Question

Total Manufacturing Cost, Income Statement, Unit Cost, and Selling Price

Two inventors, recently organized as Innovation, Inc., consult you regarding a planned new product.They have estimates of the costs of materials, labor, overhead, and other expenses for 2016 but need to know how much to charge for each unit to earn a profit in 2016 equal to 15% of their estimated total long-term investment of $560,000 (ignore income taxes).
Their plans indicate that each unit of the new product requires the following:
Direct Material 4 lb. of a material costing $7 per lb.
Direct labor 2 hrs. of a metal former's time at $15.40 per hr. 0.6 hr. of an assembler's time at $11.20 per hr.
Major items of production overhead would be annual rent of $65,044 for a factory building, $40,124 rent for machinery, and $30,380 of indirect material. Other production overhead is estimated to be $326,592. Selling expenses are an estimated 30% of total sales, and non-factory administrative expenses are 20% of total sales.
The consensus at Innovation is that during 2016 10,000 units of product should be produced for selling and another 2.000 units should be produced for the next years beginning inventory. Also, an extra 3,000 pounds of material will be purchased as beginning inventory for the next year. Because of the nature of the manufacturing process, all units started must be completed, so work in process inventories are negligible.
Required
Incorporate the above data into a schedule of estimated total manufacturing costs and compute the unit production cost for 2016.

Answer 1

1. Total manufacturing costs = $1,248,380

2. Unit production cost = $104.03 ($1,248,380/12,000)

Step-by-step explanation:

a) Data and Calculations:

Long-term investment = $560,000

Expected annual profit = $84,000 ($560,000*15%)

Cost of direct materials per unit = $28 (4lb *$7)

Cost of direct labor per unit = $37.52 (2*$15.40) + (0.6*$11.20)

Total manufacturing overheads:

Rent for factory building = $65,044

Rent for machinery 40,124

Indirect materials 30,380

Other overheads 326,592

Total production overheads $462,140

Production:

Units sold = 10,000 units

Ending inventory of finished goods = 2,000 units

Total production for the year = 12,000 units

Direct materials purchase = 12,000 * 4 + 3,000 pounds = 51,000

Estimating the total manufacturing costs:

Direct materials costs = $357,000 ($28 * 12,750) or ($7 * 51,000)

less Ending inventory of raw materials = $21,000

Cost of direct materials used = $336,000 ($28 * 12,000 units)

Cost of direct labor = $450,240 ($37.52 * 12,000)

Production overhead = $462,140

Total manufacturing costs = $1,248,380

Cost per unit = $104.03 ($1,248,380/12,000)