixed selling & admn 15000 15000 0 186000 209350 23350 46.7 Revenues 25000 50.0 Excess of differential revenue over cost 1650 3.3 The special order should be accepted as the differential revenue is more that the differential costs.